What is Outsourcing and Benefits of Outsourcing
Outsourcing can bring about a lot of advantages and benefits and place your business in a great position but it involves a lot of risk factors that one needs to understand. In this article, we will be breaking down every aspect of outsourcing and how it will end up affecting your business.
Definition of Outsourcing
Outsourcing is referred to the practice of business wherein the services and the job functions are put out to a third party and take the place of the providers who were in the house. The practice of outsourcing is usually carried out by companies as a cost-cutting measure. It has the capability of affecting a wide array of jobs, which range from the customer support sector to the manufacturing unit and also may be a part of the back office.
History and operations of Outsourcing
The first traces of outsourcing as a business ploy can trace back to the last 1980s and it became an important part of business economics by the 1990s. This practice is also a hot topic of debate in several countries. This is because the people who are not in favor of the practice of outsourcing fear the loss of domestic jobs in particular those involving the manufacturing sector. The people who support the cause are because they feel that the businesses and the companies will be able to allocate the resources and funding most effectively. They also argue that outsourcing helps in maintaining the free-market nature of the economies on a global scale.
The companies mainly perform outsourcing to cut labor costs and overhead operation costs of equipment and technology. It helps the companies to narrow down and focus on the core aspects of the venture. The disadvantage of this procedure shows up when there is a lack of communication between the core company and the outside providers.
Following Examples of Outsourcing
One of the best reasons the practice of outsourcing is employed is due to the advantages of time and cost cuttings. There can be several real-life scenarios elaborating the practice of outsourcing:
- A producer of personal computers may have outsourced the production of the internal components to other companies to save production costs and the cost of hiring operating technicians.
- A law firm may outsource the process of storing and backing up case files in a cloud computing service provider without needing to bear the hefty cost of owning the technology
- A small industrial company may choose to outsource the bookkeeping duties to an accounting firm to save money from hiring an actual in-house accountant.
When used effectively, outsourcing can become an effective strategy to reduce operating costs and can also end up providing a competitive advantage to the company in the discussion. In fact, many companies around the globe are now trusting the services of a call center in the Philippines and other parts of Asia.
The challenges faced when Outsourcing
Outsourcing is a very difficult procedure to implement and failure in implementing the same has high chances. Depending on the source of the study, it can range from around 40% to the 70% mark.
The problem arises from the inherent conflict of interest among the parties involved. The client will often ask for better quality service at a lower cost and the vendor will however also want to make a profit. This tension must be well managed for the goodwill of both the client and the vendor.
Another frequent reason for an outsourcing failure is the rush in the proceedings even in the absence of a good business case. A large fraction of the business world views outsourcing to be a fast cost-reducing procedure rather than an investment that is designed to enhance the capabilities.
Benefits of Outsourcing
There are several benefits of outsourcing and these can truly help the business thrive at times. These benefits are:
Cost Advantages
One of the biggest and the most obvious benefits relates to the savings that the practice of outsourcing brings about. The business can get beer quality jobs to lower costs. Due to the difference in the wages of different countries, some kind of work can be done in the outsourced country at a lower rate. Thus, the lower cost does not mean lower quality as that is the standard rate in that particular country.
Focus on Core Aspects
The outsourcing of the business processes would free up valuable time and energy and will enable you to focus on the building of the brand. It will also enable you to invest in research and develop technology to enhance the services.
Access to skilled resources
With the usage of outsourcing, you will not require to recruit and train expensive resources. The outsourcing agency will be taking care of all that.
Savings on Infrastructure
The practice of outsourcing eliminates the transfer of funds for the development of infrastructure. The outsourcing partners take care of all the processes and invest in the infrastructure for the same.
Advantages of Time Zone
Besides the advantage of cost savings, another great benefit of outsourcing is surely the difference in time zone. You can surely have the outsourced job done while you are closed for the day and wake up the next morning preparing to deliver the product. This lets you operate your business 24/7.
Criticisms of Outsourcing
The great business strategy of outsourcing also has its fair share of criticism. The process of outsourcing may consume a lot of time and extra effort from the firm’s legal team to sign off on contracts. There are a lot of security threats if another party has access to the firm’s important and often confidential information and this may lead to a data breach. In an occasion of lack of communication between the parties on hand, there can be a lot of delays in the completion of projects.
Conclusion:
The companies can surely take advantage of the difference in the labor and production costs among the different countries and use the practice of outsourcing as an advantage to their venture. But, every tactic in the business world needs to be employed carefully and fully scrutinized before it is brought into effect to ensure that there are maximum benefits to the business in the picture.
