Outsourcing: Why Outsource? Potential Benefits and Risks

benefits and risks of outsourcing

In this article we will briefly expose the benefits and risks of outsourcing. Outsourcing has quickly become a commonly used practice in modern organisations. What has made outsourcing so popular? The popularity of outsourcing is well justified as it generates significant advantages in cost and efficiency. However, outsourcing has some inherent risks which should be identified and dealt with preemptively.

Why Outsource some professional work then? Organisations make use of outsourcing when a certain function has a potential to become more economic with little strategic cost to the organisation.

Benefits and Risks of Outsourcing

Benefits of Outsourcing

Outsourcing is usually used if one or more of the following applies to the specific function within the company:

  1. Special skills are required and it is unwise to invest in their development within the organisation – It is wise to outsource if it is not economically sound to invest in developing a set of skills. Another consideration should be the quality of skills developed in comparison to those available outside the organisation.
  2. Not a core-competence of the organisation – If a specific function required to an organisation is not a part of its core competencies or core strategy there is little sense in performing that function within the organisation. Organisations carefully select focal points in adherence to their competitive advantage. In other words, if it is expensive and time consuming to build an internal skill set, consider outsourcing it to a specialised provider.
  3. Need for constant technological improvement and upkeep – Technology requires high investments in maintenance and updates. If a technology is a means and not an end outsourcing should be considered as a specialising company will be more efficient and effective.
  4. Specialisation produces greater effectiveness and advantages to scale – Some functions have significant scale advantages. Outsourcing these functions will often result in better outputs with lower costs once the outsourcing provider will already have economies of scale for such specialisations.
  5. Improving organizational effectiveness by utilizing a third party – Sometimes outsourcing enables using the advantages of the third party company to the organization’s advantage (for example in negotiations, networks etc.)
  6. Lowering organisational complexity for increased ‘management-ability’ – Outsourcing certain function may simplify the organisation and enable management to focus on core-competencies and core-functions with greater clarity. In addition, it will allow the organisation to become more flexible and scale the team up and down with ease and without the burden or firing and hiring new internal staff members.
  7. Lack of available skills locally – If your organisation can’t find and hire a specific type of professional internally, your other option will be to outsource the skill requirement to a specialised company in the field, locally or overseas.

Risks of Outsourcing

Outsourcing might have many potential benefits. However organisations should also be wary of potential risks. The following is a list of the common risks of outsourcing:

  1. Information leaks – Obviously when a function is outsourced interface with another organisation are set up. These may be a source for information leaks which might damage the organisation’s ability to compete.
  2. Losing the ability to re-establish outsourced functions – By outsourcing a function given up on. This results in losing professional know-how and infrastructure in case the organization decides to re-establish the function within itself.
  3. Lowered employee loyalty – Outsourced functions may be performed by employees with little or no organisational relevance.
  4. Inner oppositions to outsourcing – Outsourcing functions results in personnel changes. Naturally organizations should expect employee opposition to outsourcing.
  5. Unclear borders for cooperation – Cooperating with another organisation is not a clear cut undertaking. There is a risk of creating unclear borders between the organisations.
  6. Problems with quality, consistency and oversight – Outsourcing requires setting up an oversight function within the organisation as there is a requirement for quality and consistency. Keeping an eye and good communication on outsourced functions is crucial to ensure the quality of product or service outsourced.

In today’s dynamic environment competitiveness and effectiveness is paramount. Advantages to scale and learning curves force organisations to outsource functions and abilities which are not at the core of their business. Focus on what you do best and outsource your inefficiencies. Outsourcing holds many benefits but it is not risk free.

There are techniques and practices to mitigate the risks listed above. Several large organisations in Australia were able to successfully setup overseas outsourced operations to deal with the ongoing issues of lack of skilled labour and high labour costs. At Outsource Fitch we have created a process to mitigate and minimise all risks involved in outsourcing. Shall you need assistance with that we will be more than happy to assist. You must understand the benefits and risks of outsourcing before setting up for it.