May 2016 Q4 b&c

Outsourcing involves an organisation contracting out certain internal business functions to a third party. In outsourcing, the external third party is located within the same country as the outsourcing entity. The outsourced function is usually considered be a non-critical activity within the value chain of the firm. A bank hiring out its security or cleaning services to external security or cleaning companies is a typical example of outsourcing.

Offshoring is a form of outsourcing. It, however, differs from traditional outsourcing to the extent that it involves an external entity – i.e. the third party – which is based in a different country that provides an organisation with a particular product or process which had previously been provided in-house. An example of Offshoring will be a financial institution operating in the United Kingdom but has a customer call centre operated in India.

Shared servicing is an alternative to outsourcing. In this structure, an organisation establishes shared service centres to consolidate the transaction-processing activities of many operations with the organisation. Shared service centres aim to achieve significant cost reductions whilst improving service levels through the use of standardized technology and processes. A typical example of shared servicing would be a very large University that centralizes its IT support function or its HR support function instead of decentralizing among the various colleges of the University.

i) It can affect the quality of a firm’s product or services offered since the use of third parties breaks the direct link between the firm and its customers.
ii) It can lead to bad publicity to the firm in the home market when consumers perceive moves to offshore operations as leading to domestic jobs losses.
iii) It could lead to loss of control since it increases the scope for third parties not to meet agreed service levels.