Outsourcing is a growing business trend that has proven to be quite effective for businesses looking to reduce costs and increase productivity. Outsourcing mundane and low priority tasks to off-shore companies often cut costs, expands capacity, and increases growth in many businesses. This article talks about the advantages and disadvantages of outsourcing. More importantly, it discusses instances where outsourcing may be beneficial for a business and cases in which it could do more harm than good. When a company chooses to outsource, there is no longer a need to invest time and money into infrastructure development. Instead, they can use that investment money on marketing and R&D, which is more in line with core business processes that lead to providing higher value-added services.
Advantages of Outsourcing
There are several advantages to outsourcing non-core business activities as discussed below:
1. Cost Savings:
Outsourcing business processes such as customer support, accounting, administration along with HR related activities can lead to substantial cost savings. This is mainly because off-shore companies in countries like India and the Philippines have much lower wage rates than those of the western world. These countries also have fewer restrictions on taxes and are generally cheaper to operate, which translates to cost savings for international organizations.
2. Increased Efficiency & Expertise
Specific tasks are outsourced to companies that specialize in that respected field. For example, HR tasks for recruitment, payroll, and scheduling can all be done overseas as long as the organization specializes in HR procedures and is aware of all the business’s policies. This can lead to increased efficiency as each task is outsourced to companies that specialize exclusively in that respected field or department.
3. Focus on Core Business Processes
Outsourcing non-revenue generating tasks such as administration and customer support free up time to focus on revenue-generating business processes that can increase profitability and boost sales.
4. Reduced Operational, Infrastructural and Recruitment Costs
Outsourcing departments frees up space and saves on hiring staff, purchasing office equipment, computer systems, and rental fees. Apart from this, day-to-day operational costs are also reduced as the company no longer has to invest time and money into infrastructure development, employee training, or recruitment. These responsibilities are now transferred over to the outsourced vendor responsible for hiring, training, and management.
When an organization outsources specific components of business processes, they also shift responsibility associated with those processes over to the outsourced vendor. They are now responsible for all the risks related to that process, and since they are the specialists, they can better mitigate those risks.
Disadvantages of Outsourcing
Although there are many advantages to outsourcing, there are also several disadvantages that a company must consider when deciding whether to outsource a business process or not? Here are some disadvantages of outsourcing that any business should be aware of:
1. Risk of Exposing Confidential Corporate Information
The risk of losing sensitive data and the loss of confidentiality is perhaps the most significant disadvantage of outsourcing business processes. When outsourcing departments like HR or customer support, the third party has to be often disclosed to confidential data that can easily be stolen or sent to the wrong hands. Corporations take intellectual property quite seriously, so having foolproof measures and checks regarding data loss and confidentiality contracts is a must when negotiating outsourced deals.
2. Service Delivery
Once a business process is outsourced, feedback and reporting occur on a weekly and sometimes daily basis. This may not be enough, especially if the delivery falls behind schedule or quality is below expectations. Measures cannot be implemented as quickly as it would be if the department were operating in-house.
3. Instability of Outsource Companies
If an outsourcing company goes bust, so does the entire business department for your organization, leading to devastating outcomes.
4. Lack of Customer Focus
Outsourced companies often work with a wide variety of clients and cater to the expertise needs of multiple organizations at a time. This can often result in underwhelming results on organization tasks as outsourced vendors may quickly lose track and focus.
Although cost-effective, off-shore outsourcing brings about its own set of challenges that have to be carefully analyzed by any business looking to outsource its nonessential business processes. These challenges may present themselves in the form of hidden costs, language and cultural issues, poor quality, and reduced customer focus. Choosing whether to outsource or remain in-house is a key decision that can often make or break an organization.