The Effect of Outsourcing Strategies on Organization Performance

The Effect of Outsourcing Strategies on Organization Performance

ABSTRACT

This project focused on the effects of outsourcing strategies on organization performance with particular reference to Nigeria Breweries Plc. The importance of outsourcing strategies in organizations cannot be overemphasized, hence the need for this research work. The objective of this study was to examine the relationship between outsourcing and organization performance and assess the uses of outsourcing by organizations to gain a competitive advantage over their competitors. Based on these objectives, data were sourced through a survey research method, and data was collected from a sample size of 99 respondents, which was arrived at through the use of the quantitative approach. The study found that an outsourcing strategy help organizations cut cost and increase profitability and productivity, which leads to higher organizational performance. Therefore, it was recommended that organizations embrace the outsourcing strategies and improve service delivery to their customers. Also, organizations should continue to monitor the contractor’s activities and establish constant communication.

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

Outsourcing is defined as the procurement of products or services from sources that are external to the organization (Rundquist, 2006). Outsourcing can be defined as a phenomenon in which a company delegates part of its in-house operations to a third party, with the third party gaining complete control over that operation/process (Ono & Stango,2005). The clients inform their provider what they want, how they want the work performed, and the control of the process is with the third party instead of the parent company. From the above, outsourcing in this study will essentially refer to a function in which an organization delegates in-house operations/processes/services to a third party. Outsourcing is the process of replacement of in-house provided activities by subcontracting them out to external agents.

Consequently, the management and development of innovations in outsourced activities become an agent’s responsibility external to the firm. Outsourcing allows organizations to concentrate their core competencies on definable preeminence business areas and provide customers with unique value (Behara, Gundersen, & Capozzoli, 1995). The goals of outsourcing are strategic: improved efficiencies, lower costs, improved flexibility, higher quality, and a more remarkable ability to achieve a competitive advantage. The ultimate strategic goal is to develop core competencies that will strengthen entry barriers for new firms to survive. By focusing on core competencies and utilizing qualified vendors to provide processes that are not one of the organization’s core competencies, the organization’s risk can be minimized and shared with its suppliers. Core competencies are the collective institutional learning capabilities of the company that allow it to supply products and services that uniquely add absolute preeminence in those competencies (Hilmer & Quinn, 1994). “Core competencies are the innovative combinations of knowledge, special skills, proprietary technologies, information, and unique operating methods that provide the product or the service that the customer value and want to buy” (Greaver, 1999). When outsourcing decisions are made based on an in-depth understanding of the organization’s core competencies and are intended to build or enhance the organization’s competitive advantages, outsourcing becomes strategic (Bettis, Bradley, & Hamel, 1992). Firms’ outsourcing decisions are usually analyzed as a “make or buy” dilemma. On the one hand, market imperfections, such as measurement problems, difficulties in controlling the collaboration between the customers and the provider, reduced control over how certain services are delivered, and increased complexity in arms-length contracts may raise the company’s liability exposure. The “make” option is favored in the case of services that hinder the comparability of output and prices and reduces market transparency.

Further, asymmetric information generates adverse selection and moral hazard problems, emphasizing the role played by reputation (De Bandt, 1996). On the other hand, other arguments favor the “buy” option. Among them are cost cuts, increased capacity, improved quality, increased profitability and productivity, improved financial performance, lower innovation costs, risks, and enhanced organizational competitiveness, which are commonly considered the main reasons to justify outsourcing strategies.

1.2 STATEMENT OF THE PROBLEM

Firms’ outsourcing decisions are usually analyzed as a “make or buy” dilemma. The “make” option is favored in the case of services that hinder the comparability of output and prices and reduces market transparency. On the one hand, market imperfections, such as measurement problems, difficulties in controlling the collaboration between the customers and the provider, reduced control over how certain services are delivered, and increased complexity in arms-length contracts may raise the company’s liability exposure. Further, asymmetric information generates adverse selection and moral hazard problems, emphasizing the role played by reputation (De Bandt, 1996). On the other hand, other arguments favor the “buy” option. Among them are cost cuts, increased capacity, improved quality, increased profitability and productivity, improved financial performance, lower innovation costs, risks, and enhanced organizational competitiveness, which are commonly considered the main reasons to justify outsourcing strategies. This view makes the researcher want to investigate the effects of outsourcing strategies on organization performance.

1.3 OBJECTIVE OF THE STUDY

The objectives of the study are;

1. To ascertain the effect of outsourcing on organization performance

2. To determine whether cost affects organizational performance

3. To ascertain the relationship between outsourcing strategies and organization performance

4. To ascertain the effect of outsourcing on organization profitability

REFERENCES

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