Advantages and Disadvantages of Outsourcing

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December 16, 2016

Advantages and Disadvantages of Outsourcing

Outsourcing is an arrangement wherein a company subcontracts services to another company. The goal of outsourcing is typically two-fold- to cut costs, and to employ skills that are not available in-house. Today, the increase in the number of outsourcing companies has put outsourcing in the spotlight, and debates on whether it is undesirable or desirable have been many. As a result, many commercial companies are all for it, while employee unions are often against it.

First off, a disclosure is in order here. I own and operate a Business Process Outsourcing organization specializing in the unique needs of the technology industry. The information in this article are based on my conversations with businesses, general research and my own experience as a customer and owner of an outsourcing organization. My goal is to be transparent and honest.

Advantages of Outsourcing

Business enterprises usually opt to go for outsourcing for the following benefits:

(1) Cost savings, including cost re-structuring. Businesses typically becomes successful when they are able to minimize and manage costs, and outsourcing provides this advantage. For example, an automobile company can cut on their expenditures if they buy the parts they need and assemble them, instead of setting up entire steel pouring, stamping, and production lines for each product they require.

(2) Quality control. By outsourcing, companies can tap better into pools of expertise and gain access to intellectual property, as well as sustainable sources of skills. Moreover, this method avoids the time-consuming process of training to develop the services in-house. Also, by providing new service-level agreements in their contracts, enterprises can make sure that the quality of the outputs or products isn’t lost. These contracts usually contain penalties or legal redress for performance failure.

(3) Time-related advantages. It is possible that services are made available every day, at any time of the week. This is achievable because the services can be done in different locations with time zones. When the organization from Country A goes off-duty, the organization from Country B can take over. Not only that, a product can also be speedily developed and marketed because of outsourcing.

Disadvantages of Outsourcing

(1) Harm to labor force. Unions, on the other hand, argue that outsourcing harms a local labor force. Outsourcing can result in fewer jobs available home-side. This happens because services that can be done in home organizations are now shifted to other locations, especially to countries where comparable labor is less expensive.

As a result, the labor rates will usually decline due to increased competition for jobs. Unemployment will affect a country’s economy. However, currently in the United States, unemployment rates are under 5%, and in high demand professional occupations like software development, the unemployment rate is less than 2%, which means that labor demand is still outpacing the supply.

(2) Work quality. Unions will often make the point that the quality of work is not up to the standards of union labor, or even take it further by calling it exploitation of lower-paid employees.

(3) Language barrier. In another angle, language barriers are eyed as being detrimental to the quality of service. When the services are drawn from places with different culture or when the first language is dissimilar, it is viewed that it could do more harm than help. This is an important factor at our BPO. We intentionally relocated our BPO to Manila for a variety of reasons: the language, slang, infections, and dialect is very similar to the United States, the talent is highly skilled, and we have access to experienced BPO employees and can draw upon the top four Philippines universities for new talent.

(4) Data security. Data security is another factor. It is possible that since data is moved around offshore, leakages or even misuse of information can happen. Security practices differ from country to country that is why it is a must to check whether the vendors you have partner up with has the kind of protection and security practices that your company requires. When working on international business, the risk of security leakages is high. Although this is not really that much of a major concern in offshore outsourcing, data protection and security should be implemented as much as possible.

Our company is based in the United States and are subject to the laws of this country, whereas our Manila employees are subject to similar Philippines laws. We utilize bio metrics and background checks to reduce unauthorized access to sensitive information.

(5) Loss of business knowledge. There are some organizations that have business knowledge that is inherent only with the developers of applications. This knowledge could be a competitive advantage over other companies in the same industry. It should be carefully evaluated whether such knowledge base is to be outsourced or not since doing so entails the risk of losing this to other companies.

However, my response is this. By outsourcing certain non-core business processes, then a company can focus on their core business model and channel more resources in retaining the talent and function of their core process. For example, a widget manufacturer can outsource sales and marketing support to an outsourced company like ours, and use the cost savings to increase R&D budgets, buy another machine, etc.

With outsourcing, there are two sides to a coin. To outsource or not is up to the company’s decision makers to determine whether the advantages outweigh the risks.

About the author: Toby Reeves is the founder of Mercury Business Center, LLC (http://MercuryVIP.com) , an Indianapolis and Manila based sales, marketing and operations support center for technology companies. Toby is also founder of MiTo Trade Partners, (http://MitoTrade.com) an international U.S. – Asian trade consulting firm based in Indianapolis and Hang Zhou.

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