1.1 BACKGROUND OF THE STUDY
As companies’ attempts to focus on core competences, many are considering outsourcing various aspects of their in-house operations. The rapid growth in outsourcing has occurred because organizations are struggling to cope with the demands on their skills. Aoki 1988- says when products becomes increasingly differentiated and renewed, the best strategy appears to focus on core competences and let other firms deal with production of other parts, machine maintenance or distribution. Almost every organization outsource in some way. Typically, the function being outsourced is considered non-core to the business. The decision to outsource is often made in the interest of lowering firm or making better use of time and energy costs, redirecting or conserving energy directed at the competences of a particular business, or to make more efficient use of land, labour, capital, (information) technology and resources. It is essentially a division of labour.
Although outsourcing has been around as long as work specialization has existed, in recent history, companies began employing the outsourcing model to carryout narrow functions that could be done more efficiently and therefore more cost-effectively by other companies with specialized tools and facilities and specially trained personnel.
Currently, outsourcing takes many forms; organizations still hire service providers to handle distinct business processes or whole operations such as benefits management. Companies have latched onto outsourcing as a route to almost immediate savings and quality improvement.
In their bid to be more competitive and relevant in today’s global environment, most companies are constantly restructuring their business; downsizing them so as to become cost efficient, more responsive to customers, and to maintain or gain competitive advantage. In order to achieve these goals, companies have to outsource those services that they do not have competitive ability leaving their core competent.
Goldfrab and Heller (2001) Outsourcing is contracting with another company or person to do a particular function or the passing of service provision or production to another internal or external party. Researchers such as Hilton et al. (2001) and Rainborn et al. (1999) regard it as a ‘strategic cost management tool’ and as ‘a strategy in business’ by Diering and Click (2005) ‘not only because it can help to reduce cost, but also because it potentially enables firms to concentrate on their core activities. The areas of core competence will encompass those activities where the company possesses competitive advantage, which enables them to perform better, and at lower cost than its competitors. As a result, managers evolve strategies that progressively tend to exploit a company’s core competences. Small and medium enterprises in Nigeria cannot be left out. ( Egabor (2008) says small and medium enterprises can prospectively propel a country’s economic development and growth.
SMEs boost employment, capital formation and indigenous technology. The small and medium enterprises in Nigeria faces myriad of problems, which hinder its development and affect growth negatively. These problems include poor infrastructure, high transaction cost, low demand for locally made goods and lack of competitive advantage are impacting against the performance or even the existence of small scale enterprises Emoleke, (2006). These preferences stem from the fact that some of the locally made goods are not durable and are inferior to the imported ones.