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Advantages and disadvantages of outsourcing

Yes and No triangular shapes

You might be considering outsourcing to reduce operating costs or streamline your efficiencies. However, before outsourcing any component of your business, you need to understand the advantages and possible disadvantages that outsourcing brings.

To assess whether to contract or avoid outsourcing certain operations check the below lists of outsourcing advantages and disadvantages, and decide what impact each would have on your business. If the outsourcing disadvantages outweigh the benefits, then you should avoid outsourcing those tasks.

Core advantages of outsourcing:

1) Save time

Outsourcing non-core activities like back-office operations or administration frees up your resources helping you to focus on the core functions of the business, rather than supporting ones.

2) Reduced costs

One of the biggest and most obvious advantages of outsourcing is lower labour and operations costs, as well as a reduction in overhead expenses.

3) Savings on technology and infrastructure

Outsourcing removes the need for infrastructure investment as the contractor takes responsibility for the business processes and hence develops infrastructure for the same.

4) Expertise

Access to skilled resources means that businesses can avail of the right talent, assuring a higher quality of the outsourced tasks.

5) Increased efficiency

An outsourcing vendor brings in specialised knowledge and experience, which in consequence leads to increase in productivity and efficiency of your business.

6) Reduced risk

Outsourcing removes a large share of risk, thereby reducing the risk to your company. By spreading your risk, you reduce your total risk.

7) Staffing flexibility

If your business has operations with cyclical or seasonal demands to bring in extra staff, outsourcing provides an opportunity to avail of additional resources when you need it and release them when they are no longer required.

Outsourcing disadvantages

1) Loss of managerial control

Once they are contracted the managerial control belongs to the other company. This might not matter if the third party is doing a good job, but what if the contractor enters into transactions or does things in the name of your company of which you wouldn't approve?
It could be damaging to your company's reputation, or even in extreme cases, you could be held liable in law for the actions of the contractor. Prevention is the key, and careful consideration should be given to the terms and conditions of a contract.

2) Quality issues

You can't assume that your outsourcing provider is driven by the same mission and standards that drives your company. Not to mention, the passion for your service or product. Vendor's focus is to make a profit from the services that they provide to you and other businesses like yours.
To guaranty shared service norms, you should formally agree on targets which the service provider must meet. Also, have regular meetings and reviews with the contractor to ensure the satisfactory progress for both parties of the outsourcing exercise.

3) Hidden costs

Cost savings are the main reason most companies decide to outsource, but you need to be aware of potential hidden costs.
An outsourcing contract should cover the details of the service that the outsourcing company will be providing. Anything that may come up later during the relationship, and is not covered in the contract, will constitute additional charges.

4) Threat to security

If you have confidential information that an outsourcing company will have access to, like payroll or medical records, you risk a breach of confidentiality.

If the outsourced task involves sharing proprietary company data or know-how, this must be considered. Evaluate the outsourcing company carefully to ensure the safety and protection of your data. Make sure that the contract has a penalty clause if an incident occurs.

5) Time and effort

Vendor selection process shouldn't be taken lightly. It takes time to research, test and select the right partner. Management needs to allocate their time for both choosing the contractor and making sure that their work is meeting set targets.

6) Problems replacing outsourcing vendors

Lack of knowledge about the outsourced function means that you could have problems describing the services to the new supplier. The existing agreement will most likely be out-of-date, and it can include limits of the scope of the service, which could have been part of the problem that led to switching.

Final word

Outsourcing presents a variety of advantages, but it could also pose difficulties if not done correctly or outsourced to the right third-party provider. Many of the potential problems could be avoided by having a solid outsourcing contract which examines service level agreements, timeframes and measurement, penalties, rewards, regular reviews and exit strategies.