Outsourcing is used widely, across industries and around the globe. Just like any other process, it has its pros and cons. But before getting into that, let’s understand what outsourcing is.
Outsourcing can be defined as a strategic tool to fulfill certain functions, normally handled by internal resources within a company, but which are extended to external sources. While maintaining key business processes within its umbrella, companies usually outsource some key specialized functions to relevant service providers and, who in the long run become crucial business partners.
So what are the advantages, or disadvantages of outsourcing?
- It is Cost-effective
Considering how volatile current global economic trends are, outsourcing makes perfect sense when cost-cutting is the aim. Apart from saving on man hours, and salary, it also helps reduce operating costs substantially. Companies can also save on health insurance and vacation pay for employees. Offshore outsourcing allows companies to take advantage of cheaper labor, as is mostly seen in the south Asian regions. The weaker currency in the outsourced countries further adds to saving for companies.
- Saves Precious Time
Time is a real constraint in today’s globalised economy. Outsourcing helps save time on the more low-key and, back-end jobs, so that core staff has more time to focus on critical areas such as product development, customer service, marketing strategies, etc. Besides, research across industries has shown that offshore outsourcing has helped companies achieve more – by keeping the work happening 24/7. So companies not only save time, but also ‘gain’ time, in a way.
- Improves Efficiency
Outsourcing to specialized vendors, skilled adequately in the nature of the job, provides better overall quality of work. Often manufacturing companies or financial institutions outsource their integrated marketing functions, or market research to other agencies, helping them achieve greater quality and efficiency in these areas than would have been possible if handled in-house.
- Access to Better Resources
Offshore outsourcing is global in nature, which instantly helps companies get access to resources not available either internally, or in that geographic region. It also translates to greater access to newer market areas and utilization of talents/experts from all over the world.
- Greater Flexibility
An outsourcing contract offers greater flexibility in terms of staffing and contract negotiations; and helps the top management to keep devising strategic initiatives to keep this rapport growing.
However just as many advantages support the cause of outsourcing, a number of inherent weaknesses in this management tool are present. These are likely to create fissures in the smooth running of a company and its services.
- Data Security Risk
This is one of the biggest lacunas in the outsourcing debate. The moment a company subcontracts its functions – there arises key confidentiality issues. Since sharing of sensitive data also includes certain profit statements, and tax issues – companies have felt the need for stricter confidentiality procedures.
- Loss of Control
By definition, outsourcing means an offshore or off campus entity that takes charge of certain functions on behalf of a company. This means you have no control or far less control than you would have if the function was internal to your organization. For example deliveries and financial loss cannot be controlled by you, nor is there a way to monitor the outsourced company’s financial health. It is crucial therefore for businesses to examine their outsourcing strategies more often, refine their goals vis-à-vis outsourcing and review how each stake holder stands in the equation.
- Lower Productivity
Another major hurdle faced by partner firms is the issue of work quality, especially when vendors have more clients than they can handle or when problems due to language barriers erupt. Having open channels of communication between the 2 partners and choosing outsourcing partners with good reputation can help resolve these problems.
- Hidden Costs
While outsourcing saves on operational costs greatly, often unknown valuations emerge additionally at the end of a financial year, pushing up overall costs. These hidden costs, with regard to manpower, project completions, production or maintenance, mostly occur due to flaws and loops in contracts. And since laws of the land for every country are different, they might create significant financial differences when certain key flaws emerge in the contract.
Since the outsourcing rapport is legally binding, the additional legal fees which have to be compensated during negotiations, and renewed time and again, shoot significantly. These extra costs often spiral into severe crisis situations requiring the contract to be severed.