OUTSOURCING: THE BENEFITS AND THE RISKS
IRINA I. SALAN, DAN C. LUNGESCU, VERONICA M. PAMPA
Babe-Bolyai University, irina.salanta@econ.ubbcluj.ro
Babe-Bolyai University, dan.lungescu@econ.ubbcluj.ro
Babe-Bolyai Univeristy, veronica070280@yahoo.com
ABSTRACT
The goal of this paper is to analyze and structure the
most wanted benefits and the most dangerous risks of
outsourcing. The research is primarily based on
professional literature reviews.
The benefits are well known and most businesses count
on them when launching into outsourcing. They
generally aim cost reduction, access to new
technologies, focus on core competences or improve
customer service. It is quite difficult to accurately
quantify the total benefit generated by outsourcing, but
all companies that use outsourcing as a business
strategy are well aware of the possible benefits.
The risks are generally less spoken about, but equally
important. Hidden costs, violations of the outsourcing
contract, loss of customers/opportunities, potentially
conflicting interests are just some of the most frequent
outsourcing related risks.
Moreover, we are offering a set of methods for reducing
or even avoiding some of the most dangerous risks of
outsourcing. The most popular method to minimize
risks is a close cooperation between the companies
involved in the outsourcing process. The contribution of
this paper refers to organizing the main benefits and
risks related to outsourcing provided by the literature.
KEYWORDS: outsourcing, outsourcing risks,
outsourcing benefits, outsourcing risk mitigation
1. Introduction
Outsourcing is a fully-fledged business megatrend
around the world. Outsourcing involves the
procurement of physical and/or service inputs from
outside organizations either through cessation of an
activity that was previously performed internally or
abstention from an activity that is well within the
capability of the firm (Barrar, P., Gervais, R.,, 2006)
Because of the high popularity of this business strategy,
researchers have pointed out that there is an initial
tendency to overstate benefits from outsourcing and to
minimize the unsuccessful experiences that accrue
undesirable consequences. Furthermore, we consider
important to structure the risks and benefits of
outsourcing as previous literature has often described
them in a linguistic manner. As the degree of
involvement in outsourcing differs among firms, the
complexity of the interfaces between firms may differ,
leading to different benefits and risks concern (Ellram,
L., Billington C., 2001).
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2. Outsourcing
2.1. The benefits of outsourcing
The benefits or, to put it in other words, the advantages
enjoyed by companies as a result of outsourcing are
uncountable and frequently discussed, even though
sometimes slightly overrated. In this paper, we chose to
approach the risks from the perspective of the
dominating company that considers the possibility of
outsourcing.
According to Tjader et. all., the outsourcing-related
benefits include: increased focus on the company's core
functions, cost reductions, increased flexibility, the
emergence of a variable cost structure that may allow
for the transformation of fixed costs in variable costs,
improved productivity, increased competitiveness,
access to external skills and competences, risk sharing,
improved quality, the preservation of own capitals,
stimulation of innovation (Tjader, X.C., Shang, J.S.,
Vargas, L., 2010).
Authors like Kremic add new elements to this list, such
as: shorter feed-back time to customer orders, access to
new infrastructures and technologies, competitor
emulation, juridical alignment with the supplier
company, a more effective and efficient management,
input of capital (Kremic, T., 2006, p. 471). Preston and
Brohman add further benefits of outsourcing to the list,
namely:
specialization of the company that provides
outsourced services in order to obtain
economies of scale;
access to advanced technologies
an fresh, innovative way to do business
(Preston, D., Brohman, K., 2002, p. 207).
Another noteworthy advantage to be added to the list
above is the fact that companies that consider
international outsourcing have the possibility to use the
time zones to their advantage, i.e. be available for their
customers at any moment of the day - or night.
Multinational companies resort to this type of
outsourcing because IT system malfunctions have to be
dealt with in real time.
It is quite difficult to accurately quantify the total
benefit generated by outsourcing logistics to a third-
party provider; however, Corbert has proven that the
value acquired by a company as a result of outsourcing
is made up of:
, whereby:
3. VE signifies the value acquired as a result of
outsourcing;
 4. VT signifies the value of transaction;
5. v signifies the rate of return (?);
6. F signifies flexibility, that is defined as the
fraction / percentage of the an organization's
resources that may undergo positive or
negative variations in response to the changes
that occur according to the company's needs.
(Corbett, 2004).
In order to summarize all points referred to in this sub-
chapter, we have sketched the Figure 1, that illustrates
the main benefits of the outsourcing process.
Figure 1. Main outsourcing benefits
The currently prevailing trend in specialist literature is
to overestimate the importance of outsourcing-related
benefits. We believe, however, that more emphasis
should be put on the risks now, because identifying and
understanding them properly will enable us to maximize
the benefits, thus securing the success of the whole
process.
2.2. Outsourcing risks
We construe risks as the possibility of positive or
negative deviations from the expected result. In this
paper, we chose to approach the risks from the
perspective of the dominating company that considers
the possibility of outsourcing. In one of his writings,
Lonsdale claims that not occasional problems and
incidents are to be blamed for the failures experienced
by some companies in the process of outsourcing, but
rather a serious lack of understanding as to the workings
of the system in question (Lonsdale, 1999, p. 179).
A recent survey shows that in many companies' view,
the major outsourcing-related risk, that belongs to a first
class of threats, lies in the reliance on a supplier
(Quelin, B., Brohman, K., 2003), which basically means
that, more than often, companies don't have a plan B to
resort to in case that the supplier of outsourced products
and services fails to perform its duties in due time.
Another major risk is represented by the limited amount
of control on the quality of outsourced products and
services.
However, another serious threat emerges on a long
term: the companies' incapacity to perform the
processes they have been outsourcing for a long time.
Over the course of time, it is has been demonstrated that
many companies lose their valuable know-how as a
271
result of outsourcing. This makes the outsourcing
contract extremely difficult to terminate in case of
either party's discontent.
A second set of risks concerns the capabilities of the
suppliers. They may exert themselves in a flawed
manner, with limited international mobility, limited
knowledge of the customers' activities and limited
capital (Quelin, B., Brohman, K., 2003, p. 652). The
degree of dependence between the companies involved
in the process is very high and there from stems
naturally the concern about the suppliers' capabilities.
The third major class of outsourcing risks includes the
ecological and social hazards. They are extremely
dangerous and difficult to quantify. Figure 2
summarizes the main risks encountered in the process
of outsourcing.
Figure 2. The main outsourcing-related risks
In addition to those already mentioned, there are several
other risks according to Kremic:
Selecting an inappropriate supplier;
Moving the center of gravity towards the
supplier;
Problems generated by the supplier
(incongruities, quality issues, failure to observe
the delivery terms and conditions,
opportunistic behavior, denial of access to the
best technologies);
Loss of customers / opportunities;
Loss of reputation
High degree of uncertainty because of the
volatile business environment;
Low morale
Costs generated by the synergy with the
supplier of outsourced services and goods.
Potentially conflicting interests;
Legal hindrances (Kremic, T., 2006, p. 470).
Each outsourcing contract may generate further risks
that are worthy of analysis. These include the
information risk, the employees reluctance to change,
the need to reorganize specific departments.
Back in 2008 Tsai et. all reminded us of several risks
that we have also appropriated in this paper. The list we
will be therefore supplemented with the following types
of risks:
- Violations of the outsourcing contract;
- Lack of communication, which on the long
term brings about a large array of dysfunctions
between the two companies;
- Lack of common goals;
- The loss of the supplier's competitiveness in
time;
- The supplier's limited capacity to maintain a
steady course of strategic development or
customer service levels (Tsai, M.C., Liao,
C.H., Han, C.S. , 2008, p. 416).
There is a large variety of risks and that's the reason
why we chose to arrange them into four major
categories, as shown below in Figure 3.
Figure 3. The main categories of outsourcing risks
Because of the large number of challenges and threats
that companies must consider both before and after
making the outsourcing decision, we endeavor to
explore some ways to alleviate the outsourcing related
risks in the next section of this chapter.
2.3. Outsourcing risks alleviation methods
In an article published in 2009, Tate i Ellram explain
that the companies that get involved in outsourcing
share both risks and resources, with the common
purpose to maximize the benefits by capitalizing on the
common resources and to minimize the risks (Tate, W.,
Ellram, L. M., 2009, p. 258).
The sources of risks and uncertainty that looms around
outsourcing-based business are many and they include:
the external environment, the internal environment and
certain specific variables. The most popular method to
minimize risks is a close cooperation between the
companies in involved in the outsourcing process.
Kumar and his collaborators have devised an extremely
relevant scheme of the major risk groups that
outsourcing companies must face (Kumar, S, Kwong,
A., Misra, C., 2009), that we have chosen to include in
this paper (refer to Figure 4).
With Figure 4 as a starting point, we construe the
country risk as an outcome of a multitude of
circumstances created by the political, social and
economic instability in the areas where the companies
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involved in outsourcing operate. This risk can be
avoided by moving the operations to a different country
or by outsourcing a part of the company's functions to
another region of the globe. If both companies operate
in the same country with a high degree of political
instability, corruption and other related problems, their
business relations are very likely to be considerably
affected and obstructed.
Figure 4. Fishbone diagrame
Source: Kumar, 2009, p. 445.
The second notion in the fish-bone diagram is related to
reputation. This type of risk stems from the fact that
the companies involved in outsourcing may be mutually
and negatively affected by the other ones' loss of
reputation. There is a large assortment of business
activities where a negative perception, once created,
contaminates the partners, as well. This is particularly
true in case of outsourcing relations, as they tend to be
close and durable.
The next risk, the strategy-related one, assumes the top
position among the concerns of the companies that may
plan to take the first step in outsourcing or may be
already adept at that, because all experts in this field
recommend that a strategy should be devised before
outsourcing. Having a plan, a well-considered idea
about the steps to be taken in the outsourcing process
minimizes the failure potential. A deficient
implementation of the strategy is another significant
hazard.
The financial risk comprises the issues that pertain to
the recovery of the sums involved in the process. This
risk can be minimized by including clauses designed to
protect both companies against significant financial
losses in the outsourcing contract. There are financial
experts that have worked out unique methods of
avoiding such risks. Last but not least, the operational
risk includes a series of other risks, such as structural,
technological, process- and human resources-related
risks.

Figure 5. Standards steps to reduce outsourcing
risks
Source: Tate and Ellram, 2009.
No matter how we choose to classify or name these
risks, they should be reckoned with and be given the
proper amount of care, as they are real and quite
pernicious if taken lightly. There is an abundance of
specialist literature on this topic, which proves once
again the seriousness of the matter. Tate and Ellram
provide a list of steps that the companies can take once
they are seduced by the idea of outsourcing in order to
minimize risks (see diagram no. 4).
3. Conclusions
Outsourcing is a worldwide known business solution
for companies that are seeking to reduce cost, improve
or acquire competitive advantage, focus on own core
competences, expand business or improve customer
service. The benefits, as appealing as they may seem,
are not guaranteed for all companies that outsource. In
case the outsourcing process takes place on a scarcely
documented ground, the risks increase and shadow the
benefits of the process. In this article we have examined
the main, in terms of most frequent and well known
benefits and risks. Furthermore, we identified some
simple steps for avoiding the outsourcing related risks.
The limits of our research refer to the lack of data from
the business world, this being the direction and future
steps of our work in the field.
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