Estimated reading time: 6 minutes
Outsourcing is a business strategy that moves some of an organization’s functions, processes, activities, and decision responsibility from within an organization to outside providers.
Let’s explore some of the advantages and disadvantages of outsourcing.
Outsourcing is done through negotiating contract agreements with a vendor. This agreement then requires the vendor to take responsibility for the production process, people management, quality, customer service, and critical asset management of the function.
The process can reduce an organization’s fixed overhead costs.
Why do organizations outsource services?
Outsourcing is popular with many organizations because it allows them to focus on their core business and can create a competitive advantage by reducing operational costs.
The beauty of outsourcing is you can outsource an entire function or only a part of it.
For example, you can outsource the network management oversight of an IT system but keep the end-user support in-house.
This flexibility can provide an organization with a good balance of on-site support for employees.
Organizations use outsourcing as a strategic initiative to improve customer service, quality and reduce costs.
Outsourcing can be a permanent or temporary arrangement to bridge the gap in staffing, learn better quality techniques, or improve faulty product design.
For instance, let’s say you manage the cleaning function of your office. You have had a significant turnover and no longer have the staff to do the work. Outsourcing this function can allow you the time to hire and train a new team of custodians.
When looking for outsourcing opportunities, an organization should look at potential areas and each component within that area to determine if part or all of that function should be outsourced.
Different industries outsource various aspects of their businesses, but some common operational functions that get outsourced are:
- Human Resources
- Cleaning Services
- Payroll Services
- Facility Management
- Manufacturing
- Order Fulfillment
- Call Center
- Marketing Services
- Accounting Services
Advantages of Outsourcing
Cost Savings
There can be significant cost savings when a business function is outsourced.
Employee compensation costs, office space expenses, and other costs associated with providing a workspace or manufacturing setup are eliminated and free up resources for other purposes.
Focus on Core Business
Outsourcing allows the organization to focus on its expertise and core business.
When organizations go outside their expertise, they get into business functions and processes that they may not be as knowledgeable about and could potentially take away from their main focus.
An example of this is when a grocery store decides to add a florist to its operation.
If too much focus is put on that part of the business, they lose focus on the core business, which is grocery.
Improved Quality
Improved quality can be achieved using vendors with more expertise and specialized processes.
An example of this would be contracting out a cleaning service.
An outside service would have the resources for hiring, proper training, and facility inspections that may not be available if the function were kept in-house.
Customer Satisfaction
The advantage of having a vendor contract is that they are bound to certain levels of service and quality.
An example is if your IT function is outsourced and the technician calls in sick, it is the vendor’s responsibility to find someone to replace them and meet your support needs.
Operational Efficiency
Outsourcing gives an organization exposure to vendor-specialized systems.
The specialization provides more efficiency that allows for a quicker turnaround time and higher levels of quality.
For instance, a cleaning company that specializes in office cleaning has processes in place to ensure a streamlined yet thorough cleaning process.
Disadvantages of Outsourcing
Quality Risk
Outsourcing can expose an organization to potential risks and legal exposure.
As an example, if a car is recalled for faulty parts and that part was outsourced, the car manufacturer carries the burden of correcting the potentially damaged reputation of the carmaker.
While the vendor would need to make good on the faulty product by contract, the manufacturer still has the black eye from the incident and carries the burden of correcting the negative public perception.
Quality Service
Unless a contract specifically identifies a measurable process for quality service reporting, there could be a poor service quality experience.
For instance, if you decide to outsource your IT function, try to make sure there are expected service standards that will be delivered for your team.
Some contracts are written to intentionally leave service levels out to save on costs.
Language Barriers
Most of us have experienced a call with a company that outsources its helpline. While these interactions are often good, there can be a level of frustration if the technician does not have strong English skills.
If a customer call center is outsourced to a country that speaks a different language, there may be levels of dissatisfaction for customers dealing with the language barriers of someone with a strong accent.
Employee/Public Opinion
There can be negative perceptions of outsourcing and sympathy for lost jobs.
For instance, if you decide to outsource the management of facilities, coworkers may empathize with a lone employee who lost a job in the process.
This type of transition needs to be managed with sensitivity and grace.
Organizational Knowledge
An outsourced employee may not have the same understanding and passion for an organization as a regular employee.
For instance, employees have tacit knowledge that is only learned through time on the job.
There is the potential that an outsourced employee will come in contact with customers and not be as knowledgeable of the organization, resulting in a negative customer experience.
Labor Issues
Organized labor in the United States has very strong feelings about outsourcing to other countries that have a lower standard of living and worse working conditions.
This viewpoint can affect how the workforce responds to outsourcing and can affect their daily productivity.
Legal Compliance and Security
It is important that issues regarding legal compliance and security be addressed in the formal documentation.
Processes that are outsourced need to be managed to ensure there is diligence with legal compliance and system security.
An example of this is outsourcing the IT function and having outsourced employees use their access to confidential customer data for their own gain.
Employee Layoffs
Outsourcing commonly results in the need to reduce staffing levels.
Unless it can be planned through attrition, layoffs are inevitable.
This is difficult at best and if not managed appropriately, can have a negative impact on the remaining employees.
Finally, when researching vendors for outsourcing, be sure to think through your specific needs and get at least three Requests for Proposals (RFP) to ensure you are getting the best value for your dollar.
Does your organization outsource any of its functions?
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