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R E S E A R C H Open Access
Effect of outsourcing strategies on the
performance of small and medium scale
enterprises (SMEs)
John I. Agburu
1
, Nyianshima Calvin Anza
2*
and Akuraun Shadrach Iyortsuun
2
* Correspondence:
anzagbem@gmail.com
2
Department of Business
Administration, Federal University,
Taraba State, Wukari, Nigeria
Full list of author information is
available at the end of the article
Abstract
Several organizations have embarked on outsourcing strategies over the years but
many still suffer in terms of their goal achievement; some have experienced low
productivity both in terms of quality and quantity, their profitability has not been
stable, and their capacities are grossly underutilized. This research work determined the
effect of outsourcing strategies (back office activities, primary activities, accounting
activities and supporting activities) on the performance of Small and Medium Scale
Enterprises (SMEs). Survey research design was adopted in Benue State, Nigeria.
Stratified random sampling technique was used in selecting respondents for a primary
source data gotten through a well-designed and self-administered questionnaire. Also,
secondary data was sourced from the financial records of ten (10) selected SMEs. The
variables were statistically analyzed using multiple regression technique. At the end of
the research, the study found that; outsourcing of back office activities (such as
bookkeeping, payroll, billing, order processing, payment processing, cleaning services,
security services and other administrative activities); outsourcing of primary activities
(such as manufacturing, purchases, warehousing, Sales force and customer service);
outsourcing of Supporting activities(such as shipping, IT services/system, training,
advertising, legal services, transport services, public relations) has a significant effect on
organizational profitability of SMEs whereas, outsourcing of accounting activities(such
as financial reporting, tax processing) has no significant effect on performance of SMEs.
This study therefore recommended that SMEs should embark more on outsourcing
strategies to attain the benefits of cost savings/restructuring which results in better
customer service at profit; also, outsourcing process management through follow up
steps like effective communication and monitoring should be employed and taken
seriously to better reap the benefits of this maintenance/growth strategy. Also, SMEs
should ensure that, the costs of managing the outsourcing process is not greater than
the benefits generated by the outsourcing program.
Keywords: Outsourcing strategies, Performance and small and medium scale enterprises
Background
Business environment in today’s world is severely dynamic (Jae, Minh, Kwok and Shih,
2000). Rapidly changing and increasingly complex business issues are creating key shift
in organizations and the manner in which they do business (Sev, 2009). One fact is still
certain; every organization has its goals; also, the success of an organization is
measured by the level at which it attains its goals.
Journal o
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© The Author(s). 2017 Open Access This article is distributed under the terms of the Creative Commons Attribution 4.0 International
License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution, and reproduction in any medium,
provided you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons license, and
indicate if changes were made.
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26
DOI 10.1186/s40497-017-0084-0
In order to achieve its set goals in the presence of technological advancement, sophis-
tication of business processes, knowledge explosion and need for constant growth, an
organization looks out for strategies to enhance performance (Dominguez, 2006). It
therefore reflects on the capabilities of its workers (staff ), its technological knowhow,
business processes and so on, and answers the question of whether it can achieve its
goals with what it already has on ground or look out for ways to complement (Sev,
2009; Isaksson and Lantz, 2015). In struggling to meet the demands of customers and
shareholders, an organization may look out for ways that it has a comparative advan-
tage. It therefore focuses on core competences and seeks to reduce operation cost
which presents outsourcing as the right strategy (Akewushola and Elegbede, 2013).
Outsourcing is one management tool that has gained relevance among managers in
addressing today’s business dynamics (Jae, et al. 2000). It entails contracting out of a
business function (Jae, et al. 2000; Dominguez, 2006; Isaksson and Lantz, 2015). It is
the replacing of in-house provided activities by subcontracting it out to external agents.
Consequently, the management and development of innovations in outsourced activ-
ities become the responsibility of an agent external to the firm.
Outsourcing avails organizations the opportunity to concentrate her core competen-
cies on definable preeminence business area and provides a unique value for customers
Dominguez (2006; Gro¨ßler, Laugen, Laugen and Fleury, 2012). Also worthy of note is
the fact that present day outsourcing is no more limited to peripheral activities such as
cleaning, catering and security. As noted by Jennings (1997) and Dominguez (2006),
outsourcing also includes critical areas such as design, manufacturing, marketing, dis-
tribution, information system etc.
Outside Nigeria, notable companies which have outsourced are among others Kodak
Company who subcontracted its computing operations to International Business
Machines (IBM); the result of which was higher quality computing system and operation
at Kodak for less money than it was spending (Sev 2009). Also as noted by Hill (1997),
Boeing as at 1997, was world’s largest manufacturer of commercial jet aircraft with a 60%
share of the global market. Despite the large share of the market, Boeing was faced with
competitors like Europe’s Airbus industries. The dog fight between the big two resulted to
high operating cost which made Boeing to look out for ways to beat down cost. In 1993
Boeing undertook a companywide review of its make or buy decision. In pursuit of this
decision, Boeing decided and outsourced certain components to China. Worthy of note is
the fact that Boeing avoided outsourcing the production of wings because it believed that
doing so might give away valuable technology to potential competitors.
In Nigeria, Sev (2009) noted some examples of companies who have outsourced their
operations. The examples are Ashaka Cement Plc, which outsourced its operations and
services to Blue Circle industries of United Kingdom; Dangote Cement, Gboko (Benue)
plant which acquired the expertise of Pakistani who have managerial know-how and ex-
pertise to give quality services and operations. Notable also is in the banking sector.
Several Nigerian Mega banking groups have outsourced their operations and services
to “Experts”to enhance global competition in the international financial markets. The
United Bank for Africa (UBA) plc, Access Bank plc, and other universal banks in
Nigeria outsourced Automated Teller Machines (ATM) to a company called inter-
switch. Similarly, most banks’recruitment exercises are being outsourced to other hu-
man resource companies like Dragnet and Philips consulting.
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26 Page 2 of 34
All the organizations identified so far are by all standards, big organizations. It is
therefore pertinent to submit here that, all forms of organizations engage in one form
of outsourcing or another regardless of their size (whether small or large) (Isaksson &
Lantz, 2015). Be it manufacturing, services, information technology, management ser-
vices, product engineering, and research process or marketing services (Suraju &
Hamed, 2013). It is usual sight to see SMEs collect contracts from their customers and
rather than do it themselves turn out to subcontract them to other organizations, either
small or big to execute them for them. Instances of such outsourcing in Nigeria can be
seen in the outsourcing of security services from security outfits by some hotels that
focus on rendering hotelier services which is their core operation.
Also, a pilot study conducted revealed that, most SMEs outsource their major ac-
counting operations to external accounting firms instead of employing accountants.
They most at times have one or few accountants whose job is to record transactions
and then acquire the services of external accountants who do the computation and
preparation of sophisticated accounts and also audit their operations. Other areas of
outsourcing by SMEs as noted by Isaksson and Lantz, (2015) and Akewushola and
Elegbede, (2013) are training of staff, advertising and other supporting activities.
The reasons for outsourcing over the years are seen as to pave way for an organization’s
concentration on their core competencies thereby experiencing effectiveness and efficiency
through cost savings, reduced capital investment within the firm, improved responsiveness
to changes in the business environment, increased competition among suppliers ensuring
higher quality goods and services in the future, reduced risk of changing technology, among
others (Jae, et al. 2000; Dominguez, 2006; Sev, 2009; Isaksson and Lantz, 2015).
In line with the above established merits of outsourcing, several organizations (some
of which are noted above) have ventured into outsourcing. However, as noted by Sev
(2009), despite the outsourcing they have been carrying out over the years, some orga-
nizations still suffer in terms of their goal achievement; some have experienced low
productivity both in terms of quality and quantity, their profitability has not been
stable, and their capacities are grossly underutilized.
Based on research findings over the years also, researchers have theorized reasons
and areas of outsourcing and its strategies. For instance, C.K. Prahalad and Gary Hamel
advocated the theory of core competencies which insists on outsourcing of non-core
areas as a best practice in utilizing of resources (Prahalad and Hamel, 1990; Jae, et al.
2000; Dominguez, 2006); yet, organizations are seen outsourcing even their primary op-
erations which is seen as their area of competence. Also, some look at the cost of oper-
ation thereby outsourcing to minimize cost (Busi and McIvor, 2008), yet some
organizations give out some operations that they can carry out in a cheaper way. The
question here is that; are they looking at quality or their decisions are based on social
reasons as noted by the social view theory (Jae, et al. 2000) or what?
The case of SMEs has been so peculiar here. Their outsourcing is in addition to the
backup/supporting activities, more of their core areas which are before now being
retained in-house (Isaksson and Lantz, 2015). This research therefore delved in the spe-
cific outsourcing strategies embarked upon by these SMEs; why their choice and the ef-
fect of various strategies on organizational performance of these SMEs.
This research work explored outsourcing activities among SMEs in Gboko, Makurdi and
Otukpo metropolis of Benue State, Nigeria with emphasis on organizational operations for
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26 Page 3 of 34
the recent past five years (2012 to 2016). Small and Medium Scale enterprises here are de-
fined in line with the definition of SMEs by the National Council of Industries in Onugu
(2005) as any enterprise whose total worth including working capital but excluding value of
land is more than ten (10) million naira but less than one hundred million naira
(N300, 000,000.00); a workforce between eleven (11) and seventy (200) full-time staff and/
or with a turnover of not more than twenty million naira (N20, 000,000) in a year. The main
research objective was to determine the exact effect of outsourcing strategies on the per-
formance of SMEs, hence, the following questions are asked;
i. How has the outsourcing of Back Office Activities affected the profitability of SMEs?
ii. What are the effects of Outsourcing Primary Activities on the profitability of SMEs?
iii. What are the effects of Outsourcing Accounting Activities on the profitability of SMEs?
iv. What is the contribution of Outsourcing Support Services to the profitability of SMEs?
Conceptual framework
Just like any other concept in the academic world, outsourcing has diverse definitions.
This is due to the diverse nature of the perceptions of those who use it. It is therefore
not feasible for one to state in a clear cut manner a definition that is generally accept-
able. However, for the purpose of this research, the definitions by Yalokwu (2006) and
Dominguez (2006) are relevant and so adopted. Outsourcing is defined according to
Yalokwu (2006:590), as the process of subcontracting operations and services to other
firms that specialize in such operations and services that can do them cheaper or better
(or both). Also, Dominguez (2006:1) views outsourcing as the practice of hiring func-
tional experts to handle business units that are outside of a firm’s core business. She
describes it as a method of staff augmentation without adding to headcount.
Base on the above definitions, outsourcing can be comprehensively said to be the con-
tracting and/or subcontracting of operations and services whether they are outside of a
firm’s core business or not to other firm(s) that specializes in it and can do it better or
cheaper (or both). This definition supports the fact that organizations have their areas of
specializations. An organization that performs its administrative and business services
and operations may not perform all of them efficiently. This may lead to low quality prod-
ucts/services. When an organization focuses on areas that it has advantage comparatively
and outsource those it performs minimally this would lead to efficiency and high quality
productivity. The emphasis of this research however, is on the outsourcing strategies of
SMEs, their implementation and contributions to organizational performance.
Outsourcing strategies
Outsourcing strategies have been classified by different scholars in different ways. Some
of the classifications are here reviewed and a choice made at the end.
i. Classification according to Jennings (1997)
According to Jennings (1997) as reported by Sev (2009), outsourcing strategies can be
categorized into the principal type and the common type. The principal type entails
traditional outsourcing: Here the routine jobs or task that the staff of the organization
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26 Page 4 of 34
does not perform are identified and the service providers aired for the job and Green-
field outsourcing: Without hiring the service provider the organization can directly hire
an imminent company which can execute their business which was not done in the
organization internally (Sev, 2009). The common type on the other hand includes:
Information technology (IT) outsourcing, Call centre, Payroll, Finance functions and
activities, E- publishing, Book-keeping service, Accounting, Human resources and
Computer Aided Design (CAD) service (Sev, 2009).
This classification however, is not quite explicit to be used in defining the outsour-
cing strategies of SMEs. Also, most outsourcing is perceived as human resource man-
agement strategy, as such listing human resource outsourcing as a strategy amongst
others which obviously entails the use of human resource without adding to head count
is rather confusing.
ii. Classification according to Harward (2010)
According to Harward (2010), there are four (4) outsourcing strategies at an organi-
zation’s disposal. These four types of outsourcing strategies or what some call engage-
ment models for sourcing are largely grouped into two. The first two are considered
business process outsourcing (BPO) engagements, and the other two are considered
out-tasking models. The BPO models are comprehensive and selective. And the out-
tasking models are licensing and contracting. The four sourcing strategy model is
shown diagrammatically in Fig. 1;
A common question is “what is the difference between BPO and out-tasking?”The
easiest way to explain it is to look at an organization as an integrated group of business
processes that must be managed by someone (Harward 2010). In small businesses, the
business processes can be grouped into four functional areas of; administration, con-
tent, delivery, and technology. The number of processes a supplier manages, the com-
plexity integrating those processes, and the duration of time a supplier is expected to
manage those processes all help define the differences in outsourcing strategies.
BPO refers to those engagements that are most complex, longer in duration, inte-
grated across functional process areas, and considered most strategic to the business
Fig. 1 Classification of Outsourcing Strategy according to Harward (2010). Source: Harward, (2010)
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26 Page 5 of 34
whereas, out-tasking refers to the models that are less complex, fewer processes and
limited to one functional area, more tactical, and more labor oriented (Harward 2010).
These four types of outsourcing strategies are briefly differentiated below:
1. Comprehensive BPO –this is the most complex, strategic, long term, and
demanding relationship you can have with a supplier. A comprehensive outsourcing
deal means that you are engaging with a partner for a multi-year period to strategically
manage a comprehensive set of processes across all four functional process areas of
your organization (Harward 2010). Both parties are willing to commit dedicated
resources to the deal which means you are both committing people and finance over
an extended period of time. Comprehensive does not imply that the supplier does
everything associated with task for your company. Even in a comprehensive
engagement, you as the buyer still must manage some processes like client relationship
management or strategic planning. The idea that you give away all responsibility to the
supplier is actually a myth, and never happens in real life.
2. Selective BPO –this is also a very complex engagement, but somewhat less than a
comprehensive deal because of the reduced integration of functional processes. In
selective outsourcing, you engage a partner to manage multiple processes within one
functional area (administration, content, delivery, or technology) but not process
across functional areas (Harward 2010). Here you may contract with a supplier for the
next three years to manage all custom content development activities for product e-
learning courses. But the supplier would not deliver any courses, manage
registration or admin services related to the transaction, nor host or support
the courses online. Contracts for selective BPO deals are similar to those of
comprehensive BPO but they are somewhat less complicated because there are
fewer processes involved.
3. Licensing Agreement –these engagements are forms of out-tasking and used
when sourcing a tangible asset, such as a technology or real estate. Licensing
agreements for technology usually take the form of software as a service (SaaS)
contracts (Harward 2010). When the cost of implementation and set-up are high,
these deals are often times multi-year. This allows the client to amortize costs over
longer periods of time. When these costs are low, deals often take the shape of
month to month. Contracts for license agreements are generally purchase orders
with defined terms and a unit price in the form of price per time.
4. Contracting –the second form of out-tasking engagements and the most common
form of outsourcing in the small business industry is contracting. Some refer to it
as a ‘labor for hire’engagement (Harward 2010). It’s where we pay a contractor by
the hour/day/week/month to perform a task. Contracting is commonly used when
we source a supplier to manage a project, and we compensate them when the
project is completed. The project can be consulting, instructional design, delivery
of a course, etc. It is a tactical engagement when your objective is to limit the
complexity and breadth of processes you expect the supplier to manage. It is
transactional, which means the relationship ends when the activity is complete. It is
the most flexible, least risky and easiest to manage relationship for the buyer. It
limits your obligations to a supplier and allows you to easily terminate a contract
when things are not going well. Contracts are generally purchase orders with
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26 Page 6 of 34
defined terms of activities for a unit price for each deliverable. Unit prices are
usually in price per time or price per project terms.
This classification according to Harward (2010) is also seen as not being explicit
enough. The two groups of strategies (Business Process outsourcing strategies and out
tasking strategies) are so inter related such that the last two (contracting and licensing)
are seen as been sub of the first two (Comprehensive and selective). Also, while the first
two measure the extent of outsourcing, the last two measure but the area of outsourcing.
iii. Classification according to Gilley and Rasheed (2000)
According to Gilley and Rasheed (2000), outsourcing strategies can be grouped into
four strategies housing related activities commonly outsourced. These four strategies are:
1. Outsourcing of back office activities
2. Outsourcing of primary activities
3. Outsourcing of accounting activities
4. Outsourcing of support activities
Isaksson and Lantz (2015) based on the classification by Gilley and Rasheed (2000) fit
in sixteen (16) sub activities commonly outsourced in the strategies base on their char-
acteristics. An improved version of these activities is here presented for this research.
The classification is shown in Fig. 2.
The four strategies are further discussed below:
Back office activities
Back office activities are the non core activities that an organization needs to pave way
for the day to day running of their office/business. As the name suggests, back-office
refers to the functions which are required to be carried out efficiently to ensure the
success of the business, but these services do not fall into the core operations functioning
Fig. 2 Classification of Outsourcing strategy according to Gilley and Rasheed (2000). Source: Base on the
classification of outsourcing strategies by Gilley and Rasheed (2000); Isaksson and Lantz (2015)
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26 Page 7 of 34
of the firm (Isaksson and Lantz, 2015). Back-office operations are considered to be the
backbone of an enterprise and hence are no less important than the essential functions.
Apparently, back-office outsourcing has been on the rise in recent years as they are quite
crucial to the core activities of any enterprise. There are many benefits of outsourcing
back office functions. Some are; focus on core operations, Job carried out by professionals
with domain expertise, higher level of flexibility, access to state of the art technology and
infrastructure, Lowered costs and no hassle of staff acquisition and retention (Sev, 2009).
In outsourcing, one is advised to ensure that, they don’t have the resources to do it,
they don’t have the know-how to do it well, they don’t have the experience with the
process at all and trying to manage the process internally will actually hurt the
organization (TaskUs, 2014).
Some of these activities as noted by Gilley and Rasheed (2000) are bookkeeping, pay-
roll, billing, order processing, and payment processing. Others are cleaning services, se-
curity services and other administrative activities which are needed by organizations to
better serve their customers (Dominguez, 2006). These back office activities when out-
sourced rightly improves an organizations performance (Steensma and Corley, 2000). It
is a means of reducing costs, increasing quality, and enhancing a firm’s overall competitive
position (Frayer, Scannell and Thomas 2000). This improves one’s competitive edge.
Primary activities
The primary activities outsourcing practice stems more from the resource availability
and cost advantage. The resource-based view of the firm and transaction cost econom-
ics provides a comprehensive explanation of the conditions which lead firms to resort
to the outsourcing of primary activities and of the reasons why such outsourcing has
grown in importance in recent years (Isaksson and Lantz, 2015).
Many organisations today outsource even their primary activities. For instance, the
footwear manufacturer Nike has long been renowned for the fact that it does not own
any manufacturing facilities, but subcontracts out the manufacture of its products to
independent suppliers.
It is argued that certain firms choose to outsource primary activities within their pro-
duction chains to independent suppliers, not because of relative capability consider-
ations, but because they are able to leverage their resources to appropriate the rents
from the chain whilst reducing their asset base. The activities which are directly related
to the primary operations are manufacturing, purchases, warehousing, Sales force and
customer service (Isaksson and Lantz 2015).
Accounting activities
More recently, some businesses have begun outsourcing at a more strategic level not
just to reduce costs in non-core processes but to improve business performance. This
is being driven by a number of factors such as competitive and budgetary pressures, ad-
vances in technology and communications and the need to transform the finance and
accounting function (Krell, 2007).
Finance and accounting outsourcing (FAO) has undergone major transformation over
the years (Hayward, 2002). The market for FAO has matured in terms of the type of
work undertaken from routine, transactional work to delivering customized, complex and
higher-value services (such as fore casting and planning and treasury) (Hayward, 2002).
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26 Page 8 of 34
Some companies are consolidating their outsourcing work, citing reduction in complexity,
streamlining operations and increased efficiency as benefits, while others are still taking a
multi-sourcing route based on particular provider expertise (Hayward, 2002).
Also, globalization of services opens up new opportunities for companies to out-
source finance activities to service providers worldwide (Hayward, 2002). Companies
which choose to outsource one or more finance processes continue to benefit from glo-
bal differences in wages, and they access new talent and expertise (such as in systems
implementation and process improvement) to create further competitive advantages.
According to Kumaran (2013), Organizations, these days, not only look for cost-
effective solutions to systematically run non-core activities like accounting and payroll
services, but also expect to add value in order to achieve better control and under-
standing of cash flow and thereby make informed decisions. In spite of being consid-
ered as non-core, accounting services form an integral part of an organization’s
operational capabilities and systematic functioning. Therefore, outsourced accounting and
payroll services definitely help streamline core business operations of an organization
(Kumaran, 2013). Kumaran (2013) further highlighted top 10 advantages of outsourcing
accounting and payroll services as; achieving high level of accuracy, cost effective services,
fraud check, direct deposit through efficient payroll processing, avoiding penalties during
tax processing, reaping benefits with up-to-date technology, saving up on processing time,
gaining from the assistance of experts, avoiding reconciliation worries related to financial
institutions and staying informed with up-to-date accounting status.
The above notwithstanding, Isaksson and Lantz (2015) asserts that, the activities
which are typically performed by outside accountants that can be grouped under ac-
counting activities include those of financial reporting and tax processing. Their classi-
fication forms a basis for this research.
Support activities
Just like in the case of back-office activities, support activities help in the efficient run-
ning of a business (Isaksson and Lantz, 2015). These activities support the core activ-
ities in an organization (Sev, 2009). Support services as noted by Isaksson and Lantz
(2015) include activities such as; shipping, IT services/system, training, advertising, legal
services, transport services, public relations.
This classification of outsourcing activities by Gilley and Rasheed (2000) is therefore
adopted for this research. The choice of this classification is due to its explicit nature.
It points out clearly, the activities which are being outsourced and also, succinctly clas-
sified base on its peculiarities. A pilot survey also shows clearly the fact that, these ac-
tivities are usually outsourced by SMEs at various extents.
Outsourcing and organizational performance
Organizational performance is measured in different ways depending on the intent.
However, whatever criteria is used, organizational Performance is the output of the
organization. Kotabe et al. (1998) identifies three types of performance measures as neces-
sary components in any outsourcing performance measurement system: strategic mea-
sures; financial measures; and quality measures. Other studies use additional dimensions
of market performance such as costs savings, cycle time, customer satisfaction, and
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26 Page 9 of 34
productivity to measure the effectiveness of outsourcing strategy (Malhorta, 1997; Carney,
1997; and Goldstein, 1999).
Organizational Performance here is seen as the output of the organization measured
in terms of profitability. Profitability is measured in terms of Cost savings, Focus on
core business (thus increasing efficiency), Reduction in money spent on fixed assets
(cost restructuring), Reduction in tax paid (tax benefit) and Increase turnover (Sales).
In tracing the relevance of outsourcing to organizational performance also, many
authors including Quinn, (1992); Gupta and Zheuder, (1994); Greer et al., (1999); Lever,
(1997); Sharpe, (1997); Steensma and Corley, (2000); Yalokwu (2006) and Dominguez
(2006) submitted that, outsourcing can improve organizational performance when
applied as an organizational strategy.
Outsourcing one’s business processes can improve one’s competitive edge (Dominguez,
2006). The reason behind this is that outsourcing reduces business costs (Yalokwu, 2006;
Dominguez, 2006; Kroes, J.R. and S. Ghosh, 2010). Organizations may choose to out-
source with certain business aims in mind. The aim might be the need to improve on fi-
nancial performance (Isaksson and Lantz, 2015). Most times, such organizations are
aware that outsourcing firms may offer them an opportunity to work cheaply through effi-
cient technology and economies of scale. By minimizing costs, organizations can achieve
their economic related goals and this enhances their organizational performance (Leavy,
2004). Consequently, the extra amount that would have been passed to the consumers in
the form of higher prices for the goods and services now becomes irrelevant as consumers
pay less for their commodities (Dominguez, 2006). This allows businesses to compete fa-
vorably based on price thus giving them a competitive edge (Yalokwu, 2006).
Organizations that do everything on their own may be exposed to greater levels of
risk than those who outsource their business functions (Dominguez, 2006). Most time,
the former mentioned organizations may face difficulties trying to balance between
choosing the right alternatives, training their employees in that area of interest, increasing
reliability, and maximizing efficiency. By doing everything on its own, an organization
may have a difficult time trying to eliminate risks, and usually run the risk of spending too
much on infrastructural capital (Dominguez, 2006; Akinbola, Ogunnaike and Ojo, 2013).
Consequently, this eats into their profitability and reduces their chances of growing their
organization’s businesses. However, through outsourcing, organizations can minimize
their risks with regard to huge infrastructural expenditures and the overall result of this
issue is that more investors will be attracted to such organizations (Yalokwu, 2006;
Dominguez, 2006; Sev, 2006; Bustinza, Arias-Aranda and Gutierrez-Gutierrez, 2010).
Outsourcing is good for business because there are certain situations that can be
avoided through it (Sev, 2006). For instance, organizations that perform all their busi-
ness functions may have to spend huge amounts on replacing obsolete technology
(Dominguez, 2006). However, when that business function is outsourced, then organi-
zations will not even feel the pinch. Frayer, Scannell and Thomas (2000) suggest that
companies are increasingly viewing outsourcing strategies as a means of reducing costs,
increasing quality, and enhancing a firm’s overall competitive position.
This means that organizations can dedicate their resources to productive activities
alone and thus enhance their effectiveness and efficiency (Frayer et al. 2000). Successful
implementation of an outsourcing strategy has been credited with helping to cut cost
(Gupta and Zheuder, 1994; Greer et al., 1999), increase capacity, improve capacity,
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26 Page 10 of 34
improve quality (Lau and Hurly, 1997; Kotabe et al., 1998), increase profitability and
productivity, improve financial performance, lower innovation costs and risks (Quinn,
2000), and improve organizational competitiveness (Lever, 1997; Sharpe, 1997;
Steensma and Corley, 2000). Nevertheless, outsourcing does generate some problems,
as outsourcing usually reduces an organization’s control over how certain services are
delivered, which in turn may raise the organization’s liability exposure (Dominguez,
2006).
Achieving success or failure of outsourcing strategies
Organizations consider their outsourcing projects successful when the benefits gener-
ated by the outsourcing strategies are greater than the costs of developing the required
resources and capabilities through internal development or acquisitions (Isaksson and
Lantz, 2015). Meanwhile, organizations consider their outsourcing projects unsuccess-
ful or as a failures, when the costs of managing the links between outsourcing partners
were greater than the benefits generated by the outsourcing program (Sev, 2006). This
finding is consistent with previous studies on alliances success and failure (Foster,
1999).
Successful firms identified their clear objectives and expectations of outsourcing ac-
tivities as the most useful and contributing factors to their outsourcing effort. Outsour-
cing must be done carefully, systematically, and with explicit goals and expectations.
Sensible reasons to consider outsourcing include both strategic and tactical concerns
on both a department and organizational level. A good choice of outsourcing partners
was the most useful and contributing factor among successful organizations. Outsour-
cing partners should be selected based on their expertise in the operation being out-
sourced and their cultural fit with the organization. Another factor is providing
adequate training skills needed to manage outsourcing activities and to negotiate a
sound contract. Providing managers with skills that will enable them to adapt to other
cultures and work with other managers may be very important to ensure the success of
outsourcing. Developing a comprehensive plan outlining detailed expectations, require-
ments, and expected benefits during all phases of outsourcing activities may be the key
to successful sourcing efforts (Guterl, 1996).
Effective communication among cross-functional areas reduces the negative effects of
outsourcing projects on the morale and performance of the remaining employees.
Management must step in and rebuild trust among the workers, and jobs may need to be
evaluated and expanded or changed to fit the new organization. This can be achieved
through support and involvement of top management and by providing incentives to em-
ployees and vendors who meet and exceed the contracted performance expectations
(Jones, 1997; Foster, 1999). Another factor is to acquire the right people, with the right
skills involved in all phases of outsourcing activities. Early in the evaluation, persons must
be identified as to who will take leadership responsibility, perform the analysis, and make
the decisions. Adequate supporting infrastructures, commitment by top management,
and development of objective performance criteria were among the factors contributed to
successful outsourcing projects. Properly defined performance criteria for an outsourcing
engagement are objective, quantifiable, and collectible at a reasonable cost, and should be
metrics, which can be benchmarked against performance of other organizations and pro-
viders (Ramarapu et al. 1997; Kleepes and Jones, 1999). Other factors identified among
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26 Page 11 of 34
the top priorities in successful firms include adequate performance feedback, emphasis on
both short and long-term benefits, anticipation of change for both good and bad times
and accommodation of cycles of demand that require an adjustment in services.
Nevertheless, unsuccessful firms identified the fear of change, including fear of job
loss as the most serious problem facing their outsourcing efforts. Dealing with these
fears through communication and honesty is important to managing this factor (Jones,
1997; Quinn, 2000; Dominguez, 2006). A poor choice of outsourcing partners was the
second most serious problem facing unsuccessful organizations. Establishing strategic
supplier alliances and adoption of the philosophy that the firm is a partner with the
suppler may help alleviate this problem (Lau and Hurly, 1997; Dominguez, 2006; Sev,
2006). The third factor was not providing enough training/skills needed to manage
outsourcing activities. The individuals responsible for managing the outsourcing
relationship should receive specific training that includes a complete understanding of
the business goals of the contract, the specific performance criteria agreed upon, and
individual roles. This training and communication can also help reduce resentment or
resistance (Foster, 1999; Dominguez, 2006; Sev, 2006).
Inadequate comprehensive plans outlining detailed expectations, requirements, and
expected benefits of outsourcing efforts was the fourth factor identified by unsuccessful
firms in their outsourcing projects (Dominguez, 2006). Somewhat surprisingly, given
the nature of outsourcing activities, the following obstacles were ranked lower than
other problems in respondents outsourcing efforts: inadequate control systems over
how certain services are delivered, which in turn may raise the company’s liability expo-
sures (Guterl, 1996), and hidden costs and risks such as travel costs, license transfer
fees, exchange rates, and foreign taxes on products and services (Ramarapu et al. 1997).
In addition, significant was that unsuccessful organizations did not generally consider
lack of high-level management support to be a serious problem, which probably means
there was support and involvement by top management in these organizations.
Organizations that outsource should continue to monitor the contractors’activ-
ities and establish constant communication (Guterl, 1996). Another big problem
with outsourcing comes from the workers themselves, as they fear loss of jobs
(Malhorta, 1997). According to a recent survey, 55% of outsourcing relationships
fail in the first five years. Of these that do manage to stay together, 12% are un-
happy with their arrangement and regret ever making the deal (Foster, 1999).
Other problems identified including poor organizational communication, cross
functional political problems, unclear expectations, lack of flexibility, keeping con-
tracts short, and taking a tactical rather than a strategic approach to outsourcing
activities. Also, despite the significant growth of the outsourcing concept, most or-
ganizations embarking on these projects do not achieve their intended result.
Quinn (2000) estimates that as many as 40 to 50% do not achieve the improved
results they seek. This is attributed to poor implementation of outsourcing strat-
egies rather than a problem with the concept itself (Quinn, 2000).
According to Ellram et al., outsourcing has implications for day-to-day management
and performance, as well as strategic implications. Therefore, companies must out-
source intelligently. Outsourcing decisions may affect company’s cost structures, long-
term competitive situation and can also alter the nature of risks that the company must
manage. Hence, it is crucial for management to understand and have a clear conceptual
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26 Page 12 of 34
framework of their outsourcing decision. Furthermore, it is also important that company
must know the benefits and risks of outsourcing (Yalokwu, 2006; Sev, 2006). The increas-
ing use of outsourcing arrangements, as well as the unfamiliar complexity associated with
it especially in developing countries suggests the need to probe further about how to ef-
fectively utilize this strategy (Sev, 2006). Worthy of note is the fact that, even though there
are evidences of outsourcing at the small and medium scale level, there is very little em-
pirical works supporting it (Isaksson & Lantz, 2015). That notwithstanding, outsourcing
enhances service provision of SMES. It provides additional income for businesses even
without spending (Isaksson & Lantz, 2015).
Theoretical framework
It is difficult, if not impossible, to agree on the origin of outsourcing as a practice and/
or a scientific concept. Some researchers, mostly from the manufacturing and supply
chain management background, would arguably see it as nothing more than an evolu-
tion of older researches on “make-or-buy”(Busi and McIvor, 2008). These theories are
summarized in Table 1 below:
Discussion and application of these theories:
According to Prahalad and Hamel (1990) as supported by Jae, et al. (2006), there are two
theories most often referred to in relation to outsourcing; these are the Core Competen-
cies Theory (Resource-Based Theory) and Transaction Costs Theory. This research how-
ever will be based on these two generally used theories and a third which is presented in
generic form- the social view theory. Thus, the theories to be discussed are:
Table 1 The key distinctions among major theories used in outsourcing research
Orientation Theory Focus Resource Main constructs
Strategic
Management
View
Resource
Based
Internal slack
resource
Physical capital,
Human capital,
Organizational
capital
1. Value,
2. Rareness,
3. Imperfect immutability,
4. Non substitutability
Resource
Dependence
External
resource
(Uncertainty)
Land,
Labor,
Capital,
Information,
Products (service)
1. Task dimensions (Concentration,
Munificence, Interconnectedness)
2. Resource dimensions (Importance,
Discretion, Alternatives)
Economic
View
Transaction
Cost
Cost-efficiency
(Economics of
scale)
Production cost,
Transaction cost
1. Asset specificity,
2. Uncertainty,
3. Infrequency
Agency Cost Principal-agent
relationship
(Contracts)
Monitoring cost,
Bonding cost,
Residual loss cost
1. Uncertainty, 2. Risk aversion,
3. Programmability,
4. Measurability,
5. Length of relationship
Social View Power,
Political
Power-structure
relationship
Power, Politic 1. Power (Authority, Resource acquisition,
Dependency & low substitutability,
Uncertainty absorption)
2. Politic (Selective use of decision criteria,
Selective use of information, Use of outside
Experts, Building coalitions, Cooptation)
Social
exchange
Interaction
processes
Trust, Culture 1. Comparison level,
2. Comparison level for alternatives
Source: Jae, Minh, Kwok and Shih (2000)
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26 Page 13 of 34
i. Core Competencies Theory (Resource-Based Theory).
ii. Transaction Costs Theory
iii. Social view theory (Power, political and social exchange theory).
Core competencies (resource based) theory
Core competencies theory postulated that, the core activities should remain in house. It
is a concept in management theory originally advocated by Prahalad and Hamel (1990).
The concept of core competencies has been developed on the basis of the resource-
based theory. Prahalad and Hamel (1990) defined the core competencies as the collect-
ive learning in the organization, especially how to coordinate diverse production skills
and integrate multiple stream technologies.
The main idea of this theory is enhancing the core competence of the company in
order to develop sustainable competitive advantage, which outsourcing is positioned to
achieve (Jae, et al. 2006). The resource-based view suggests that, valuable firm re-
sources (comprising tangible and intangible elements) are usually scarce, imperfectly
imitable, and lacking in direct substitutes; It is about producing the most value from
one’s existing capabilities and resources by combining these with others’sources of ad-
vantage and, in this, ensuring complementarities is paramount.
Some SMEs have some products that are peculiar and associated best with their orga-
nizations and this makes them to be regarded as leaders in the area of such product of-
ferings or delivery to customers. A core competency can take various forms, including
technical/subject matter know-how, a reliable process and/or close relationships with cus-
tomers and suppliers (Jae, et al. 2006). It may also include product development or culture,
such as employee dedication, best human resource management (HRM), good market
coverage etc. Core competencies are particular strengths relative to other organizations in
the industry which provide the fundamental basis for the provision of added value.
Due to the nature and minimal resource base of SMEs, especially in developing coun-
tries like Nigeria, such organizations turn to source for knowledge and expertise of out-
siders who are not on their payroll to carry out activities such as back office (book
keeping, payroll, order processing, other administrative services); Accounting services
(financial reporting, tax processing); supporting activities (shipping, training) and even pri-
mary activities such as purchasing, manufacturing, warehousing, selling, customer service,
others. This therefore points to the relevance of the resource based theory in general and
core competency theory in particular in explaining the outsourcing decisions of SMEs.
However, there are instances where organizations may have the needed resources but
still go ahead to outsource. Some even go to extent of subcontracting in areas of their
core competence. This therefore brings the fore the insufficiency of the core compe-
tency theory in explaining the outsourcing decision in terms of strategic choice and im-
plementation among SMEs.
Transaction cost theory
This theory holds an assumption that business outsourcing is implemented in order to lower
the transaction costs. Transaction Cost Analysis (TCA) is another widely used outsourcing
based theoretical perspective especially in supply chain management (Busi and McIvor,
2008). The approach seeks to identify the environmental factors that together with a set of
related human factors explain how companies can organize transactions to reduce the costs
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26 Page 14 of 34
associated with these transactions. TCA postulates that managers suffer from bounded ra-
tionality, whereas other stakeholders may opportunistically act if given the chance.
Small and medium scale enterprises are always out to minimize their cost of oper-
ation. They therefore subcontract some of their jobs which can be done more efficiently
by outside vendors. This also paves way for them to enhance their customer service
which leads to customer satisfaction.
This theory asserts that, an organization may outsource even when it has the where-
withal to execute the activity itself if and only if the sum cost carrying out the activity
by an outside vendor including contract processing cost is lower than the cost of carry-
ing out the activity in house. This theory is quite relevant in explaining the outsourcing
of primary activities which are seen as being part of the organizations primary (core)
operation as captured in their mission statement.
However, this theory cannot be said to be sufficient in explaining all outsourcing de-
cisions of SMEs owing to the fact that some still go ahead to outsource even when they
could have carried out the task cheaper than the outside vendor. This informed our de-
cision to look at the social views.
Social view theory
Other researchers, especially in the marketing area, have suggested social theories such
as social exchange theory and power-political theory as appropriate tools for analyzing
the outsourcing relationships (Jae, et al. 2000). These theories are used to explain the
reason why organizations enter into closer relationship with their service providers.
They tried to understand the relationship as dynamic processes through specific se-
quential interactions in which two participants carry out activities toward one another
and exchange valuable resources. Theories in the social aspect assume processes evolv-
ing over time as the actors mutually and sequentially demonstrate their trustworthiness
whereas the exchange activities by the organizations in economic perspective are en-
forceable. Thus, the social theories are mainly used to explain partnership relationship
between the clients and the service providers (Jae, et al. 2000).
Worthy of note here is the fact that some SMEs outsource their services to bigger or-
ganizations to attain recognition and or establish a relationship with a hope of other
benefits rather than cost minimization such benefits may still lead to profit in later life
of the business. Also, some organizations outsource their services just for patronage
sake. Patronage here refers to social relationship without looking up for profit.
Theory choice
This research is based on the core competencies theory and the transaction cost theory
which emphasizes minimization of cost either through concentrating on their core compe-
tences and subcontracting other non core areas of operation or subcontracting even their
primary activities to others that can perform them less costly thereby earning some returns
which is in form of the difference between the value of the contract and the cost of its
execution. Cost here entails both; the amount paid the outsourcee and the processing/ op-
erational fee. The choice of these two theories stems from the fact that, SMEs outsourcing
entails both the core and non core activities. Social view theory is left out here for the
thrust of this research is the effect of the strategies on profitability and not relatedness. The
focus of every manager is achievement of objectives at a lesser cost. When one achieves a
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26 Page 15 of 34
goal, the first question that comes to mind is how? How much was spent in realizing the
goal? Is there any better way of doing it thereby incurring less cost? Outsourcing here is
looked at as a “make or buy”decision where the decision maker looks at the cost of carry-
ing out an activity and outsourcing it and goes for the more efficient one. This leads to
achievement of customers’needs thereby attaining customer satisfaction at a lesser cost.
Empirical review
In a research to explore outsourcing strategies among small manufacturing firms, and to
test how these strategies can be linked to financial performance (Return on Investment
and Return on Equity), Isaksson and Lantz (2015) applied multiple regression on the data
collected through a stratified sample of 700 small (<50 employees) manufacturing firms in
Sweden and realized that, there is no significant relationship between the strategies (Back
office activities, Primary activities, Accounting activities, and Support activities) and finan-
cial performance measured in terms of return on investment (ROI) and return on equity
(ROE). This research however, did not delve in the effect of these strategies on SMEs prof-
itability. Also, the research was carried out in Sweden whose business environment is bet-
ter established and so different from that of Nigeria.
To find out the strategies in the outsourcing process, the challenges associated with out-
sourcing in the hotel industry and what benefits are derived from outsourcing of non-core
functions, Gyemang, Aikins, Asibey and Broni, (2014) used a descriptive approach to analyze
and evaluate the impact of outsourcing in the hotel industry in Ghana. Questionnaires were
administered to fifty (50) respondents comprising core management staff and other key
headsofthedepartmentsandthemaincrew.Atthe end of the research, they concluded that,
Hotels have been concentrating on their core functions in the areas of accommodation, food
and bar services and housekeeping and have outsourced most of their non-core functions.
This research was carried out with a very limited sample of only 50 respondents and also, did
not point out clearly the various strategies embarked upon by the organizations.
To examine outsourcing services as a strategic tool for organizational performance in
the Nigerian food, beverage, and tobacco industry, Suraju & Hamed (2013) used two
estimators: naïve estimator and the weighted estimator Proposed by Dehejia & Wahba
and modified by Nanfosso and Mbassi were used for the analysis. Data were obtained
from the questionnaires administered for period of two weeks to cross-sections of 15
companies in food, beverage, and tobacco industry in Nigeria, as well as secondary data
extracted from the files of statistical and fiscal declarations of these companies con-
tained in the fact-book of Nigeria Stock Exchange (NSE) for the period of 2000–2010. At
theendoftheresearch,theyrealizedthat,themoreanorganizationoutsourced,thehigher
its organizational growth. Also, organizational productivity is positively correlated to the
amelioration of competitive advantage of labor productivity and average production cost.
The paper also revealed that outsourcing is beneficial to organizational performance, and
enhances firm’s financial economies and competitive advantage in the market place. This re-
search considered outsourcing as a generic strategy instead of pointing out specific outsour-
cing strategies embarked upon by these organizations.
According to Yeboah (2013) who examined the relationship between outsourcing and
organizational performance in the services sector using SPSS to correlate the variables
and data gotten from a population of 50 firms operating in the banking and insurance
sectors of the economy of Ghana reported that, there is no statistically significant
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26 Page 16 of 34
correlation between outsourcing and organizational productivity, there is statistically
significant correlation between outsourcing and quality, there is statistically significant
correlation between outsourcing and competitive advantage. This research however
fails to consider the effect of the strategy on organizational profitability.
To examine the axiomatic relationship between outsourcing strategy and organizational
performance in Nigeria manufacturing sector, Akewushola, and Elegbede (2013) adopted a
stratified sampling technique to arrive at 120 sample elements for the study. Some of the
top and middle level managers of Cadbury Nigeria Plc and Nestle Foods Plc responded to
the questionnaire administered and were interviewed to further elicit information on the
key variables. Data obtained were analyzed using Regression analysis, the researchers real-
ized that, firms that outsource experience reduced average cost, increased sales turnover
and profitability, enhance expertise, improve service quality, reduce staff strength, stream-
line the production process, reduced administrative burden and savetimeforcoreactivities.
This research however, is limited to the manufacturing sector of Nigeria.
To ascertain the effect of outsourcing strategy on project success, Irefin, et al. (2012) admin-
istered copies of questionnaire to staff of Nestle Nigeria PLC using stratified sampling tech-
niques and also interviewed some to authenticate the information derived. Data obtained was
analyzed using frequency distribution and Chi-Square analysis. The research found out that,
Firms outsourced their production process in order to manage cost, reduce time-to-market,
boost bottom line, increase sales turnover and profitability, enhance expertise, improve service
quality, reduce staff, streamline the process, reduce the administrative burden and save time
for core activities. This research gives a very good background for the assessment of the effect
their outsourcing activities had had on the performance of their enterprises.
To examine the propensity to outsourcing and its impacts on operational objectives in-
cluding cost reduction, improved quality, flexibility and better service and organizational
performance, which includes financial performance and non-financial performance,
Nazeri, et al. (2012) analyzed feedback of questionnaires distributed among the board of
directors, quality managers, operational administrators, and lower managers using SPSS
and Minitab software based on deductive and descriptive statistics. The results of the sur-
vey indicated that outsourcing could lead to reduced cost, improve quality, increase flexi-
bility, better financial and non-financial performance and services.
To examine the relationship between the outsourcing process, and perceived
organizational performance, Bolat and Yilmaz (2009) surveyed Eighty (80) hotels in
Turkey and realized that, Outsourcing has a positive effect on organizational perform-
ance (organizational effectiveness, productivity, profitability, quality, continuous im-
provement, quality of work life, and social responsibility levels).
To examine the impact of outsourcing on a firm’s performance, Jiang et al. (2006) used
annual report data from a sample of 51 publicly traded firms in USA and got some evi-
dence that outsourcing improved firm’s cost-efficiency (sales less expenses/sales) but did
not find any effect on firm’s productivity or profitability (ROA and profit margin). This re-
search was carried out in a developed country/economy setting; also, using firms that are
not clearly defined as being in the small scale category. This research can therefore serve
only as a background for a research on SMEs in a developing country/economy.
To analyze the effect of outsourcing of human resource (HR) activities (payroll and
training outsourcing) on firm performance, Gilley et al. (2004) sampled 94 manufactur-
ing firms in U.S.A and found out that, outsourcing had no effect on financial
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26 Page 17 of 34
performance, but there was a small positive effect on firm’s innovation performance
(R&D outlays, process innovation and product innovations) and stakeholder perform-
ance (employment growth & morale, customer and supplier relations). This research
was also carried out in a developed nation as such serves as a background for this
research.
As noted here, previous research findings have proved contradictory results on the effect of
outsourcing strategy on performance. While some including those of Gyemang, et al. (2014);
Suraju & Hamed (2013); Akewushola, and Elegbede (2013); Irefin, Olateju, & Hammed
(2012); Awolusi (2012); Nazeri, Gholami & Rashidi (2012); Hayes, et al. (2000), presented a
positive effect, those of Isaksson &Lantz (2015); Yeboah (2013) and Gilley, et al. (2004); found
out no effect or relationship between outsourcing and performance. Also, Most of the re-
search were carried out in relatively strong economies and developed nations and so, their
findings cannot be imported directly and said to represent what is obtainable in a developing
country/economy like Nigeria. The gap is further buttressed in the following section.
Research gap and statement of hypotheses
From the concepts reviewed, outsourcing strategies of SMEs can be measured in terms of
outsourcing of back office activates, primary activities, accounting activities and support ac-
tivities (Gilley and Rasheed, 2000; Isaksson and Lantz, 2015). SMEs performance on the
other hand can be measured (in addition to others) in terms of profitability (Malhorta,
1997; Carney, 1997; and Goldstein, 1999). In terms of theoretical backing, several re-
searchers have adopted the core competency theory which emphasized the outsourcing of
functions which are outside of a firm’scoreareaofoperation.ThisisalsotrueforSMEsfor
due to their minimal resource base, especially in developing countries like Nigeria, these or-
ganizations turn to source for knowledge and expertise of outsiders who are not on their
payroll. This buttresses the choice of this theory to explain the outsourcing of back office
activities, accounting activities and support activities.
However, it falls short in explaining the outsourcing of the core areas by SMEs. There are
instances where organizations may have the needed resources but still go ahead to out-
source. This informs the relevance of the transaction cost theory. This theory asserts that,
an organization may outsource even when it has the wherewithal to execute the activity it-
self if and only if the sum cost carrying out the activity by an outside vendor including con-
tract processing cost is lower than the cost of carrying out the activity in house. This theory
is quite relevant in explaining the outsourcing of primary activities which are seen as being
part of the organizations primary (core) operation as captured in their mission statement. In
line with the theory choice here, where the core competency theory explains in part as aug-
mented by the transaction cost theory which explains the outsourcing of primary activities,
a research is needed to assess the effect of these outsourcing strategies on the profitability
of organizations (SMEs) who operate in an environment where profitability is emphasized.
In terms of empirical studies, the researches reviewed herein and several others con-
sulted did not show clearly how various outsourcing strategies affect the performance
of SMEs in terms of profitability and also in a developing country environment like that
of Nigeria. For instance, Gyemang, et al. (2014) carried out their research using hotel
industry in Ghana with a very limited sample of only 50 respondents and also, did not
point out clearly the various strategies embarked upon by the organizations; Suraju &
Hamed (2013)‘s research considered outsourcing as a generic strategy instead of pointing
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26 Page 18 of 34
out specific outsourcing strategies embarked upon by these organizations; Akewushola,
and Elegbede (2013) limited theirs to the manufacturing sector of Nigeria and also did
not specially outline and assessed the effect of various strategies on SMEs profitability.
The research by Isaksson and Lantz, (2015) is very pertinent here. It is Isaksson and
Lantz, (2015) who did a study on the specific outsourcing strategies and their effect on
SMEs financial performance. This research however, was done measuring financial perform-
ance in terms of return on investment (ROI) and return on equity (ROE) leaving out profit-
ability which is the main focus of most SMEs businesses. SMEs, especially in developing
countries like Nigeria, focuses on their profitability and so measures their successes primar-
ily based on the difference between the money spent on a project and that realized. This in-
forms the essence of replicating such a research in Nigeria and also focusing on profitability
rather than other performance measures. This has created a gap which this research sought
to fill. The research therefore made the following hypotheses:
Ho
1
Outsourcing of Back Office Activities has no significant effect on the profitability
of SMEs in Nigeria
Ho
2
Outsourcing of Primary Activities has no significant effect on the profitability of
SMEs in Nigeria
Ho
3
Outsourcing of Accounting Activities has no significant effect on the profitability
of SMEs in Nigeria
Ho
4
Outsourcing of Support Services has no significant effect on the profitability of
SMEs in Nigeria
Model conceptualization and specification
Diagrammatical model
Figure 3 shows the link between outsourcing strategies which when embarked upon by
the SMEs lead to organizational performance. The outsourcing strategies as captured
by the diagram are outsourcing of back office activities, primary activities, accounting
activities and support activities. These outsourcing activities when carried out by SMEs
as shown by the link between the various strategies and SMEs organization leads to a
performance which here is defined in terms of profitability.
Fig. 3 Diagram showing the link between outsourcing strategies of SMEs and SMEs performance. Source:
Based on the classification of outsourcing strategies by Gilley and Rasheed (2000); Isaksson and Lantz (2015)
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26 Page 19 of 34
Mathematical model
Multiple regression with profitability as dependent variable is conducted with the four
outsourcing strategies as explanatory variables while simultaneously controlling for en-
terprise size and strategic direction. Thus, the generic model is given as:
Perf :¼f OutsðÞ
Where:
Perf = performance
Outs = outsourcing Strategy
The specified regression model to be tested is:
Prof ¼b0þb1BOF þb2PRI þb3ACC þb4SUP þb5STR þb6NOE þb7YRS
þb8SOP þb9ONS þb10ASS þε
Where:
Prof = Profitability (measured by cost savings, focus on core business, reduction in
money spent on fixed assets (cost restructuring), reduction in tax paid (tax benefit))
BOF = Back Office activities (measured by the average tendency of outsourcing back
office activities)
PRI = Primary Activities (measured by the average tendency of outsourcing primary
activities)
ACC = Accounting Activities (measured by the average tendency of outsourcing
accounting activities)
SUP = Supporting activities (measured by the average tendency of outsourcing support
activities)
STR (control variable) = a dummy variable describing whether the core company strategy
should be described as oriented towards costs (value = 1) or differentiation (value = 0)
NOE (control variable) = a dummy variable describing the number of employees of a SMEs
YRS (control variable) = a dummy variable describing the number of years a SMEs has
been in operation
SOP (control variable) = a dummy variable describing SMEs sector of operation
ONS (control variable) = a dummy variable describing SMEs ownership structure
ASS (control variable) = a dummy variable describing SMEs value of assets
ε= the error term of 5% which is provided for in the course of the analysis. The a
priori expectations are:
b1;b2;b3;b4;b5;b6b7b8b9b10 >1
Methods
The specification of relevant procedures for collecting and analysing information (data)
which would help solve the research problem at hand is quite pertinent for a research
(Agburu, 2007). For the purpose of this study, survey research design and secondary
data was adopted. Thus, data was collected through the use of questionnaire (which en-
tails going to the field to source for responses from experts and other respondents).
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26 Page 20 of 34
Also, a secondary data source was used which contains the relevant data about out-
sourcing strategies and also, profitability of some selected SMEs.
To source for primary data, the researchers sought the responses of SMEs located in
Gboko, Makurdi and Otukpo metropolis which are the three major towns in Benue
State. Based on the records for year 2014 gotten from Benue state Board of Internal
Revenue Service (BIRS), the researcher arrived at a target population of five hundred
and sixty three (563) which consists of SMEs operating in the selected metropolis.
From the population of 563, a sample of 233 SMEs was selected using Taro Yamane’s
formula for sample determination as follows:
n¼N=1þNeðÞ
2
Where:n = sample size; N = population size; e = level of significance; 1 and 2 are constants.
n¼563=1þ563 0:05ðÞ
2
n¼563=1þ1:4075
n¼233
The sample size as calculated above is 233 SMEs and is shared among the three se-
lected towns under study using Bourley’s 1994 population allocation formula in Nzelibe
and Ilogu (1999, p.201) as stated below:
nS ¼nNSðÞ
N
Where: nS = sample size per town; n = total sample size; NS = Total number of
SMEs in the area of study; N = Total population size. This results in the sampling of 69
SMEs in Gboko, 105 from Makurdi and 59 from Otukpo metropolis. For a population
that is made up of sub groups, a stratified random sampling can be used in drawing a
sample (Orsaah, 2009). The sample size was therefore shared among six categories of
SMEs purposively selected for using stratified random sampling technique where the pro-
portions are taken based on their existence in the population. The categories, their pro-
portions and the number sampled using Bourley’s 1994 formula are shown in Table 2.
From Table 2, the sample distribution as calculated using Bourley/s formula shows
proportionately the number sampled as 22 for manufacturing, 33 for educational, 5 for
computer/information technology and telecommunication, 43 for restaurants and ho-
tels and 130 for wholesale and retail shops. The questionnaires were therefore pur-
posely distributed to SMEs in the three selected town for they are seen as been
homogenous regardless of their location in the state.
A questionnaire was administered on every SMEs sampled whereby either the owner,
manager (or a top officer) responded to it. This was done through personal delivery.
That notwithstanding, ten (10) SMEs (two each from the five areas of operation under
study), were sampled for secondary data to confirm the responses of various SMEs.
To ensure validity of the measuring instruments in this research, a carefully drafted
and wide-ranging questionnaire aimed at eliciting right responses was constructed and
piloted in order to detect any ambiguities or inherent problems. While some questions
were open-ended most were with a response scale of 1 to 5. The questionnaire is de-
signed to capture detailed profile of the respondents in addition to what they consider
as their outsourcing of core activities and its effect on their performance. Also, expert
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26 Page 21 of 34
opinions on the subject were sought to confirm the extent to which the question has
face and content validity.
To ensure reliability, this research used Cronbach alpha coefficient to test reliability.
The Cronbach’s coefficient alpha ranges from 0 to 1. A scale is considered to have good
reliability if it has an alpha value greater than 0.60 (Zikmund, 2010). The Cronbach’s
alpha results were 0.761 for outsourcing of Back Office Activities, 0.721 for outsourcing
of primary activities, 0.701 for outsourcing of accounting activities, .743 for outsourcing
of supporting activities, 0.843 for organizational performance, while the overall alpha
coefficient is 0.929.
Hypotheses were tested using multiple regression analysis. The output shows the t-
statistic and p-values for the coefficients which results in either rejecting or accepting
the hypotheses at a specified level of significance. The null hypothesis is rejected where
the p-value is less than the critical value (0.05). Also, the output shows the coefficient of
determination (r
2
), which measures the proportion of the dependent variable that is ex-
plained by the regression model. The range for the coefficient of determination varies be-
tween 0 and 1; that is 0 ≤r
2
≤1. As r
2
approaches 1, the more the independent variable
explains the variation in the dependent variables. Statistical Package for Social Sciences
(SPSS 20.0) computer program was used to enhance the robustness of the results.
Results and discussion
Results of questionnaire
A total of 233 questionnaires, each containing 18 aggregate questions were designed
and issued out to respondents who are divided into 5 categories of SMEs base on their
area of operations. At the end of the questionnaire process which took place from 10th
January, 2017 to 15th March, 2017, only 218 representing 93.5% of questionnaires were
dully filled devoid of errors and returned to the researcher and so, the analysis of ques-
tionnaire responses was based on these 218 copies dully returned.
Demographic characteristics of respondents
Demographic content here entails the distribution of respondents (SMEs) based on
area/ nature of operation, nature of ownership, duration of operation (in years),
Table 2 Sample Distribution
Area of operation/ Nature of business Number of SMEs in
the population
Number sampled
nS ¼nNSðÞ
N
1. Manufacturing 52 233(52) = 22
563
2. Educational 80 233(80) = 33
563
3. Computer/Information Technology
& Telecommunication
12 233(12) = 5
563
4. Restaurants and Hotels 105 233(105) = 43
563
5. Wholesale and retail shops 314 233(314) =130
563
Total 563 233
Source: Field Survey, (2017)
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26 Page 22 of 34
number of employees, worth including working capital but excluding value of land and
annual turnover. The detail of these attributes is captured in Table 3.
Result from Table 3 presents in addition to others, the area of operation distribution
of respondents. Out of the 218 respondents, 20 (9.17%) are into manufacturing; 28
(12.84%) are owners/operators of schools; 5 representing 2.29% are into computer/ in-
formation technology & telecommunication; also, another 41 (18.81%) are operators of
restaurants and hotels while the remaining 124 (56.88%) are operators of wholesale and
Table 3 Respondent’s Distribution based on SMEs’Characteristics
Attribute Frequency Percentage (%)
Area of operation/Nature of business:
Manufacturing 20 9.17
Educational 28 12.8
Computer/information technology and communication 5 2.29
Restaurants and hotels 41 18.18
Wholesale and shops 124 56.88
Total 218 100
Nature of Ownership:
Private limited company 13 5.96
Public limited company ––
Partnership 47 21.56
Sole proprietorship 136 62.39
Family owed 22 10.09
Others ––
Total 218 100
Duration of operation:
Less than 5 years 15 6.88
Between 5 and 10 years 162 74.31
Between 11 and 15 years 20 9.17
Between 16 and 20 years 5 2.29
Above 20 years 16 7.34
Total 218 100
Number of employees:
Less than 50 employees 197 90.37
Between 50 and 100 employees 21 9.63
Total 218 100
Worth including working capital but excluding value of land:
Less than 10 million naira ––
Between 10 million and 100 million naira 186 89.91
Between 101 million and 300 million naira 22 10.09
Total 218 100
Annual Turnover:
10 million Naira and below 146 66.97
Over 10 million naira but not more
than 20 Million Naira 72 33.06
Total 218 100
Source: Survey data (2017)
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26 Page 23 of 34
retail shops. The distribution is uneven and commensurate with the proportion of the
areas of operation in the sample.
The nature of ownership of the SMEs is also captured in Table 3. Results captured
shows that, out of the 218 respondents, 13 (5.96%) are private limited companies, none
is a public limited company, 47 (21.56%) are partnership ventures, 136 representing
62.39% are of sole ownership, while the remaining 22 (10.09%) are family owned. This
unveils the nature of SMEs ownership in Nigeria where the majority is solely owned.
From Table 3, out of the 218 organizations, only 15 (6.88%) has been in operation for
less than five years. Those that have been in operation between 5 and 10 years are 162
(74.31%). Also, those that have been in operation between 11 and 15 years are 20
(9.17%). Those that have been in operation between 16 and 20 years are 5 (2.29%),
whereas, those in operation for over 20 years are 16 representing (7.34%). By definition
of SMEs and the nature of businesses in Nigeria where most start small, most of the
business surveyed had been in business for about five years.
Also, from Table 3, out of the 218 organizations, those with staff strength of less than
50 employees are 197 (90.37%), whereas, those with staff strength between 50 and 100
are 21 (9.63%). This means that, most of the enterprises surveyed are small scale and
just few are of medium scale. This is also in line with the fact that, just few of the en-
terprises in the country are not small scale.
The distribution of questionnaires base on SMEs’worth including working capital
but excluding value of land is also shown in Table 3. From Table 3, out of the 218 orga-
nizations, those between 10 million and 100 million naira are 196 (89.91%) and the
remaining 22 (10.09%) falls between 101 million and 300 million naira. This unveils the
capital and assets base of SMEs in Nigeria where most are are within the small scale
range where there worth is below 100 million naira.
Finally, Table 3 shows that, SMEs with annual turnover of 10 million naira and below
are 146 (66.97%) whereas, the remaining 72 (33.03%) are those with a turnover of over
10 million naira but not more than 20 million naira. This shows the operational nature
in terms of turnover and points to the fact that, most of the enterprises surveyed are
worth just about 10 million naira in annual revenue.
Respondent’s views about the outsourcing (subcontracting) of one or more activities
The views of respondents about the outsourcing of back office activities, primary activ-
ities, accounting activities and support activities are presented in Table 4.
From Table 4, the summary of respondent’s views about the outsourcing (subcon-
tracting) of one or more of back office activities such as security services, cleaning ser-
vices, bookkeeping, payroll, billing, order processing, payment processing, others are
categorized based on SMEs area of operation. The distribution revealed that 34 (16%)
respondents strongly disagreed to the assertion that they have outsourced supporting
activities within the past five years. Also, 67 (31%) disagreed while 37 (17%) are neutral.
However, 38 (17%) agreed to the assertion that they have outsourced supporting activ-
ities within the past five years. Also 42(19%) strongly agreed. This result shows that,
not all SMEs outsource their back office activities; only a small percentage does.
Average responses on areas of outsourcing grouped under primary activities as shown
in the results from Table 4 revealed that 54 (25%) respondents strongly disagreed to the
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26 Page 24 of 34
assertion that they have outsourced primary activities within the past five years. Also, 85
(39%) disagreed while 36 (16%) are neutral. However, 28 (12%) agreed to the assertion that
they have outsourced supporting activities within the past five years. Also 15 (7%) strongly
agreed. This result shows that only few SMEs outsource their primary activities.
Also, from Table 4, on average, 22 (10%) respondents opined strongly that they do
not outsource their accounting services. 24 (11%) also disagreed whereas, 39 (18%) are
neutral. However, 39 (18%) agreed and 95 (43%) strongly agreed. This result shows
that, most SMEs outsource some of their accounting activities. However, the sector
evidence shows that, whole sale and retail shops which forms the bulk of the sam-
ple outsources much of their accounting services and this leads to the high average
Table 4 Summary of Respondent’s Views about the Outsourcing (Subcontracting) of one or more
Activities
Attribute SD D N A SA Total
Back office activities:
Manufacturing 8533120
Educational 10 844228
Computer/ Information and Telecommunication 111115
Restaurants and hotels 352121941
Wholesale and retail shops 12 48 27 18 19 124
Total Average Response 34 67 37 38 42 218
Average Percentage (%) 16 31 17 17 19 100
Primary Activities:
Manufacturing 2356420
Educational 4558628
Computer/ Information Technology .2 .5 2 1.5 .8 5
Restaurants and hotels 14.5 14 5.8 5 1.7 41
Wholesale and Retail Shops 33 62.5 18 7 3 124
Average Response 54 85 36 28 15 218
Average Percentage (%) 25 39 16 12 7 100
Accounting activities:
Manufacturing 2 3 3 5.5 6.5 20
Educational 8 8.5 5.5 5 1 28
Computer/ Information Technology 111115
Restaurants and hotels 2 3.5 6.5 10.5 18.5 41
Wholesale and Retail Shops 8.5 7.5 22.5 17 67.5 124
Average Response 22 24 39 28 94 218
Average Percentage (%) 10 11 18 18 43 100
Supporting activities:
Manufacturing 2.8 3.7 2.7 4.5 6.3 20
Educational 1.7 4 4.7 9 8.7 28
Computer/ Information Technology 1.1 0.5 1.3 1.5 0.5 5
Restaurants and hotels 2.3 4.5 3 11.7 19.5 41
Wholesale and Retail Shops 2.7 3.8 7.2 67.7 39.3 124
Average Response 11 17 19 94 74 218
Average Percentage (%) 5874334100
Source: Survey Result, (2017)
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26 Page 25 of 34
percentage so recorded even though, some educational services hardly outsource
their accounting services.
Finally, average responses on areas of outsourcing grouped under supporting activ-
ities as shown in Results from Table 4 revealed that 11 (5%) respondents strongly dis-
agreed to the assertion that they have outsourced supporting activities within the past
five years. Also, 17 (8%) disagreed while 19 (7%) are neutral. However, 94 (43%) agreed
to the assertion that they have outsourced supporting activities within the past five
years. Also 74 (34%) strongly agreed. These responses point to a fact that, most SMEs
outsource their support services. The outsourcing of services which are of support na-
ture forms the bulk of their outsourcing practice.
Respondent’s views about their profitability as it relates to the outsourcing (subcontracting)
of one or more of outsourcing activities
The views of respondents based on the profitability of SMEs relating to their outsour-
cing of one or more activities are shown in Table 5.
From Table 5, an average respondents of 11 (5%) strongly disagreed that outsourcing
leads to their profitability. About 8% representing 18 respondents also disagreed while 27
(12%) respondents stood undecided. However, 102 (47%) respondents agreed that their
outsourcing activities have led to their profitability. Also, an average of 61(28%) strongly
agreed. This clearly shows that, SMEs are of the opinion that, their outsourcing practice
has over the years resulted in increased profitability. Due to the nature of their accounting
systems which are unsophisticated and so basically captures their expenses and returns,
SMEs profitability here as reported may be only the difference between the amount spent
in the subcontracting process and that realized in return. This however points to the fact
that, outsourcing strategies embarked upon by SMEs has an effect on their profitability.
Regression result for questionnaire responses
Table 6 shows the results from the multiple regression analysis with profitability as
dependent variable and the outsourcing strategies as explanatory variables. From the
regression result, F (4, 218) = 102.032 at a 0.00 level of significance while R^2 = 0.596
which is the coefficient of determination which measures the proportion of the
dependent variable that is explained by the regression model. It points that the regres-
sion model explains up to 59.6% of the dependent variable.
Table 5 Summary of Respondent’s Views about their Profitability as it Relates to the Outsourcing
(Subcontracting) of one or more of Outsourcing Activities
Area of operation/ Nature of business S D D N A SA Total
Manufacturing 2 3 2.8 7 5.6 20
Educational 1.6 3 3.4 10 10 28
Computer/ Information Technology & Telecommunication –1 1.2 1.8 1 5
Restaurants and Hotels 2 3.8 3.2 10.8 21.4 41
Wholesale and retail shops 5.6 7.2 16 72.8 22.8 124
Total Average response 11 18 27 102 61 218
Average percentage (%) 5 8 12 47 28 100
Source: survey data,(2017)
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26 Page 26 of 34
From the test of hypotheses in Table 7, the acceptance/rejection decision is taken base
on the decision rule that states that, the null hypothesis will be rejected if the p-value
(Sig.) is less than the critical value (0.05). The detail of the regression result is attached as
appendix IV. Based on the decision rule therefore, the results in Table 7 show that:
1. Outsourcing of Back Office Activities has a significant effect on the profitability of
SMEs in Nigeria
2. Outsourcing of Primary Activities has a significant effect on the profitability of
SMEs in Nigeria
3. Outsourcing of Accounting Activities has no significant effect on the profitability of
SMEs in Nigeria
4. Outsourcing of Support Services has a significant effect on the profitability of SMEs
in Nigeria
Results of secondary data
The estimated cost of outsourcing based on various outsourcing strategies of ten (10) se-
lected SMEs and their estimated profits for the period under consideration (2012–2016)
are presented and regressed to arrive at the effect of various outsourcing strategies on the
organizations’profitability. Here two organizations are selected each from the five areas of
operation considered in the research. Table 8 below shows the estimated profits of se-
lected SMEs.
Regression result of secondary data
From the regression results above, F (4, 49) = 43.760 at a 0.00 level of significance while
R^2 = .795 which is the coefficient of determination which measures the proportion of
the dependent variable that is explained by the regression model. It points that the re-
gression model explains up to 79.5% of the dependent variable.
From the test of hypotheses, the acceptance/rejection decision is taken base on the decision
rule that states that, the null hypothesis will be rejected if the p-value (Sig.) is less than the crit-
ical value (0.05). The detail of the regression result is attached as appendix V. Just like in the
case of primary data, based on the decision rule therefore, the results in Table 9 show that:
Table 6 Effect of Outsourcing Strategies on SMEs Profitability (based on questionnaire responses)
Model B Std. Error T p-value
Outsourcing of Back Office Activities .199 .054 3.724 .000
Outsourcing of Primary Activities .247 .060 4.133 .000
Outsourcing of Accounting Activities .018 .060 .295 .768
Outsourcing of Supporting Activities .108 .046 2.354 .019
Table 7 Test of Hypotheses
S/N Model T p-value Decision
1 Outsourcing of Back Office Activities 3.724 .000 Rejected
2 Outsourcing of Primary Activities 4.133 .000 Rejected
3 Outsourcing of Accounting Activities .295 .768 Accepted
4 Outsourcing of Supporting Activities 2.354 .019 Rejected
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26 Page 27 of 34
1. Outsourcing of Back Office Activities has a significant effect on the profitability of
SMEs in Nigeria
2. Outsourcing of Primary Activities has a significant effect on the profitability of
SMEs in Nigeria
3. Outsourcing of Accounting Activities has no significant effect on the profitability of
SMEs in Nigeria
4. Outsourcing of Support Services has a significant effect on the profitability of SMEs
in Nigeria
Discussion of findings
Findings about hypothesis one which is in line with objective one:
This hypothesis states that Outsourcing Back Office Activities has no significant effect
on the performance of SMEs in Nigeria. The performance measure here is profitability.
Based on the regression result for secondary data (Sig. 0.000) as backed by the result
of respondents’views (p= 0.000), the alternative hypothesis was accepted which says that
there is a significant relationship between outsourcing of back office activities and per-
formance of SMEs in Benue state, Nigeria. From the responses gotten through the ques-
tionnaire, this research found out that, SMEs outsource back office activities such as,
security services, cleaning services, bookkeeping services, order processing and other ad-
ministrative services. Giving out these services to outside vendors who can perform them
better has also resulted in a decrease in the cost of running the enterprises. Giving out
theses services which are practically augmenting in nature also paves way for the enter-
prises to focus on their core areas and so enjoy the benefits of specialization.
This finding supports the view by, Lau and Hurly (1997), Kotabe et al. (1998), Frayer
et al. (2000), Gupta and Zheuder (1994), Greer et al. (1999), others that outsourcing is
correlated to profitability through cost savings, focus on core businesses, cost restructur-
ing, tax benefits and increase turnover. This finding however, opposes the finding by
Isaksson and Lantz (2015) which asserts that outsourcing strategies and outsourcing of
back office activities to be specific has no significant effect on financial performance of
SMEs as shown by their research in Sweden. Isaksson and Lantz (2015) measured finan-
cial performance in terms of ROI and ROE and found no effect where as our research
Table 8 Effect of outsourcing strategies on SMEs profitability (based on estimated annual profits)
B Std. Error T p-value
Estimated Cost of Outsourcing Back Office Activities 36.352 9.579 3.795 .000
Estimated Cost of Outsourcing Primary Activities −39.093 6.577 −5.944 .000
Estimated Cost of Outsourcing Support Activities 33.602 15.533 2.163 .036
Estimated Cost of Outsourcing Accounting Activities 19.825 10.155 1.952 .057
Table 9 Test of Hypothesis
S/N Model T p-value Decision
1 Outsourcing of Back Office Activities 3.795 .000 Rejected
2 Outsourcing of Primary Activities 5.944 .000 Rejected
3 Outsourcing of Accounting Activities 1.952 .057 Accepted
4 Outsourcing of Supporting Activities 2.163 .036 Rejected
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26 Page 28 of 34
measured financial performance in terms of profitability which merely considered the dif-
ference between the cost of outsourcing and the return realized. The difference in our re-
sult may not be unconnected with the difference in our measure of performance. This finding
further supports resource-based thinking which as postulated by CK Prahalad and Gary
Hamel stipulate that firms benefit more when resources are channeled towards core
activities while the non core activities such as back office activities are contracted
to an outside vendor (Prahalad & Hamel, 1990).
Findings about hypothesis two which is in line with objective two:
This hypothesis states that, Outsourcing Primary Activities has no significant effect on
the performance of Small and medium scale enterprises in Nigeria.
Base on the regression result for secondary data (Sig. 0.000) as backed by the result of re-
spondents’views (p= 0.000) which fully supports the alternative view, the alternative hypoth-
esis was accepted which says that there is a significant relationship between outsourcing of
primary activities and performance of SMEs in Nigeria. The findings reveal that, there is an
effect of outsourcing primary activities such as manufacturing, purchases, warehousing, sales
force, and customer service, others on the profitability of SMEs. The findings show a very
strong effect of this outsourcing strategy on SMEs financial performance.
This finding however opposes the thinking of proponents of core competency theory
which stresses that the primary activities which fall within the core area of operation of
organizations should be retained in house and so carried out by the organization itself.
Rather, it supports the transaction cost theory which emphasizes more on the cost of
operation and so states that, organizations should contract or subcontract their opera-
tions if such can be done cheaper and or better by an outside vendor (Yalokwu, 2006).
SMEs due to their profit focused nature turn to go buy in any strategy that will increase
their returns, as such outsource even their primary activities when they are convinced
that the outside vendor can do it cheaper and or better.
Just like in the case of back office activities aboe, this finding supports the view by,
Lau and Hurly (1997), Kotabe et al. (1998), Frayer et al. (2000), Gupta and Zheuder
(1994), and Greer et al. (1999) but opposes the finding by Jiang et al. (2006) and Isaks-
son and Lantz (2015) which found no effect of outsourcing primary activities on finan-
cial performance of SMEs. In the same way, the difference in result here is as a result
of difference in measure of performance. Also, the level of outsourcing in primary ac-
tivities done in a relatively low economic country like Nigeria is higher than that of
Sweden.
Findings about hypothesis three which is in line with objective three:
This hypothesis states that, Outsourcing Accounting Activities has no significant effect
on the performance of Small and medium scale enterprises in Nigeria.
Here, based on the result of both regression analyses, which are greater than the crit-
ical value of 0.05 (p= 0.768 and p= .057 for primary and secondary data respectively),
the null hypothesis was accepted which supports the assertion by Isaksson and Lantz
(2015) that outsourcing strategies and outsourcing of primary activities to be specific
has no significant effect on financial performance of SMEs as shown by their research
in Sweden. The result here means that, Outsourcing Accounting Activities has no
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26 Page 29 of 34
significant effect on the profitability of Small and medium scale enterprises in Nigeria.
The respondents views show clearly the fact that most SMEs do not outsource their ac-
counting activities. They do carry out their recording and reporting internally. A fact
still stands that, most SMEs do not have an established record keeping habit. This has
being identified over the years as one of the major weaknesses of SMEs business opera-
tions (Onugu, 2005). The result here too may not be unconnected with the fact that
SMEs do not appreciate the importance of record keeping. However, from the ques-
tionnaire responses, few SMEs who outsourced their accounting services said they
benefit from the exercise. The independence nature of the exogenous accountants who
are experts and specialists in computing and auditing of accounts for firms may be a
reason for the efficacy of their services.
Findings about hypothesis four which is in line with objective four:
This hypothesis states that, Outsourcing Support Services has no significant effect on
the performance of Small and medium scale enterprises in Nigeria. The regression re-
sults (p= 0.019 and 0.036 for primary and secondary data respectively) show a signifi-
cant effect of the outsourcing of Support activities such as Shipping/ transportation, IT
services/system, training, others on SME’s profitability. In line with this, the null hy-
pothesis is rejected and alternative hypothesis accepted.
Here also, just like in the case of back office activities, this finding supports the view
by, Lau and Hurly (1997), Kotabe, et al. (1998), Frayer et al. (2000), Gupta and Zheuder
(1994), Greer et al. (1999), others that outsourcing of none core activities is correlated
to profitability through cost savings, focus on core businesses, cost restructuring, tax
benefits and increase turnover. However, due to the discrepancy in our measurement
of financial performance with that of Isaksson and Lantz (2015) who measured in terms
of ROI and ROE, and Jiang et al. (2006) who measured in terms on ROA, our finding
clearly opposes theirs.
In addition, this finding further supports resource-based thinking which as postulated
by CK Prahalad and Gary Hamel stipulates that, firms benefit more when resources are
channeled towards core activities while the non core activities which here are merely
supportive in nature are contracted to an outside vendor (Prahalad and Hamel, 1990).
Also worthy of note here is the relevance of this finding to the transaction cost theory
which insists that, operations that can be done by an outside vendor at a lower cost
should be outsourced. In line with this therefore, support activities such as training are
outsourced instead of employing trainers; same as in the case of outsourcing legal ser-
vices instead of placing a lawyer on their monthly payroll. Additional information about
data and results is captured in Additional file 1.
Conclusion and recommendations
Conclusion
Base on the above findings, this research concludes that just like large scale organizations,
small and medium scale enterprises outsource. They have over the years embarked on out-
sourcing strategies such as back office activities (such as security services, cleaning services,
order processing, others); primary activities (manufacturing, purchases, warehousing, sales
force, customer service, others); accounting activities (such as financial reporting, tax pro-
cessing, others) and support activities (legal services shipping/ transportation, IT services/
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26 Page 30 of 34
system, training, others). These outsourcing activities have over the years led to their in-
crease in profitability.
Also, base on the findings of this research, this research concludes that, Most SMEs
outsource more of their primary activities than others which are backup, or supporting
in nature. This act is unlike the large organizations which outsource more of their non
core activities. However, not every SME outsource. Also, some which outsource have
not being managing it effectively. Worthy of note here is the fact that, some which out-
source do so without much consideration of their area of operation thereby not utiliz-
ing fully the merits of this strategy.
Recommendations
The researcher therefore recommends that;-
i. SMEs should embark more on outsourcing strategies to attain the benefits of cost
savings/restructuring which results in better customer service at profit.
ii. Outsourcing process management should be taken seriously to better reap the
benefits of this maintenance/growth strategy. Follow up steps through effective
communication and monitoring should be employed.
iii. Also, SMEs should ensure that, the costs of managing the outsourcing process is
not greater than the benefits generated by the outsourcing program.
iv. Record keeping is a very vital aspect of business operations. However, base on the
responses captured above, it is clear that SMEs attach less value on its record keeping.
This research therefore submits that, owing to the unqualified imperativeness of
accounting function in today’s business word, SMEs should take this function with all
seriousness and thus outsource it to competent vendors who can carry out this
function better or at a cheaper rate than putting accountants on their payrolls.
Contribution to knowledge
Issakson and Lantz (2015) carried out a research on outsourcing strategies and their
impact on SMEs performance in Sweden and realized through regression results that,
all the four strategies have no effect on financial performance of SMEs as measured in
terms of Returns on Equity (ROE) and Return on Assets (ROA).
This research has taken a step to replicate their research here in Nigeria; focusing on
profitability as a measure of performance and realized that, three of the strategies (Back
office, Primary activities and Support activities) have significant effect on the profitabil-
ity of SMEs except outsourcing of accounting activities whereby, there is a high indica-
tion that most don’t even outsource here in Nigeria.
This research adds to the literature on outsourcing strategy and Small/medium scale
business operations. It fills a gap by providing local evidence as to the effect of various
outsourcing strategies on the organizational performance of small and medium scale
businesses in Beenue State, Nigeria. Also, it will be quite useful for proceeding re-
searchers who may use it as a background for further research.
Limitations of the study
Aside the common but less strong limitations to a research such as time constraint,
lack of resource materials, financial constraint, others, this research is constrained by;
Agburu et al. Journal of Global Entrepreneurship Research (2017) 7:26 Page 31 of 34
Lack of records: Ordinarily one would have preferred to present and analyze financial
records of all these organizations to arrive at the implication of their outsourcing practices
but due to the presence of insufficiently and so skeletal records, this research has
depended more on the responses of the SMEs owners/Managers to arrive at the financial
implication of their outsourcing practices. This is a threat to this research as a common
error or misinformation by the respondents can mar the truism of its findings.
Limited scope: This study is limited by its small sample across a wide range of busi-
ness sectors and organizations. Here, only 233 SMEs are sampled among the almost
uncountable SMEs in Nigeria. The scope here is also Makurdi metropolis which is a
feint representation of Nigeria.
Suggestions for further studies
The research by Issakson and Lantz (2015) and this research, notwithstanding, there is
need for a research to ascertain effects of these outsourcing strategies on other non fi-
nancial performance measures such as SMEs customer satisfaction; employee job satis-
faction; employee commitment, others.
Additional file
Additional file 1: Appendix I. (DOCX 128 kb)
Acknowledgements
We sincerely appreciate the help and guidance of our colleagues, friends and relatives; some of which are Dr. Joseph
T. Sev, Dr. Saasongo Nongo, Dr. Darius Ikyanyon, Professor F.A Ayatse, Dr. (Mrs) Kwahar, Dr. (Mrs) Omogbai, Dr.
Onyeaghala Obioma, Mr. Emmanuel Ejike, Mr. Abel Haruna, Mr. S. H. Dibal, Mr. Anza Abraham T, Mrs. Dinah Anza, Mrs.
Faeren Unde- Anza and several others for their various supports to us towards the realization of this research work.
Author details
*John Agburu is a professor of management at Benue State University, Makurdi, Nigeria.
*Anza Calvin Nyianshima and *Iyortsuun Akuraun Shadrach are lecturers in the department of Business Administration,
Federal University, Wukari, Nigeria.
Funding
This study is partly funded by Federal University, Wukari.
Availability of data and materials
Data and supporting materials for this research are attached as Additional file 1. More information shall be provided
when required.
Authors’contributions
Mr. NCA reviewed the literature and administered the questionnaires, Mr. ASI analyzed the data collected and
presented for easy understanding while Professor JIA did the compilation in addition to technical support in
mentoring the aforementioned authors. Also, all authors read and approved the final manuscript.
Competing interests
The authors declare that they have no competing interests.
Publisher’sNote
Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.
Author details
1
Department of Business Administration, Benue State University, Benue State, Makurdi, Nigeria.
2
Department of
Business Administration, Federal University, Taraba State, Wukari, Nigeria.
Received: 12 May 2017 Accepted: 26 October 2017
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