Outsourcing in the era of globalisation

Maria Stepien  Bath 13/03/19

Entrepreneurs Society, University of Bath

Globalisation was initiated after the World War II when the countries stressed the importance of interdependent cooperation and trade liberalisation. Despite the growing tensions in Eastern European countries and the emergence of the Cold War, there’s no doubt that after 1945 world started realising that the ways through which countries can gain a competitive advantage include variable entry modes to other countries, such as exporting, licensing, franchising and turnkey contracting. It can be argued that all of these contributed to the popularity of outsourcing.

What is outsourcing?
Accordingly to Morschett et al. (2015), ‘outsourcing’ is an activity realised internally in the company and transferred to the external firm at a strategically convenient time, for instance to get the access to locally scarce resources. There are certain advantages and disadvantages to this practice:
Advantages:

1. Cost advantages.

Certainly one of most important reasons to conduct outsourcing, which will be efficient if the external company is specialised in the field desired by the first firm.

1. Improvement of performance.

An access to specialists from another company and often another country is an easy way to gain knowledge that can contribute to the growth of our business.

1. Advantages in financing and risk transfer.

“Outsourcing activities related to high financial investment, reduces the amount of capital tied up and the firm’s funding requirements” (Morschett et al.) In addition, during the outsourcing process, fixed costs automatically become variable costs, meaning it is easier for the firm to manipulate them and adjust to needs in time.
 
However, there are also significant drawbacks that need to be taken under consideration before involving the firm in the outsourcing practices.

1. Increase of costs.

Transportation, negotiation and control costs can put high pressure on the firms that are considering a long-term cooperation.

1. Loss of expertise and transfer of competencies

A company getting involved in outsourcing practices and asking another firm for help, automatically admits that they are not capable of tackling certain problems on their own. They agree to admit that someone else has more expertise in the field of their business practice.

1. Dependence on the external company

As aforementioned, it is important that the company is aware that they are seeking for help, not for the rival. They need to be well-experienced in negotiations and be sure that involving this particular firm will be beneficial for them.
 
Outsourcing can be placed in the so-called “strategic relevance/ competence-matrix”, developed by Krüger and Homp (1997), meaning it is supposed to support company’s strategy and organisation. It is therefore crucial that the right partner is chosen in order to face the challenges of globalisation.