The Use of Strategic Outsourcing in SMEs and Startups to Reduce Dependence on External Finance
There is an abundance of evidence suggesting that in recent years, Irish financial institutions have adopted stringent lending policies, restricting access to finance for Small and Medium Enterprises and startup firms. This is supported somewhat by recent academic research. Established literature on outsourcing raises a number of points which suggest that outsourcing, when leveraged correctly, can contribute to a lower financial requirement for such firms. However, no research has been found which makes this claim expressly. This literature review seeks to examine how the use of outsourcing can help to alleviate the problems associated with inability to secure finance from lending institutions as well as reducing financial risk for the entrepreneur. Specifically, the aims of this paper are threefold: to examine the extent to which a firm can outsource or subcontract business processes; to evaluate the effects of business process outsourcing particularly with regard to financial investment; and to examine how the use of strategic outsourcing as a means of vertical disintegration contributes to reduced dependence of Small and Medium Enterprises and startup firms on external finance. The literature on the topic of outsourcing has been divided into three themes: general theory, outsourcing risk and the use of fourth party logistics. A further section has been included to specifically address the area of finance and capital structure. It was found that there are advantages and disadvantages to strategic outsourcing. However, based on the assumption that a lower financial requirement implies a lower dependence on financial institutions, it is concluded that strategic outsourcing as a means to vertical disintegration can be used as a vehicle for Small and Medium Enterprises and startup firms to reduce dependence on the less accessible means of business finance such as bank loans.