**Abstract**

Outsourcing is part of a system, as it includes products and services integrated in a value chain and which are performed by an external (contracted) firm, aiming to establish an interdependent, collaborative and trusting relationship between the contracting and contracted firms. Like any dimension of business in organisations, changes in organisational structures and in how the service is produced/ provided, outsourcing brings benefits and risks. Therefore, from literature review method, this chapter aims to explore the concept of outsourcing as a differentiating tool in organisations' performance, emphasising the benefits and risks. The results showed the dimensions to consider in the decision to implement outsourcing, which are: (1) transaction costs, (2) use of resources, and (3) collaboration between the parties. The contribution of the study is to present a synopsis of the outsourcing topic, specifically the theories that support it, its benefits and risks. Additionally, a decision-making model is presented, in the certainty of its usefulness for the organizations' managers.

**Keywords:** Outsourcing, organisational performance, theories, strategic decision

### **1. Introduction**

The concept of outsourcing dates back to the 1940s (Second World War) and emerged in the United States of America (USA), given the war industry's need to concentrate on improving arms production in order to maintain the Allies' supremacy. This industry passed on some activities supporting production to other firms providing services [1]. However, only in the second half of the 20th century was the concept put into practice in the service sector, to stimulate organisations' profitability through sub-contracting services. These services cover low-value activities, such as cleaning and security, and others such as marketing, human resources, information technology and finance.

Here, Nunes [2] argued that outsourcing is a way to add value to business. In other words, outsourcing is a strategy to improve organisations' efficiency, through contracting specialised third parties to carry out some organisational functions [3]. Jacobs et al. [4] and Quélin and Duhamel [5] defined outsourcing as an operational change, involving transfers of suppliers. Barrett and Baldry [6] explained it is a process in which the user contracts a supplier to perform one of the organisation's internal functions and transfers assets (human resources and management responsibility) to this end.

Nevertheless, outsourcing is regularly confused with sub-contracting, given the close relationship, but the main strategic function of outsourcing is to ensure an organisation's profitability, through control of the financial area, human resources and information and technology, allowing efficiency and effective management of the available organisational resources by resorting to external sources to perform a certain area of business. This way of making organisations profitable has gained relevance, as an organisational tool, as a consequence of the opportunities and threats caused by globalisation.

Outsourcing allows the construction of better business, stronger economies and a more prosperous life-style [7]. Access to information, allied to technological innovation, lets organisations decide and act in a global scenario, creating interdependence and stimulating productivity and competitiveness, as argued by the same author. However, adopting it involves a decision, specifically one of the main decisions faced by organisations being the question of producing a given product/service or acquiring it through external entities - "make or buy" – where the focus is on gaining a competitive advantage over rivals [7, 8]. Therefore, outsourcing emerges as a strategic tool claiming to respond to current issues in the global economy [9], a real way to obtain a competitive advantage [10] and is an innovation in the service category, allied to the dynamics of core competences [11]. Recently, Ramasubbu et al. [12] concluded that the early studies on information systems controls considered only the projects developed internally by the organisations, currently, these go through external subcontracting, i.e., outsourcing, which include face-to-face and virtual teams, characterised by flexibility and agility.

Despite the growing number of organisations using outsourcing, not all achieve the expected results. So there must be a strategic focus to overcome the associated risks, since the success of any organisation is the fruit of its strategic orientation [13–15].

Regarding the theoretical framework, various theories support studies on the risks and benefits of outsourcing in industries and service providers. However, *"some of them are complementary, the others are contradictory. This creates confusion among the researchers of the outsourcing phenomenon"* ([8], p. 1). The following theories are highlighted: Transaction Cost Theory [16], Resource-Based View Theory [17] and Relational View Theory [18]. These theories and others will be addressed in the next sections dealing with the topics raised, because according to Perunović [8], this concept should be approached holistically.

In the vast literature on this topic, some gaps remain, which justifies this study. For example, research has been carried out on governance mechanisms [19] or explicitly relational mechanisms [20], but numerous studies have a limited reach due to using proof based on case studies [21] or on secondary data [22]. More recently, Hanafizadeh and Zareravasan [23] stated that more studies were necessary on the factors affecting decisions to use outsourcing. Moreover, in order to facilitate perception of organisational strategic processes, various researchers [24–27] studied the factors contributing to organisations choosing outsourcing. Also the decision between Insourcing and Outsourcing ("make or buy") has contributed to research aiming to understand the benefits and risks involved in that decision [28].

According to the dominant line of thought in the literature, in terms of organisational management, outsourcing can be considered a strategic tool that when correctly implemented allows a reduction in costs [29, 30] and optimised production [31], potentially giving organisations a competitive advantage [10, 32]. Therefore, this chapter aims to explore the concept of outsourcing as a differentiating tool in organisations' performance, to determine the viability of implementing this strategic tool, through the constructs of the benefits and risks associated with

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benefits that can arise.

*The Viability of Outsourcing in Organisational Performance: Benefits and Risks*

also showing that failure is always associated with responsibility [3].

certainty of its usefulness for the organizations' managers.

the process of deciding between *make* and *buy*. This means that this chapter aims to present a synopsis of the outsourcing topic, specifically the theories that support it, its benefits and risks. Additionally, a decision-making model is presented, in the

Organisations have been sub-contracting since the Industrial Revolution [3]. The managers of pioneering projects using outsourcing have left strong lessons: the importance of following an appropriate process in selecting suppliers and drawing up the contract; the importance of reaching an appropriate balance between the costs and benefits, understanding how the benefits can arise; the need for both parties to allocate their own resources to manage the relation and for new models to encourage both, and individual and organisational rewards in seeking success [33];

Focused on the USA and the UK, the belief emerged that improved results were obtained based on solutions originating in competitive markets, such as the private sector [34]. For these authors, the focus was on reducing costs and better use of organisations' available resources, which in the public sector would imply a change in administrative processes, with hierarchical structures giving way to more flexible organisational structures, with growing concern about customers' needs, similarly

With outsourcing being a strategic tool, the decision to implement it should involve analysis of the set of levels forming an organisation, in tacit, strategic and operational terms [7]. This author also highlights that at a first level, corresponding to tacit relations, outsourcing was seen as a tool to solve organisational problems (lack of administrative competence, inappropriateness of human resources or lack of financial resources), where it was important to obtain better services involving less capital investment and less management time. Subsequently, outsourcing evolved to the strategic level, with maturing relationships, moving from a tacit tool to a management tool. Relations changed from seller and buyer to the formation of partnerships. External functions took on greater control in terms of responsibility, by directing attention to the strategic aspect. For Corbett [7], strategic outsourcing redefined organisations' essential competences, through forming long-term contracts and creating relations with suppliers, directed towards results. The last level concerns operational outsourcing, allowing managers to redefine the business. Value is found in the innovations that external sources can add to the organisation. It is also described as tool of leverage, allowing business changes in order to fit the global market, new customers and the need to introduce new products and/or services to the market [35]. According to Corbett [7], service providers are no longer seen only as means to obtain more efficient business, to be regarded as partners. As mentioned by Elmuti et al. [36], when an organisation opts for outsourcing to stimulate business, it should make a detailed strategic analysis to determine the

Elfring and Baven [37] identified the variables that can influence the choice of make or buy, in three groups: (1) strategic factors, including questions related to the main business, advantages and the specified quality; (2) environmental factors, which reflect the speed of technological development, exponential competitiveness in the supplier market and government regulations; and (3) operational factors, which are production costs and scale economy. To understand the emerging market,

*DOI: http://dx.doi.org/10.5772/intechopen.98308*

to what happens in the private sector.

**2. Literature review**

**2.1 Brief synopsis**

the process of deciding between *make* and *buy*. This means that this chapter aims to present a synopsis of the outsourcing topic, specifically the theories that support it, its benefits and risks. Additionally, a decision-making model is presented, in the certainty of its usefulness for the organizations' managers.
