Faculty of Engineering

University of Kragujevac

OUTSOURCING AS A BUSINESS STRATEGY OF

MODERN COMPANIES
English 2

Professor: Student:

School year 2022/2023

CONTENT
INTRODUCTION............................................................................................................3
1. OUTSOURCING AS A COMPANY STRATEGY........................................................3
2. TYPES OF OUTSOURCING STRATEGIES..............................................................4
2.1. OUTSOURCING OF BUSINESS PROCESSES..............................................5
2.2. IT ABOUTUTSOURCING................................................................................5
2.3. MANUFACTURER OUTSOURCING...............................................................5
3. BENEFITS AND RISKS OF OUTSOURCING...........................................................6
4. CONCLUSION.........................................................................................................7

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INTRODUCTION
In the past, business outsourcing was reserved for large, multinational companies, but this has
changed dramatically in the current digital world, with several businesses of all sizes enjoying the
benefits of outsourcing jobs.
Today, modern companies face uncertainty as new advanced technologies emerge and trends
change fairly quickly. In order to keep pace with the competition and survive among other companies
present in the market, companies in different industries choose to digitize their processes with the help
of outsourcing jobs and provide superior experiences to clients and employees.
Outsourcing is the business practice of hiring a party outside a company to perform services or
create goods traditionally performed by employees and staff of the company. Outsourcing is a practice
that companies usually implement as a cost-cutting measure. As such, it can affect a wide range of
jobs, ranging from customer support through manufacturing to a backoffice.

1. OUTSOURCING AS A COMPANY STRATEGY

Outsourcing functions, processes and activities, which are usually carried out within the
company, through external business contracts – purchases through product procurement contracts or
the results of certain activities delegated for such activities – is not a new phenomenon. [6]
Outsourcing was first recognized as a business strategy in 1989 and became an integral part of
the business economy during the 1990s. Initially, this included only IT-related issues, but gradually
more and more businesses realized that they could not be experts in more than one or two fields. This
conclusion forced them to get rid of various areas of activity and entrust them to specialists. [4]
According to Kavčič (2014), outsourcing is defined as the transfer of some activities, which the
company previously performed, to an external associate. This means that the organization is actually
part of the influence on one of the structural elements of its management system (business
processes), which affects other structural elements and the system as a whole, left to someone over
whom it does not have direct jurisdiction in terms of responsibility because it is not part of the
organizational structure of the organization itself. This is as Drljača (2010) points out an external
partner, which through outsourcing, i.e. performing a process or part of a process for an organization,
affects the quality of the business process and its result. [1]
Outsourcing strategies are a plan built on the analysis and evaluation of functions that should
be better performed by an external service. This means that the company defines tasks that are
difficult or impossible to perform with its own resources and goes in search of companies that have all
the necessary tools and qualified personnel to deal with the task within the specified deadline. The
same goes for outsourcing strategies, as IT companies work in different directions within the field and
may not have all the means to complete certain operations or implement new technologies on their
own. [8]
Outsourcing strategies consist of standards, procedures, and regulations that dictate factors
such as who an organization engages and how much they pay. A company can hire an individual, a
small business, or a large corporation, depending on its needs. [2]
The wider use of outsourcing in the industrial market is the result of the strengthening of
competitive pressures and the advancement of globalization. As the environment becomes more
complex, faster and faster advances in technology, with consequent changes in the conditions in which
each business operates, it requires the search for ever newer methods that keep their competitors
ahead. In the past, the key to success was great; Today, the importance of high quality is growing.
Most often, this process is associated with small companies that do not have enough resources
to manage all the tasks themselves. Outsourcing is also widely used among medium-sized enterprises
and large enterprises. With the help of strategic outsourcing, companies in different industries can
leverage the expertise of partners gained through years of practice and research. As a result, the
company can improve its business condition in several areas. [7]
The primary purpose of strategic outsourcing is to make the best use of external resources
using the latest technologies and industry trends, along with a high level of expertise to improve the
efficiency and competitiveness of the company.
For many people, outsourcing is a terrifying proposition. Nevertheless, this new business
model, which has been adopted worldwide in both the private and public sectors, provides multiple
advantages. It enables an organization to achieve business goals, add value, exploit a resource base,
and mitigate risk. In other words, from individual items to system management, choosing to use
external providers allows the company or organization that hires the provider ("client") to focus on what
it does best. [9]
In the literal sense, outsourcing means the use of external resources. It occurs when the
execution of tasks, functions and processes that have been fulfilled so far in the undertaking, based on
long-term cooperation, is entrusted to an external provider specializing in a given area. Outsourcing is
defined as a transaction transfer operation that was previously internally regulated to an external
supplier through a long-term contract, and which involves the transfer of staff to a supplier for a
company. The five elements are characterized by strategic outsourcing: [4]
 A close relationship between the outsourcing process and the key factors of a company's
success in the industry.
 The transfer of ownership of a business function previously internationalized, often including
the transfer of personnel and physical assets to the service provider.
 A global contract, longer and more detailed than a classic subcontracting agreement.
 A long-term commitment between the client and the service provider.
 Contractual definition of the level of services and obligations of each partner.
The increasingly common way for organizations to try to increase their "flexibility" and generate
"high value" is through external collaborators. This situation requires precise identification of the line of
business that is desired to be monitored (ensuring a competitive advantage) and careful analysis of its
weak and strong sides. One important result of this process is the recognition and reassessment of
those activities that are not essential – in particular, whether these non-basic activities should be
carried out by the organization itself (make) or left to a specialized third party (purchase). [4]
Outsourcing helps the company concentrate on its strategic tasks and goals – its core
business. As a result of minimizing costs for activities that are necessary but not related to the core
functions and goals of the firm, the purchase price can be reduced.
Every company that wants to engage in some of its activities must determine: [4]
1. what tasks should be performed in the company;
2. what tasks should be accomplished through strategic partnerships; And
3. what jobs should be entrusted (outsourcing) to third-party experts.
The decision to entrust some processes to an external supplier is strategic in nature and can
largely determine the future of the company, therefore it must be well thought out and informed. The
collaboration between outsourcing companies and businesses will result in the development of
dynamic skills that are associated with knowledge management routines such as learning, sharing,
integration and reconfiguration. [8]
2. TYPES OF OUTSOURCING STRATEGIES
Over the years, outsourcing strategies have evolved and grown into different types that have
specific purposes. Outsourcing can be divided into: [8]
 Onshore – third-party services are requested in their country,
 Nearshore – employment from neighboring countries,
 Offshore – working with remote countries.
In addition, outsourcing strategies are usually grouped into the following categories:[8]
 Professional outsourcing,
 It outsourcing,
 Multisourcing,
 Manufacturer outsourcing,
 Outsourcing specifically for the process and
 Outsourcing the project.
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2.1. Outsourcing of business processes
Business process outsourcing, also known as professional outsourcing, is one of the most
popular types of outsourcing, which allows companies to save a huge amount of maintenance costs for
an internal team of experts and tools. [7]
For most businesses, it is very common to leave certain business operations to companies that
specialize in that particular service and maintain a well-established infrastructure in their field of work.
Outsourcing of business processes includes marketing, accounting, recruitment and recruitment, legal
affairs, public relations and many other specialized services required by a dedicated team of
professionals.
These types of contracts help companies avoid internal development of high-level business
processes that are beyond their capacity (economicand technical). Process-specific outsourcing
enables businesses to pay for services and gain access to high-quality resources, while significantly
reducing overhead costs.

2.2. IT aboututsourcing
IT outsourcing is one of the most common strategic outsourcings today, which involves
subcontracting activities to meet the IT needs of your business. IT outsourcing includes services that
range from development to maintenance and support. [7]
IT outsourcing strategies are key drivers of sustainable competitiveness of companies engaged
in technologically intensive business. As a result of successful outsourcing experience, the company
can take advantage of improved dynamic capabilities, market-oriented innovation, strategic flexibility,
agility and increased efficiency. [8]
Almost every type of business today operates with technology on some level. Each business
has specific IT needs depending on the nature, size and type, which makes it the most commonly
engaged department. [5]
The services of a certified IT professional are not cheap. Being one of the highest paid jobs in
the world, it is far cheaper for companies to hire a third-party IT team compared to building an internal
one. While most smaller companies often engage entire IT activities, businesses often engage part of
IT functions, such as data management, customer support, etc.

2.3. Manufacturer outsourcing

Outsourcing manufacturers, also known as outsourcing services, is usually quite industry-
specific. For example, a car manufacturer may hire certain components or parts of a vehicle, such as
the manufacture and installation of windows. These types of external business contracts help the
company reduce production costs and improve assembly time.
Despite several advantages of external manufacturer engagement, there are several potential
risks in this type of external engagement – such as quality problems or service delivery that can
interfere with the entire production process. But in most cases, external manufacturer engagement is
necessary for small and medium-sized businesses to survive in a competitive market.
Many businesses, especially small and medium-sized enterprises, simply lack the capital to
increase and compete with the big players. Most companies do not have enough capacity to invest in
all aspects of the business, which includes the latest technology, personnel, equipment upgrades and
constantly evolving business processes. This makes it almost impossible for companies to grow and
develop all business departments and remain 100% self-sufficient.
Without the help of independent companies, it is very difficult to sustain and compete in today's
market, where the life cycle of products is rapidly decreasing.
It cannot be said that there are bad or good outsourcing strategies. The success of outsourcing
depends on a number of aspects that every company needs to think about before hiring external
services. Although the outsourcing strategies described above have different goals, they all have the
same structure. So there are certain steps that need to be followed in order for this to be successful.
[8]
 Outsourcing does things for the right reasons: we must not only look at a cost-based strategy,
but one should also make sure that both outsourcing and business strategies are aligned.

5
  Define what is expected: develop a good business case that outlines the business value of
outsourcing and how this initiative supports the company's goals. In addition, create an
achievable and realistic plan for the end product that companies and external partners can rely
on.
 Prepare documentation: in order for the cooperation between the company and the external
partner to be effective, it is necessary to prepare all relevant specifications and requirements in
order to immediately resume development.
 Choosing the right seller: the supplier should suit the needs of the company and be able to
perform tasks of any complexity.
 Choose the model of engagement that best suits the company. There are three main different
approaches to cooperation with an IT outsourcing company. Before making a final decision, it
is crucial to know what financial resources the company is willing to allocate for the
development process. Once a budget is established, you can choose the right hiring model
that will help the company do all the work that will fit into the budget that is most suitable for
the company's team.
 Make an effective contract: it should reflect strategic goals and clearly define expectations for
the seller and the company. This is the legal basis of the partnership, so special attention
should be paid to this aspect.
 Follow the process: make sure you get what you're paid for. Project progress reporting and
transparency are extremely important.
3. BENEFITS AND RISKS OF OUTSOURCING
Outsourcing involves finding and hiring a third-party service provider to handle certain tasks
beyond the capabilities of the internal team. Recently, the practice of working with external resources
has grown into a trend as it brings a number of advantages to foreign affairs holders. [8]
The most discussed benefits of outsourcing are associated with improved financial
performance and various non-financial performance effects, such as an enhanced focus on key
competencies. These and other commonly cited benefits of outsourcing in the literature are shown in
Table 1.
One of the main reasons why companies use strategic outsourcing is the desire to reduce
costs. You can rely entirely on your partner's knowledge and experience instead of hiring specific staff.
Automation and optimization usually go hand in hand with outsourcing, which allows businesses to
save on operating costs. Outsourcing helps companies get rid of a series of routine and repetitive
tasks, thus giving more time to manage their major specializations and business challenges that
require human interaction and judgment.
Table 1. The main advantages of outsourcing [4]

1. Reduced overhead and operating costs

2. Possibility of converting fixed costs into variable costs
3. Price competitiveness
4. Lower share (freezing) of capital
5. Improved cost control
6. Greater flexibility – ability to meet fluctuations in demand
7. Easier and more economical access to the latest technologies
8. Improved quality
9. Possibility of concentrating on the core business of the company
10. Improving cost measurability
11. Better control of internal departments
12. Availability of new service options and reduced capital liability
13. Access to external competencies
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 14. Acquisition of specialist expertise
15. Ability to spread commercial risk

Despite its many advantages, outsourcing involves significant risks. A company that uses
outsourcing inevitably loses some control over its future, which to some extent is handed over to
another firm, whose primary motivation (to keep in mind) is the maximization of its own profits.
Consequently, in order to be able to take advantage of all the potential benefits of external
engagement, the firm must know the associated risks and threats. He must trust the external service
provider, and know his capabilities and potential well. The most common types of outsourcing risks are
shown in Table 2.
Table 2 The main risks of outsourcing [4]

1. Dependence on suppliers
2. Hidden costs
3. Loss of knowledge – loss of contact with new technological discoveries that offer
opportunities for product and process innovation
4. Loss of competitiveness of long-term research and development (R&D).
5. The risk of cooperating with an unfair supplier who, having gained access to knowledge
about the company and its products, may use them against that company in the future
6. Lack of necessary capabilities of service providers
7. Difficulties in communication and coordination.

Outsourcing costs vary between different activities. Maybe you'll pay for integration, only then
realize that you need someone to administer the new system. To avoid unexpected consumption, be
sure to calculate all possible costs with your external partner. This is probably one of the biggest
concerns many companies have when it comes to outsourcing. Although they may not have enough
internal resources and knowledge to solve existing problems, they still believe that most outsourcing
companies provide low-quality services. If you research and delegate your tasks to a trusted service
provider that possesses specific skills and enables continuous quality assurance, you are likely to get
better end results. [7]
While the risks mentioned above exist, they directly depend on which service providers you
choose and how simplified your communication with them is. As long as you work with trusted experts
who have gained some level of trust in the market, these risks can be avoided.
4. CONCLUSION
Business organizations are increasingly embracing sustainability, which is achieved when
organizations use resources in a way that does not compromise the ability to sustain future
development. At the same time, outsourcing has become a common practice, traditionally motivated by
cost savings and other short-term goals that neglected future development.
A company's internal teams are essential to success, but they may not have the time or
expertise to complete certain tasks. Outsourcing is a strategy that involves assigning business tasks to
third-party providers. An outsourcing strategy is a plan that describes how a company engages third-
party companies or individuals to perform tasks. As an alternative to relying solely on internal
employees, this approach can reduce costs, increase productivity and improve the overall quality of the
final product. Outsourcing provides businesses with access to the latest technologies and professional
talents, which can be used to their advantage.
External cooperation brings a number of advantages of the outsourcing strategy because the
company can build an extensive network of competencies related to outsourcing contracts, from which
the necessary functions such as raw materials, components and systems can be transferred to
external associates. A company can build strong relationships and team up with outside services to
work regularly on specific projects or tasks. It gives the opportunity to exchange knowledge and
experience between companies, to build solid, professional relationships and develop managerial and
communication skills of both teams.

LITERATURE
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[1] Harrow, M. (2010). Outsourcing as a business strategy. Proceedings of the 11th International
Symposium on Quality, Competitiveness and Sustainability, Croatian Society of Quality Managers
and Oskar, Zagreb, p. 53-64.
[2] Indeed Editorial Team. Outsourcing Strategy: Examples, Benefits and How To Build.
https://www.indeed.com/career-advice/career-development/outsourcing-strategy. Adopted
31.10.2022.
[3] Kavčič, K. (2014). Strategic Management of Outsourcing. Faculty of Management. Dill
[4] Koszewska, M. (2004). Outsourcing as a modern management strategy. Prospects for its
development in the protective clothing market. Autex Research Journal. 4(4). Lodz University of
Technology. Pp. 228-231.
[5] Leo, E., Bui, Q.N. & Adelakun, O. (2022). Outsourcing for Sustainable Performance: Insights from
Two Studies on Achieving Innovation through Information Technology and Business Process
Outsourcing. Sustainability 2022, 14, MDPI. Basel. Pp. 1-16.
[6] Michela, P. & Carlotta, M. (2011). Outsourcing strategies. How to formalize and negotiate the
outsourcing contract. Department of Business Administration "Riccardo Argenziano" Faculty of
Economics, pp. 276-287.
[7] Strategic outsourcing: bringing in the value to the business across various industries.
https://www.omi.co/blog4/about-strategic-outsourcing/. Retrieved 2022-10-30.2022.
[8] How to Come Up with an Effective IT Outsourcing Strategy for Your Business. Retrieved
https://www.intellectsoft.net/blog/best-it-outsourcing-strategies-pros-and-cons/ 10/30/2022.
[9] Why is outsourcing a good business strategy?,
https://www.fespa.com/en/news-media/features/why-is-outsourcing-a-good-business-strategy.
Retrieved 2022-10-28.