Outsourcing is a term in the business world where it is either shameful to even be considering it or it is the best tactic that any business can use. In the press it is often to be found on both ends of the spectrum, it truly has a love hate relationship with the business world. But before you cast your judgement on outsourcing you need to first know what it is and the pros and cons that come with it.
What is outsourcing? Outsourcing is where a task, operation, job or process that could be performed by employees with in your business is instead contracted to a third party for a significant period of time. Most of the time an organization may not have the capability to handle all aspects of a business process internally, this is the case for most start-up businesses or small businesses. This is why they outsource specific duties to third parties. Another reason is that some processes are only intended for temporary purposes and the company may not have the intention of hiring an in-house professional to perform the temporary/one-off task. Outsourcing though being beneficial to a company does have a negative light to a certain extent, this is because some see outsourcing as a ‘job killer’. Though it has this title outsourcing has been becoming more and more popular with in the business world. Now let’s delve into the pros and the cons of outsourcing.
Pros
- Provides speed and expertise
When outsourcing the third party that you are dealing with is generally an expert in that field, this ensures the task to be done by a professional who would do it every day. The phrase ‘Practice makes perfect’ comes to mind, the more frequent you do something the better you are at it; which is why companies seek third party experts for specific tasks. The third party may also, depending on their provided service, have better quality/ specific equipment and technical expertise in using such equipment, most of the time it is better than the organizations. Because of these reasons the job/task can be done quicker and to a higher quality, which is a very beneficial for the company.
- Concentration on core business processes
Core business processes, also known as operational processes, are the primary value stream; these processes are what generate exposure, revenue, cash flow and are generally the focus of the company. Because of this businesses would prefer to outsource the supporting business processes so that they can focus on the important core processes. Below are the listed core and supporting processes that make a business function;
Core Processes (Favoured) - Operations
- Purchasing
- Manufacturing
- Advertising
- Marketing
- Sales
Although sales and advertising are core processes sometimes businesses do outsource third parties to advertise program.
Supporting Processes (outsourced) - Accounting
- Recruitment
- Call centre
- Technical support
- Sales and Lead Generation
- Sharing Risk
Businesses are always determining the outcome of campaigns, goals or ideas through risk-analysis. The experience and historical figures from different campaigns are brought into play and are used to find the lowest risk options. The lower the risk the better it looks, but sometimes the most profitable campaign may be the riskiest. One tactic businesses can then implement is risk sharing through outsourcing components/tasks to third parties. By spreading your risk you are reducing your risk in certain areas. Your risk factor is also decreased because you are spreading responsibilities to third parties that specialise in that specific task; they are experienced in that field and an expert in that field.
- Reduced costs
This is the most appealing factor when organizations are considering outsourcing, and stats can prove that costs are actually reduced when they do outsource. Gartner provided starts for 2009-2010 showing the percentage rates of potential savings from outsourcing different tasks.
- 7-10% cost reduction for outsourcing data centre services
- 8-12% cost reduction for desktop outsourcing
- 12-17% cost reduction for help-desk services
- 5-8% cost reduction for network services
- 8-12% cost reduction for application hosting services
How outsourcing reduces costs is that it eludes the need to hire individuals in-house; therefore recruitment as well as operational costs is minimized. The cost per additional employee will include salary, overhead, equipment/software, training/education, other supplies and possible facility costs. This can add up to quite a decent amount, with third party organizations taking responsibility for that task or process the costs are eliminated for the present and future. There are ongoing costs for hiring an employee and there is no guarantee of results in doing so.
Cons
- Loss of managerial control
When outsourcing either an entire department or a single task you are giving the responsibility and control of that function to the other company. You will have a binding contract but the outsourced company may not be as driven or have the same standards and mission that may drive your own personal business. Their driving force may be to make a profit from that service they provide, complete the task and make the money. This is not the passion a business is looking for when signing over a task or job to a third party organization; which is why it is recommended to do your research in all outsourcing options.
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- Security and confidentiality risk
The life-blood of any business is the data and information, it keeps it running. The important information to a business is payroll information, banking information, medical records etc. By outsourcing you are creating a risk that the confidentiality of that information has the potential to be compromised. This is for certain outsourced functions, functions that involve sharing proprietary company data or knowledge. When looking into outsourcing options evaluate the company carefully to make sure your data is protected and that the contract has a penalty clause if an incident occurs.
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- Quality Issues
When dealing with issues of quality it will not be the same for every outsourced company. But some may be only motivated by profit, and since the contract will fix the price to be payed the only method to increase profit will be to decrease expense. Their mentality will be as long as they meet the conditions of the contract, you will have to pay. This can be a very big risk, which is why reputable companies are recommended when researching options.
Overall outsourcing can reap many benefits for your business, although there are risks involved the benefits usually outshine the risks. Just research and understand, this will allow you to fully take advantage of outsourcing and the benefits it provides. Good Luck.
