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IIMB Management Review

Journal of Indian Institute of Management Bangalore

IIM Bangalore offers Degree-Granting Programmes, a Diploma Programme, Certificate Programmes and Executive Education Programmes and specialised courses in areas such as entrepreneurship and public policy.

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About IIMB

The Indian Institute of Management Bangalore (IIMB) believes in building leaders through holistic, transformative and innovative education

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The Determinants and Impact of Outsourcing on Small and Medium Enterprises

Volume 19, Number 3 Article by Jogendra Kumar Nayak, Gautam Sinha and Kalyan K Guin September, 2007

The Determinants and Impact of Outsourcing on Small and Medium Enterprises – An Empirical Study :

With the increase in competition brought about by globalisation, outsourcing has come as a strategic tool for practitioners. Companies from around the world are increasingly taking advantage of the lower costs and new markets represented by developing countries like India to create a competitive edge. Recent literature suggests that outsourcing, properly understood and managed as an integral part of strategy, can aid competitiveness. On the other hand, industry evidence suggests that if overdone it could create a fragile organisation in the long run (the hollow corporation). In this paper, the authors adopt an empirical method to examine the reasons for outsourcing and its impact on the performance of firms.

The study was restricted to small and medium firms in the manufacturing sector. The study revealed that although cost is an important reason behind outsourcing, it is, contrary to general perception, not the most important. There are other factors that play a vital role in the decision to outsource, such as investing capital in other areas for higher productivity, focusing on key issues and remaining flexible. In terms of whether outsourcing delivered the desired results for which it was undertaken, the study found that outsourcing had a big impact on improving the quality of the product, being first to market, increase in sales, improving buyer supplier relationship and focusing on core competencies. However, growth in revenue, which is a major reason for outsourcing, did not figure among the top benefits of outsourcing. The most important finding of this study is that outsourcing is strategic in nature, and that small and medium enterprises outsource not for short term or immediate financial gains, but for long-term gains and improving upon areas such as supplier skill and flexibility.

Reprint No 07307