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Introduction
Outsourcing is a business trend that has greatly increased in recent years with more and more companies outsourcing part or whole of their functions/activities. Outsourcing can be defined as the transfer of a business function or activity previously produced in-house to an external supplier which then takes prime responsibility for fulfilling the task (Finn, 2007). Although companies may perceive outsourcing as an alternative to reduce costs as a result of access to economies of scale and improve performance as a result of unique expertise that a large outsourcing vendor can deliver (Roodhooft and Warlop 1999 cited by Jiang and Qureshi 2006), outsourcing has many hidden cost and risks that can lead to create various financial and non financial problems. This essay will discuss whether outsourcing achieves economies of scale. More specifically this essay will explore current trends in outsourcing. Then it will discuss how outsourcing vendors achieve economies of scale and cost reductions. Furthermore it will give an insight of hidden costs and disadvantages in order to give a complete picture of outsourcing benefits and drawbacks.
An estimation of the amount spent on outsourcing in 2001 was to be $3.7 trillion and it was expected to reach $5.1 trillion by the end of the year 2003 (Corbett, 2003 cited by Clott, 2004). Researchers estimated that by 2015, about 3.3 million jobs accounting for $136 billion in wages will move off shore (McCartney 2003). Further outsourcing industry trends are mentioned by a survey conducted in 1997-1998, which indicated that two-thirds of executive manager had outsourced a business process and that the outsourcing market penetration was expected to grow ...