Outsourcing is a common practice of contracting out business functions and processes to third-party providers. The benefits of outsourcing can be substantial - from cost savings and efficiency gains to greater competitive advantage.
On the other hand, loss of control over the outsourced function is often a potential business risk. You should consider carefully the pros and cons of outsourcing before deciding to contract out any activities or business operations.
Advantages of outsourcing
There are many reasons why a business may choose to outsource a particular task, job or process. For example, some of the recognised benefits of outsourcing include:
Improved focus on core business activities
Outsourcing can free up your business to focus on its strengths, allowing your staff to concentrate on their main tasks and on future strategy.
Increased efficiency
Choosing an outsourcing company that specialises in the process or service you want them to carry out for you can help you achieve a more productive, efficient service, often of greater quality.
Controlled costs
Cost savings achieved by outsourcing can help you release capital for investment in other areas of your business.
Increased reach
Outsourcing can give you access to capabilities and facilities otherwise not accessible or affordable.
Greater competitive advantage
Outsourcing can help you leverage knowledge and skills along with your complete supply chain.
Outsourcing can also help to make your business more flexible and agile, able to adapt to changing market conditions and challenges while providing cost savings and service level improvements.
Disadvantages of outsourcing
Outsourcing involves handing over direct control over a business function or process to a third party. As such, it comes with certain risks. For example, when outsourcing, you may experience problems with:
- service delivery - which may fall behind time or below expectation
- confidentiality and security - which may be at risk
- lack of flexibility - contract could prove too rigid to accommodate change
- management difficulties - changes at the outsourcing company could lead to friction
- instability - the outsourcing company could go out of business
Offshore outsourcing issues
Offshore outsourcing, although potentially more cost-effective, may present additional challenges such as hidden costs of provider selection or handover, severance and costs related to layoffs of local employees who will not be relocated internationally, etc. Even simply managing the offshore relationship can prove challenging due to time zones, different languages or cultural preferences.
Examine the pros and cons of outsourcingcarefully to make sure that the benefits outweigh the risks. Before choosing a strategy, think about these common outsourcing considerations.
FAQs
The benefits of outsourcing can be substantial - from cost savings and efficiency gains to greater competitive advantage. On the other hand, loss of control over the outsourced function is often a potential business risk.
What are 3 advantages of outsourcing this function? ›
What are the advantages of outsourcing?
- There are many advantages in business outsourcing, such as:
- Cutting expenses.
- Increasing productivity and efficiency.
- Expert input.
- Immediate understanding of your costs.
- Competitive edge.
- Reduction in staff issues.
Outsourcing IT services can provide numerous advantages, including cost savings, access to specialized skills and knowledge, and increased emphasis on core company tasks. However, it has potential negatives such as loss of control, communication difficulties, and quality problems.
What are the negative effects of outsourcing? ›
Outsourcing also has a number of unintended consequences such as lowering barriers to entry and increasing the level of competition a company has. It also has effects on brand loyalty and satisfaction; both for a company's employees and its customers.
What is the key advantage of outsourcing? ›
1) Reduce your labor costs
Infrastructure, technology, and equipment costs can also impact your bottom line. However, outsourcing can significantly reduce or eliminate many of these expenses. Contractors don't require a desk or office space; they generally do not receive additional employee benefits.
What is the biggest benefit of outsourcing? ›
Today, they share the main benefits of outsourcing:
- Reduce labour costs. ...
- Pre-trained, experienced, qualified staff members. ...
- Choose your own team members. ...
- Increase efficiency. ...
- No internal team to manage. ...
- Reduced business risk. ...
- Countless skills and practices are available. ...
- Leverage advantageous exchange rates.
Outsourcing, although beneficial, can adversely affect a company's work culture. Employees may fear being replaced, causing unrest. It can also hinder workflow, as direct communication with outsourced vendors might be restricted, delaying problem resolution.
Who benefits the most from outsourcing? ›
The finance, healthcare, and insurance sectors are three common industries that benefit from outsourcing. Outsourcing saves labor costs, time, and energy.
What are three advantages and three disadvantages to outsourcing project work? ›
The Pros And Cons Of Outsourcing
- Advantages Of Outsourcing. ...
- You Don't Have To Hire More Employees. ...
- Access To A Larger Talent Pool. ...
- Lower Labor Cost. ...
- Cons Of Outsourcing. ...
- Lack Of Control. ...
- Communication Issues. ...
- Problems With Quality.
Q-Chat
- The cost and uncertainty associated with payback. ...
- Issues with communication and language. ...
- Loss of control of standards and information security. ...
- Complex hierarchies. ...
- Organisational change and redesign. ...
- Loss of corporate memory and vulnerability. ...
- Cost and time with use of information technology.
Here are some disadvantages of outsourced training:
Control over the material that is being taught to the employee can be lost by the company. As this may be a public training programme they might not touch on all the things that you want your employee to learn.
How is outsourcing risky? ›
The biggest risk of outsourcing is the lack of control. A business process that was previously executed by the in-house team when outsourced to external agencies leaves you with little to no control over it. And when mismanaged by the service provider, it can affect the quality of the outsourced service.
What are the failures of outsourcing? ›
Failure to communicate clearly, cultural differences, problems with quality control, a lack of trust, an inadequate technology infrastructure, misaligned goals, poor management, reliance on a single vendor, unforeseen difficulties, and a lack of planning are some of the causes of outsourcing failure.
What jobs are outsourced the most? ›
6. 37% of businesses that outsource list accounting as one of their outsourced processes. Accounting is the most commonly outsourced business aspect, at least among small businesses. The top 5 list also includes IT services (37%), digital marketing (34%), development (28%), and HR (24%).
What are the advantages and disadvantages of insourcing vs outsourcing? ›
Insourcing offers full control and the ability to develop internal skills but comes with high costs and reduced flexibility. Outsourcing allows for cost control and increased flexibility but carries risks to confidentiality and loss of process control.
What are the advantages and disadvantages of outsourcing HRM functions? ›
On the positive side, HR outsourcing helps a growing business address blind spots and areas of potential with greater cost-efficiency. On the negative, that effort can take a lot of communication, and might leave the business with different blind spots and growing pains down the road without the right partner.
