Outsourcing – What Are the Advantages and Disadvantages of Outsourcing?

Outsourcing – What Are the Advantages and Disadvantages of Outsourcing?

Outsourcing is a shared business strategy. Organizations outsource roles, activities, processes and decision responsibility to outside providers. Outsourcing is done by contract agreements with vendors that take on the risk and responsibility for the quality, people management, course of action and service of a business function. Outsourcing helps to reduce organizational overhead costs.

So why do organizations outsource?

Organizations outsource so they can reduce their operating costs and have more time to focus on their chief business. Outsourcing allows an organization to outsource an complete function or just a part of it. For example, you can outsource the payroll function while keeping the rest of the accounting function in-house.

Outsourcing can be part of a strategic initiative to reduce costs and enhance customer service and quality. It can be flexible and used for a long-lasting solution or as a permanent arrangement to learn improved techniques, redesign a faulty product or bridge a staffing gap.

Businesses should look for outsourcing opportunities and possible areas within the organization to determine if all or just part of a function should be considered for outsourcing.

Every organization is different and may have varying needs for outsourced sets. Some of the more shared operational roles that can be outsourced are:

  • Accounting
  • Customer sustain
  • Facility Management
  • Human Resources
  • Information Technology
  • Legal
  • Manufacturing
  • Marketing
  • Order Fulfillment
  • Payroll

Outsourcing Advantages

chief Business Focus

Organizations that outsource roles of their operation have the ability to focus on their chief business and what they are good at. As organizations grow, they are required to deal with business roles outside of their skill. Leadership spends time and energy trying to learn and manage a system or function that they may know nothing about. This distraction can take away from focusing on their chief business. An example of this would be a grocery store that adds video rental to their business. If the store puts too much focus on the video side of the operation, they may lose focus on groceries which is their chief business.

Cost Savings

Cost savings can be meaningful with outsourced business roles. Savings can be in compensation costs, manufacturing setup or expenses associated with office space. These savings free up resources that can be used for other purposes.

Enhanced Quality

Quality can be improved by employing vendors who have the skill and specialization for some roles. An example of this might be outsourcing a custodial function. A custodial vendor would often be more equipped for facility inspections, hiring and training that might not otherwise be obtainable if done in-house.

Higher Customer Satisfaction Scores

Vendor agreements typically guarantee certain levels of quality and service that may be more difficult to manage in-house. An example of this might be if the custodian calls in sick, it is the vendor’s responsibility to find a substitute to meet a contractual agreement.

Efficiency in Operations

Vendor specialization offers increased levels of efficiency that can provide quicker turnaround and higher levels of quality. These specialized vendor processes can be more efficient because it is the vendor’s chief business.

Disadvantages of Outsourcing

Service Quality

It is important to make sure that there are assessable levels of service quality written into the vendor agreement. It is shared for vendors to leave these assessable service levels out of the agreement to save on costs.

Quality Risks

Outsourcing does expose organizations to certain public relations, legal and possible quality risks. An example of this would be if a car has faulty parts and is recalled, and the faulty part was outsourced, the car manufacturer nevertheless carries the burden of correcting the problem. The vendor would need to correct the issue but the negative public perception would need to be addressed by the manufacturer.

Language Barriers

When customer call centers are outsourced to a country that does not speak fluent English there may be a language obstacle. Customer dissatisfaction can happen when a customer service rep has a strong accent that is difficult to understand.

Public/ Employee Opinion

There can be public and employee sympathy for employees who lose a job that is now being outsourced. This is sensitive and needs to be handled with compassion and tact. Communicating such changes needs to be diplomatically strategized to minimize the negative impact.

Tacit Knowledge

Outsourced employees do not proportion the same tacit knowledge and passion for the organization as regular employees. When outsourced employees come in contact with customers, they may not have the same knowledge base of the organization.

Organized Labor Issues

Organized labor has strong feelings about, and has resisted outsourcing to other countries. Pro-labor groups oppose this management approach that is perceived to consequence in a lower standard-of-living and worse working conditions. This perception can affect workforce productivity as it responds to corporate outsourcing.

Security and Legal Compliance

Outsourced roles need to be managed to ensure system security and legal compliance. Processes that include security or legal compliance should be formally addressed by documentation. For example, an outsourced customer sustain person may have access to secret customer information that could be used inappropriately.

Reduction in Force

Employee layoffs can be a shared consequence of outsourcing. A well planned strategy for outsourcing will do so by attrition and job reassignment. This can be difficult but can help offset morale issues with remaining employees.

Organizations should have a well thought out strategy and plan for outsourcing roles of their business. It also is important to request at the minimum three Requests for Proposals (RFP) to ensure the best use of resources.

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