The decision to proceed with outsourcing comes from strategic managements. Companies use strategic management to define set of decisions and action that result in the formulation and implementation of plans designed to achieve company’s objectives. One of the decisions can be outsourcing.

 The company has to go through different tasks to determine factors that will lead to a decision to proceed with outsourcing. It starts by formulating company’s vision, mission and value statement. Conduct environmental analysis that reflects the company’s internal and external conditions and capabilities. Analyze the Company’s options by matching resources with the external environment. Identify the most desirable options by evaluating each option in light of the company’s mission. Select a set of long-term objectives and grand strategies that will achieve the most desirable options. Develop annual objectives and short-term strategies that are compatible with the selected set of long-term objectives and grand strategies. Implement the strategic choices by means of budgeted resource allocations in which the matching of tasks, people, structures and technologies.

If company finds out after analyzing its environment, it is looking at cutting operating costs of support functions, it needs to focus on its core business, its needs to reduce capital expenditure in infrastructure and technology or its looking in business transformation through innovation than outsourcing is the right direction.

The move to outsourcing should not be in rush. It should be will planed and slow.

How slow, it depends on the business situation and the corporate culture.  The big bang move will be expensive and painful. Selecting the right outsource company plays important role in the success of the outsourcing. The best way to find the right partner is to collaborate with vendors from beginning and define the requirement jointly. A company might end up putting requirement, which is not realistic. After deciding how fast or slow to move and selecting the partner for outsourcing, the next step is measuring the progress of outsourcing. It is impotent to know if the process of outsourcing is going in the right direction or not. Company can find out by defining milestones and check time to time if achieved its objective. The success of outsourcing also depends on status of the infrastructure of the organization, the service that will be outsourced, and managing the risk of outsources failure.  The outsource objective should be responsive to change and deliver service quickly and efficiently. It is not means of procuring additional human resources in organization

Although the outsourcing could the right direction for the company, but there are other factors might lead the management not to consider outsourcing. One of the reasons might management not go for outsourcing because it is too much hassle. Preparing for outsourcing is not an easy job. It needs setting up process and setting up checking system. It needs effort, resource and planning. Another reason for management not going for outsourcing it is does not trust quality of work outsourcer. The third reason could be if management is not sure if outsourcing can achieve company’s objective.

If a company persists to outsource its IT functions there are risks associated with outsourcing. The lack of company’s experience and expertise in managing outsource companies. Outsourcer’s stability, quality and expertise in delivering IT functions as per company’s expectation. The outsourced activities might be vulnerable to the company’s competitors. Such risks have impact on company’s ability to function effectively and efficiently. In addition, it has impact on company’s implementation of its business strategy.

Outsourcing besides it has risks it has benefits. It lowers overhead related to employees such salary, training, management, recruitment, administration, holiday, sickness and temporary cover. Jobs are outsourced project basis as and when needed. Outsourcing reliefs companies from capital investment. It converts the cost from capital expenditures to operating expense. The company can use capital to invest in its core business. Companies can gain competitive advantage in improved and accompanying skills. It can gain customers and shareholders confidence when it outsource with well-known company. Outsourcing can increase flexibility of company to meet changing business conditions.

There are two types of cost originated in an outsourcing agreement. The first cost originated from deal which both parties agree on. The second is hidden cost such as selecting vendor that include sending out RFP, evaluating the response, negotiating contract, project leader and outsource adviser. In addition, there is transition cost. It takes from three month to full year to hand over the project to outsource company. As per some study with any outsourced service, the expense of selecting a service provider can cost from 0.2% percent to 2% percent in addition to the annual cost of the deal.


The cost might increase because of poorly structured contracts and failures on the part of the company to apply sufficient resources to managing the partnership with outsource company.

Outsourcing has implications to the business organizational structure. The organizations are becoming agile and virtual organizations because of outsourcing. They are independent companies linked by information technology to share skills, markets, and costs. They retain there core functions and let others companies to take responsibility of other functions. The agile and virtual companies reduce basic work force support costs. They increase work force productivity. Companies attract, retaining talents, reduce traffic congestion, air pollution, and more generally, the impact of business on the environment. The companies move the work to where workers want to live.



Pearce, J.A, and Robinson R. B.  Strategic Management, 10/e : Formulation, Implementation and Control.  McGraw-Hill Irwin.


Greaver, M.F. Strategic Outsourcing: A Structured Approach to Outsourcing Decisions and Initiatives. AMACOM Div American Mgmt Assn, 1999


Stright, J. F. You've decided to outsource - now what? Canadian HR Reporter; Aug 15, 2005; 18, 14;


QuickMBA : Knowledge Power Your Business Strategic Management: Self-Study Modules. Retrieved March 8th 2009 from


NetMBA Business Knowledge Center- Strategic Management. Retrieved March 8th 2009 from



Last Updated (Friday, 02 October 2009 19:31)

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