Outsourcing in the Service Company

Subject: Risk Management
Pages: 8
Words: 2189
Reading time:
8 min
Study level: PhD


In outsourcing, a service company is hired by another company to perform certain specific services. The service provider employs and pays the work done by its employees, or sub-contracts another company to perform these services. There is no employment relationship between the contractor and the workers or members of service providers. Most legislation stipulates that outsourcing should be addressed to middle-level activities. These include security services, maintenance, and cleaning as well as specialized services related to core business through the borrower who might be non-existent since personhood and the direct subordination of the outsourced employee with the contractor.

Pros and Cons of outsourcing

Protests from labor unions usually emanate from the demerits generated by outsourcing. To begin with, the scope of outsourcing in terms of supporting activities as core operations is a major area of concern. Labor obligations are the only responsibility of the third party – the contractor is only supposed to supervise; union representation can be poor, and outsourcing public services may be limited by several factors such as the need to uphold security. On the other hand, outsourcing can increase the formalization and creation of jobs. Better revenue realization is yet another advantage of outsourcing. This implies that outsourcing is capable of improving revenue generated by a firm either at the local or international level. The procedure also cuts down the cost of labor and other overheads. In addition, better innovation can be readily realized because management time is freed while employees are allowed to exercise their talents at the workplace. Nonetheless, adequate control of an organization can be lost if outsourcing is extensively practiced. It may also lead to slow business processes such as when resolving emerging issues at various workplaces. Worse still, the performance and expectations of business processes may not be compatible at all.

Lingual accent variation issues may arise when outsourcing is carried out by a firm without limits or regulations. Some organizations also find it cumbersome to operate in regions where trade unions are strong. Enraged employee unions and an irate customer base are among the negative attributes of outsourcing.

Areas most important to outsource for a petrochemical company

A petrochemical company requires a cheap source of raw materials. Hence, one of the key areas of outsourcing should be raw materials. Others include cheap labor and experienced expertise. The process of outsourcing production and provision of services in almost all capitalist countries developed as part of the productive rearrangement started in the 70s of the twentieth century from the third industrial revolution, and that extends to the present day. There are important changes in the organization of production and work and, in the case of outsourcing; the relationship between companies is fortified (Andreff 16).

In the late 80s and early 90s, most nations in the western world underwent a series of institutional and structural changes. During this period, measures were adopted to boost the competitiveness of products to meet the new conditions imposed by national and international markets.

According to management teams in most companies, the main reasons for outsourcing include:

  • Procedure is necessary for the success of organizational and the required managerial innovations (Shackleton 268);
  • The process allows concentration of firms on what is defined as a competitive advantage by transferring a set of activities that do not correspond to their core business, whether they support or even produce for other companies;
  • Cost reduction or conversion of fixed costs into variable costs;
  • Simplification of production and administrative processes;
  • The third company always finds more creative solutions and is less costly to produce. This eliminates part of the waste and the complacency which, according to the entrepreneurs themselves, is characteristic of large parent companies.

The hiring company is a subsidiary that is responsible for the labor obligations of officials of the service /debtor. The government can hire provision of outsourced services, provided it is not to perform exclusive state activities such as regulation and supervision. The government can hire contractors instead of open tenders and will be co-responsible for social security charges, but not for labor debts. Whenever the public agency unjustified delays payment of outsourced, will be jointly responsible for labor obligations of the contractor.

A petrochemical company producing a low-density polyethylene

The production of low-density polyethylene requires readily available and cheap labor. Hence, such a company should outsource affordable labor. However, skilled professionals are also required to work in the petrochemical industry. Second, outsourcing raw material is also crucial for a petrochemical factory (Chien, Wu, and Weng 116).

Some companies pay contractors fewer amounts even though they are more working hours, take longer to retire, and suffer more accidents. This confusion can be avoided by expanding this working model for the sector. Companies in this industry can improve the working conditions of their workers after outsourcing for cheap sources of raw materials.

Factors to consider when outsourcing in a petrochemical industry

To begin with, salaries and benefits should be maintained at the most minimum rates. The wages of contract workers should be lower than that of formal employees. Besides, the number of jobs should be streamlined so that only productive workers are left to deliver for an organization. On average, outsourced work should not form the cornerstone of organizational operations.

Reducing accident risks should also be another consideration to make when outsourcing for a petrochemical company. Hence, management teams should work towards reducing or minimizing instances of accidents in such plants. This implies that occupational health and safety should be prioritized in petrochemical organizations that manufacture low-density polyethylene materials. Prejudice at work can grow during the process of outsourcing goods or services from other geographical regions. High incidences of discrimination and complaints are prevalent n sectors with more contractors such as the petrochemical industry. Diversity is inevitable in such workplaces.

Currently, the petrochemical industry has accentuated capital investment. Some of these investments occurred because of increasing production scales, changes in technology in the production processes and introduction of process control systems microelectronics. This industry usually is considered intensive in capital and R &Development (R & D). Regarding R & D, petrochemical needs to get better quality. Internationally, the chemical complex to this day maintains a high level of activities in R & D. for example, the US effected expenditure on R & D in this industry by about 4.7% of net sales in 1985. However, all manufacturing activities spent 2.8%. The expenditure in R & D is not distributed evenly among the various segments.

In petrochemical commodities, the world-class R & D centers around 3% of sales, with wide variation between companies, depending on the strategy of technology adopted (Andreff 11). When the subject is related only to the chemical segments

Fine and specialties, the intensity in R & D rise to 8.4% of sales. Companies in the pharmaceutical industry spend as much as 11% of their turnover on these activities.

This distribution intensity in R & D within the Petrochemical Complex is fundamentally important for understanding the issue of innovation and competitiveness R & D in this segment can be outsourced. At the global level, large companies are highly diversified and integrated, while the petrochemical industry stands out as being extremely complex. For example, a petrochemical company cannot hire an outsourced engineer, but housekeeping can be done by a service provider. Similarly, automakers cannot outsource metallurgical products because they are functions of core activities. Outsourcing support activities or support of companies such as cleaning staff, reception, telephony, and security and information technology. The process of outsourcing is increasingly being adopted by corporations in the petrochemical industry.

Lower expenses

This is a reality that increasingly requires companies to become more agile and lean working with less effort of capital and labor. Competition between markets, now without borders or nationality, caused by the globalization of economies brings a series of changes. To survive and keep winning, these companies need to produce better and cheaper than their competitors worldwide (Yakhlef 31). The current consumer does not purchase products from a foreign country. What he consumes in number increases the product’s viability in terms of better quality and lower cost. A few decades ago, consumers used to purchase and consume only domestic products. Hence the producer would be compelled to purchase raw material anywhere in the world where it would be cheaper. There is also the need to maximize production by concentrating all efforts to achieve excellence.

When a petrochemical firm outsources IT services, other surplus expenditures are done away with within the course of production. For example, several allowances and fringe benefits cannot be catered for when outsourcing has been done. Improving the focus of the company is yet another reason why this process is fundamental in a petrochemical firm. IT outsourcing allows a firm to focus on its core competencies required for growth. Having access to exceptional resources can also boost the performance of a petrochemical firm. An impressive income is obtained after a given trading period especially when the right and the most appropriate firm is chosen for outsourcing purposes. Instead of just the knowledge of one employee, there are gains from other experts within the same field. Adequate training and capacity building are indeed major requirements of outsourcing organizations.

Readily available and accessible tools are yet another potential reason why a firm would opt for outsourcing. Some employees can be deployed in workstations that are not within their areas of expertise. An organization’s management should strictly focus on management teams. Outsourcing permits the organizational leadership to retain workers due to their superb performance. This increases the efficiency of the whole outsourcing system. Resources are sometimes scarce for use by organizations. On the other hand, managing IT needs and hiring new employees may not be within the budget (Braun et al 371). IT outsourcing may be a viable alternative, both transiently and in the long term.

Increase the gains of restructuring and outsourcing

Renewed planning and the establishment of a petrochemical business are crucial. They still need to be addressed. However, outsourcing is an ideal way to do the latter.

Outsourcing and representation of workers in Petrochemical firms. Another issue relates to union representation. It may fall within the category of contracting company or Service Company. In the petrochemical sector, outsourcing does not necessarily depend on the Employees Union which has more bargaining power. Outsourced employees should be governed by conventions or labor agreements made between the contractor and the union contractors. Proponents argue that this may increase the bargaining power with employers and can also enhance supervision for proper use of the service.

Tools used to identify outsourcing needs

The first tool that can be used to determine the outsourcing needs of a petrochemical firm is the relationship between businesses, trade unions, and workers. Outsourcing can reduce informality in the market. It is prudent to assess the possible outcomes of the outsourcing benefits contracting firms using four main tools. The first tool is generating greater competitiveness and simplifying the production process as it passes to the third party liability (Blaskovich and Mintchik 23).

Second, regulation gives greater legal certainty in a petrochemical company and reduces costs with labor claims. There are associated cost savings since workers will not negotiate directly with the borrower’s services.

An outsourced employee may receive less than the employee registered with a labor union. The regulation encourages contractors to have excellence in providing services to meet the expectations of service-makers. There will be a modernization of services. There is a need for greater oversight so that the service providers safeguard the Outsourcing to obtain improvements in productivity and specialization and therefore, competitiveness gains, which allows delivery of products and services with less cost. Risk management is an activity that aims to add value to logistics, through preventive measures, aimed at minimizing material, financial and human capital losses. Such losses can grossly affect the growth of a firm.

Risk management has emerged as a response to minimize losses due to changes in logistics operations of companies and mainly due to the increase in cargo theft (Agrawal and Hall 1559). Risk management can be done in several ways. The most common methods include the following:

Security consulting for risk assessment

The above is used to know in-depth logistics and transport operations. Regulates and detects failures in security and transportation operations.


This work detects people linked to transport operations with credit restrictions that might compromise the freight transportation operation.

Preventive maintenance

The action was taken by the carrier to detect mechanical problems in the carrier vehicle.


Everyone connected to transport operators and other outsourcing needs of a business organization is subject to ongoing training on the operation of tracking and monitoring equipment and about the company’s safety standards. Whenever possible, the knowledge of managers is recycled in capacity building and training courses, defensive management, and operation of Risk Management are all factors worth discussing when outsourcing equipment placed on an automobile. This instrument is one of the most important tools in Risk Management because it works with the awareness of people directly linked to the transport operation and depends on the success of any Risk Management operation during outsourcing.

Works Cited

Agrawal, Pushpa, and Steven Hall. “Using Accounting Metrics as Performance Measures to Assess the Impact of Information Technology Outsourcing on Manufacturing and Service Firms.” Journal of Applied Business Research 30.5 (2014): 1559. Print.

Andreff, Wladimir. “Outsourcing in the New Strategy Of Multinational Companies: Foreign Investment, International Subcontracting and Production Relocation.” Papeles de Europa 18 (2009): 5-34. Print.

Blaskovich, Jennifer, and Natalia Mintchik. “Information Technology Outsourcing: A Taxonomy of Prior Studies and Directions for Future Research.” Journal of Information Systems 25.1 (2011): 1-36. Print.

Braun, Irene, et al. “HR Outsourcing and Service Quality: Theoretical Framework and Empirical Evidence.” Personnel Review 40.3 (2011): 364-382. Print.

Chien, Chen-fu, Jei-zheng Wu, and Yu-de Weng. “Modeling Order Assignment for Semiconductor Assembly Hierarchical Outsourcing and Developing the Decision Support System.” Flexible Services and Manufacturing Journal 22.1-2 (2010): 109-139.Print.

Shackleton, Karen. “Outsourcing Investment Policy.” Pensions : An International Journal 16.4 (2011): 266-270. Print.

Yakhlef, Ali. “Outsourcing as a Mode of Organizational Learning.” Strategic Outsourcing: an International Journal 2.1 (2009): 37-53. Print.