On SAGE Insight: Outsourcing Services to Improve Financial Performance: Is There a Limit?

From Global Business Review

The outsourcing of both manufactured goods and services has been identified as a key factor in improving companies’ financial performance. This has contributed to the practice spreading considerably in recent years and becoming the norm.

In general terms, when a company decides to outsource an activity it is because it considers that it will have positive effects, such as cost reductions, less need for capital investments, a greater focus on its core business and increased flexibility. However, that decision also entails a series of disadvantages and risks, such as the possible loss of control over the outsourced activity, which might result in a reduction in the quality of the outsourced good or service, and an overestimate of the cost savings linked to the outsourcing. These disadvantages are intensified as the outsourcing level increases and can reach the point that they counteract the positive effects of the process. These advantages and disadvantages linked to the decision to outsource impact on the company’s financial performance.

The studies that have analyzed the financial effects of outsourcing assume that the relationship is positive and linear, that is, the greater the level of outsourcing, the better the financial performance. However, the widely differing results of these studies raise doubts as to this point of view and question whether it is logical to define the relationship between the outsourcing level and the company’s financial performance in this way, as outsourcing involves not only advantages but also disadvantages. Read more…

Abstract

Outsourcing has been identified as one of the key factors for improving companies’ financial performance. Moreover, the procurement of business services has become an important element of companies’ acquisition of external resources. However, there is a lack of evidence linking services outsourcing and performance. Limited prior literature has mostly assumed that this relationship is positive and linear. Our empirical study reveals that firms may be able to increase their performance through services outsourcing; however, this is only true up to a point, beyond which the performance decreases as a consequence of further outsourcing. Identifying the type of relationship between the variables under study is a key point to company managers formulating their service outsourcing strategies. They must be aware that there is a level of outsourcing that should not be exceeded. Future research should help managers to determine which is the most effective level of service outsourcing for their companies.

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Article details
Outsourcing Services to Improve Financial Performance: Is There a Limit?
Carlos Sanchís-PedregosaMaría-del-Mar Gonzalez-ZamoraMaría-José Palacín-Sánchez
First Published October 9, 2017
DOI: 10.1177/0972150917713274
From Global Business Review


     
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