Pros and Cons of Outsourcing
Outsourcing is the practice of a company contracting certain business operations to an external provider. In recent years, the term outsourcing has been used to represent any movement of functions and resources away from a firm, such as when a firm uses technology or associates with other firms to complete its processes more efficiently.
According to Jordan Sudberg, outsourcing can be an effective tool for many businesses; it allows them to take advantage of additional knowledge and experience in their operations while mitigating cost and risk. However, outsourcing can also be highly damaging to a company since the company must give up a degree of control in exchange for the benefits of outsourcing.
Pros Of Outsourcing
1. Improved Quality and Innovation
Outsourcing allows companies to access additional knowledge and resources in many different areas, including technology, manufacturing and research. Businesses can then reap the benefits of these areas if they can beneficially combine them, resulting in quality improvements and innovation.
2. Lower labor costs
Outsourcing is a popular tool for reducing labor costs since the work will be completed by a contracted worker who will not require a salary. In some cases, outsourcing can allow a company to save up to 30% of its labor costs.
3. Improved efficiency
Outsourcing also allows companies to complete human processes more quickly than they would be able to if they were attempting to do so without outsourcing. For example, a company that outsources its call center activities will be able to process call inquiries quickly and efficiently, resulting in a better customer experience.
4. Mitigate risk
Another major benefit for many businesses is the ability to mitigate risk through outsourcing in cases where a company is unwilling to invest the necessary resources to achieve the same results internally. For example, a growing business may outsource its customer service functions, allowing it to achieve customer satisfaction without making the necessary investments in staff and infrastructure.
Cons of Outsourcing
1. Lack of control
While outsourcing allows a business to access knowledge and resources that it otherwise would not be able to, the business must also lose some control over its operations and processes to benefit from this outsourcing. This is because a company normally does not have access to all of the knowledge and resources at its disposal and will not have the ability to control every aspect of its operations that are outsourced.
2. Increased exposure
While certain types of outsourcing can offer significant benefits, those benefits will often come with corresponding risks. If a company outsources its research and development operations, for example, it will be exposed to risks associated with the products and services that the third-party provider develops. In this case, the company will lose some control over its operations while exposing itself to additional risks.
3. Loss of firm-specific knowledge or secrets
If a company is outsourcing certain functions, it will be giving up any knowledge that would have been pertinent to those functions, as well as any other firm-specific secrets that it may have developed through its operations. This is a serious concern for many companies, especially those in the start-up stages since they are not likely to have the resources necessary to develop the same knowledge and secrets internally.
4. Exposed security
Many companies are increasingly concerned about the potential security risks associated with outsourcing, especially those in tech-savvy industries such as IT or healthcare.
Before a company considers outsourcing its operation, it should ensure that the benefits outweigh the risks, says Jordan Sudberg. Companies that choose to outsource should thoroughly review the terms of their outsourcing agreement and any other applicable contracts to ensure that the agreements will give them access to the necessary resources and knowledge.