Outsourcing

Benefits of outsourcing

There are two major reasons for outsourcing:

Outsourcing: Cost savings

When companies choose to outsource, it often comes with a cost advantage. They can pay few wages for the workforce or reduce costs of overhead, equipment, and technology. Either way, the costs for performing the tasks are much cheaper than doing it in-house; and the company can save a lot of money to spend elsewhere in their organization.

We often see outsourcing carried out by multinational firms.

Outsourcing: Focus on core activities

Cost-saving is not the only reason for outsourcing. Companies also outsource to focus more on other core aspects of their business. This will lead to more income opportunities and innovation. In other cases, outsourcing is a way for companies to free themselves of burdensome tasks they’re not good at.

Types of outsourcing

Depending on the location of outsourced parties, outsourcing is split into three categories:

Outsourcing: Onshoring

The main advantage of this approach is the local teams who are readily accessible and have a common background with your business in terms of language, time zone, or ways of work. This gives you more control over how the work is carried out and make timely adjustments should problems arise. In addition, the setup can be done quickly without much hassle on your side.

One disadvantage though is the high costs of employment. For example, if your company operates in the USA or Western Europe, you may need to pay more for the local staff than when hiring people from developing countries where the living cost is cheaper.

Outsourcing: Offshoring

In contrast to onshoring, the biggest advantage of this offshoring is the low costs. By shipping production to countries that have a lower minimum wage, companies can pay fewer wages and increase their profit margins.

The major drawbacks of offshoring are limited communication between the employer and employees, poor-quality products due to lack of facilities, and cultural conflicts.

Outsourcing: Nearshoring

Nearshoring is an option that can limit the cons of offshoring (cultural differences, low skills) while capitalizing on the benefits of onshoring (similarity in the background, communication, higher accessibility) to maximize the value of outsourcing.

Examples of outsourcing

A good example of outsourcing is banks that outsource a third-party provider to validate customer ID. This not only helps them to save time and effort on non-core activities but also expands the service to many locations. Customers also benefit from a quicker process without having to visit the bank physically.

Many businesses hire agencies to take care of marketing functions such as designing landing pages, writing sales copy, sending emails to customers, etc. so they can focus on other innovative aspects of the operations. This also reduces the risk of making mistakes due to a lack of speciality in the tasks.

A real-life example:

Disadvantages of outsourcing

Five most common disadvantages of outsourcing include:

Outsourcing: Contract complications

A lot of time and effort is exerted to create contracts with third-party providers. Companies also have to invest in building relationships and establishing communication systems with these partners. This may incur a lot of expenses and reduce the cost advantage of the original outsourcing plan.

Outsourcing: Communication inefficiencies

Another challenge arises from the difficulty to contact third-party companies at different time zones. This may result in a slow reaction to emergency situations and take a toll on the company’s performance. It is also hard for companies to get their in-house team to collaborate and work efficiently with overseas partners due to language and cultural barriers.

Outsourcing: Potential loss of control

Companies may lose control over certain aspects of their business. For example, they may be in charge of customer service taken over by virtual assistants from abroad. This is often the case with call centres where employees are often undertrained or lack professional tools to complete the job. Also, it proves difficult for businesses to train the external workforce rather than their internal team

Outsourcing: Security risks

There’s also the risk of security in which companies lose important data while exchanging with their third-party providers, or the providers might misuse, mishandle or accidentally expose the sensitive information.

Outsourcing: Ethical issues

Many outsourcing companies are criticized for the exploitation of cheap labour overseas. One example is in the fashion industry where fast fashion brands typically reallocate their production to workers in third-world countries like India, Bangladesh, Nepal. Most garment workers suffer from long hours and horrible working conditions with very little pay.

Insourcing vs outsourcing

The choice between outsourcing and keeping the production in-house often can give the company’s manager a lot of headaches. A common solution is to weigh the cons and pros of in-housing and outsourcing against the company’s objectives:

• Quality: companies should complete the task on their own if it’s easier to manage quality and adjust problems that arise. On the other hand, if the third-party provider is equipped with better equipment and experience, it might be better to outsource.

• Cost: small businesses may not have enough funds to hire a third-party company to handle their operations. However, a multinational company can benefit greatly by outsourcing staff worldwide.

• Speed: internal teams respond faster than external teams, which is an advantage of “doing it in-house”. That said, in non-core business activities, outsourcing may result in faster customer response and task completion.

• Flexibility: In-house team may be limited by the capacity to respond quickly whereas third-party providers may have a larger capacity to fulfil customer demands. If this is the case, outsourcing can be huge leverage.