Guide

Outsourcing

Advantages and disadvantages of outsourcing

Outsourcing is a common practice of contracting out business functions and processes to third-party providers. The benefits of outsourcing can be substantial - from cost savings and efficiency gains to greater competitive advantage.

On the other hand, loss of control over the outsourced function is often a potential business risk. You should consider carefully the advantages and disadvantages of outsourcing before deciding to contract out any activities or business operations.

Advantages of outsourcing

There are many reasons why a business may choose to outsource a particular task, job or a process. For example, some of the recognised benefits of outsourcing include:

  • improved focus on core business activities - outsourcing can free up your businessĀ to focus on its strengths, allowing your staff to concentrate on their main tasks and on the future strategy
  • increased efficiency - choosing an outsourcing company that specialises in the process or service you want them to carry out for you can help you achieve a more productive, efficient service, often of greater quality
  • controlled costs - cost-savings achieved by outsourcing can help you release capital for investment in other areas of your business
  • increased reach - outsourcing can give you access to capabilities and facilities otherwise not accessible or affordable
  • greater competitive advantage - outsourcing can help you leverage knowledge and skills along with your complete supply chain

Outsourcing can also help to make your business more flexible and agile, able to adapt to changing market conditions and challenges, while providing cost savings and service level improvements.

Disadvantages of outsourcing

Outsourcing involves handing over direct control over a business function or process to a third party. As such, it comes with certain risks. For example, when outsourcing, you may experience problems with:

  • service delivery - which may fall behind time or below expectation
  • confidentiality and security - which may be at risk
  • lack of flexibility - contract could prove too rigid to accommodate change
  • management difficulties - changes at the outsourcing company could lead to friction
  • instability - the outsourcing company could go out of business

Offshore outsourcing, although potentially more cost-effective, may present additional challenges such as hidden costs of provider selection or handover, severance and costs related to layoffs of local employees who will not be relocated internationally, etc. Even simply managing the offshore relationship can prove challenging due to time zones, different languages or cultural preferences.

You should examine carefully all the pros and cons of outsourcing to make sure that the benefits outweigh the risks. Before deciding on your strategy, it may be worth looking at some common outsourcing considerations.