Outsourcing – What Are the Advantages and Disadvantages of Outsourcing?
December 17, 2016
Outsourcing is a common business strategy. Organizations outsource functions, activities, processes and decision responsibility to outside providers. Outsourcing is done through contract agreements with vendors that take on the risk and responsibility for the quality, people management, process 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 core business. Outsourcing allows an organization to outsource an entire 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 improve customer service and quality. It can be flexible and used for a permanent solution or as a temporary arrangement to learn improved techniques, redesign a faulty product or bridge a staffing gap.
Businesses should look for outsourcing opportunities and potential 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 services. Some of the more common operational functions that can be outsourced are:
- Customer Support
- Facility Management
- Human Resources
- Information Technology
- Order Fulfillment
Core Business Focus
Organizations that outsource functions of their operation have the ability to focus on their core business and what they are good at. As organizations grow, they are required to deal with business functions outside of their expertise. 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 core 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 core business.
Cost savings can be significant with outsourced business functions. 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.
Quality can be improved by utilizing vendors who have the expertise and specialization for some functions. 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 available 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 replacement 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 core business.
Disadvantages of Outsourcing
It is important to make sure that there are measurable levels of service quality written into the vendor agreement. It is common for vendors to leave these measurable service levels out of the agreement to save on costs.
Outsourcing does expose organizations to certain public relations, legal and potential 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 still 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.
When customer call centers are outsourced to a country that does not speak fluent English there may be a language barrier. 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.
Outsourced employees do not share 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 result 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 functions need to be managed to ensure system security and legal compliance. Processes that involve security or legal compliance should be formally addressed through documentation. For example, an outsourced customer support person may have access to confidential customer information that could be used inappropriately.
Reduction in Force
Employee layoffs can be a common result of outsourcing. A well planned strategy for outsourcing will do so through 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 functions of their business. It also is important to solicit at least three Requests for Proposals (RFP) to ensure the best use of resources.