The Outsourcing Debate: Theories and Findings

By Clegg, Stewart R.; Burdon, Steve et al. | Journal of the Australian and New Zealand Academy of Management, January 1, 2005 | Go to article overview

The Outsourcing Debate: Theories and Findings


Clegg, Stewart R., Burdon, Steve, Nikolova, Natalia, Journal of the Australian and New Zealand Academy of Management


ABSTRACT

This paper addresses the issue of services outsourcing by looking at both theoretical and empirical arguments. Previous debates have often concentrated on the motives for adopting the practice rather than the outcomes. These various themes can be discussed under the twin concepts of the cost and efficiency argument and the fashion and isomorphism approach. Our research provides strong evidence to support the cost efficiency argument. On average, significant cost advantages were sought and delivered, as well as improvements in service levels and systems. Many organisations in the current environment in Australia look at outsourcing not only as a method of increasing efficiency but also as gaining competitive advantage through harnessing the superior specialist skills and experience of the outsourcing provider who takes someone's back office function and transforms them into their front office. A 10% net cost saving was considered necessary by an organisation before embarking on an organisational change that was disruptive and in some cases involved downside risks. Even if other efficiency gains such as service levels or systems improvements were required, so were 10%+ cost savings. A number of the organisations thought their skills in managing outsourcing had improved considerably such that they were in a position to move from a client/server relationship to a partnership model (i.e. an alliance).

Keywords: outsourcing, costs savings, qualitative and quantitative research

INTRODUCTION

The initial decision to move from an in-house service to an outsourcing provider is major. In the vast majority of cases, when organisations move a business function from intra-organisational to third party control, significant efficiency gains are expected by focusing "time, effort and capital on value-creating activities that yield a competitive advantage, an improved overall performance, and security for the organisations' long-term survival" (Hunter & Cooksey, 2004: 27).

Outsourcing is not a new phenomenon: in major production industries such as automotives, the outsourcing of initially non-core and latterly core functions and services has been progressively used since the 1930s (Macaulay, 1966). However, services outsourcing, although common for some time in specialist areas such as advertising and legal services, increased dramatically from the mid199Os. The outsourcing of sectors such as IT and Telecommunications and Business Processing occurred with the dawning of advanced digital telecommunications services that facilitated the availability of this option. The imperative to outsource - as distinct from the opportunity to do so was a result of other dynamics of the digital age; primarily globalisation and increased competition, leading to a continual need to improve efficiency from productivity and to increase service levels. Thus, vertically integrated services were no longer seen as the best organisational arrangements for gaining competitive advantage. The idea of extending the organisation's capabilities, whether core or non-core, to a third party, is confirmed in recent research in the area by Gottfredson, Puryear and Phillips (2005). Gottfredson et al.'s (2005) framework suggests that competitive advantage can be gained by optimising uniqueness of function versus the proprietary nature of the organisations' capabilities.

POSITIONS ON OUTSOURCING INSTITUTIONAL FASHION OR COST EFFICIENCIES?

Critics of outsourcing suggest that "contracting out might be no more than a temporary enthusiasm, a fad ..." (Savas, 1993: 43). Savas is not alone in this view: Walker and Walker (2000: 156) also suggest that outsourcing may be a modish fad, something that organisations might claim to do for efficiency reasons but which in practice deliver far less efficiency than is often claimed "...the claim '2O per cent savings from contracting out' became part of the repertoire of catchphrases favoured by privatisation advocates". …

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