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Outsourcing can be defined as a process of getting work done from the third party which is not the part of the employee strength of an organization and paying this third party separately for their contractual work done instead of offering salary alike regular employees of the organization. This third party has no other role to play in the process of organization and is only responsible for their contractual work. This third party is not related to the profit or loss of the company and is paid for their respective work, as soon as they complete the project allocated to them, regardless of the profit or loss situation. The term "outsourcing" became popular in the United States near the turn of the 21st century. Outsourcing sometimes also involves transferring employees and assets from one firm to another, but not always.
The definition of outsourcing can include both foreign as well as domestic contracting, and sometimes includes offshoring, which means relocating a business function to another country. A lot of companies these days are going for foreign outsourcing because of availability of some quality labor at some competitive rates in the developing countries like India, China, and Brazil etc. which are also one of few biggest economies in the world. Because of the large manpower available in these countries, these are able to provide some quality work at very competitive rates. Financial savings from lower international labor rates is a big motivation for outsourcing/offshoring.
Though during the starting phase it was considered that the only reason for outsourcing is the availability of the workforce at competitive rates in some countries of the world, there are many other reasons for outsourcing. Companies outsource to avoid certain types of costs, not only the labor cost. Among the reasons, companies elect to outsource include avoidance of burdensome regulations, high taxes, high energy costs, and unreasonable costs that may be associated with defined benefits in labor-union contracts and taxes for government-mandated benefits which all vary from nation to nation. Every individual country has their own norms, tax rates and other costs associated with the business. Hence getting work done in another country can sometimes prove to be more cost effective than getting the same work done from the other. In this case, a businessman goes for the cost-effectiveness.
With reduced short-run costs luring the companies, the executive management foresees the opportunity for short-run profits, while the income growth of the consumer base is strained. These cost-related advantages motivate companies to outsource owing to the lower labor costs and lower taxes are a reason too. But it is also evident that not always things go on as expected, sometimes cost of training overseas workers may be too much that it may take over all the profits earned. It is also possible that sometimes, due to language barriers, the overseas labors don’t understand well what exactly their client needs, hence leading to a complete mismatch. However it is very clear that companies do not outsource to reduce executive or managerial costs. Hence the key factors for outsourcing can be summarized as:
For a business with a good reputation, it is not very easy to trust anyone for their work, as their work is the reflection of their commitment and trust. Before hiring a company for outsourcing, it is also important for the company to be satisfied that the third party can fulfill the requirements with perfection. When outsourcing, companies look for suppliers who are credible in the field and compatible with the needs of the organization, remain flexible as needs change, have the skills you need, can save you money without compromising the quality of service you need. Before giving a contract, companies do look out for these points:
Outsourcing as defined earlier refers to hiring an outside, independent firm on a contractual basis to perform a business function. Outsourcing may otherwise also involve transferring employees. Most of the organizations outsource jobs to specialized service companies, which most of the times operate from some other country. The outsourcing trend stands to continue; the latest wave of outsourcing impacts the information technology field. IT outsourcing includes data center operations, desktop and help desk support, software development, e-commerce outsourcing, software applications services, network operations and disaster recovery. There are many advantages related to the process of outsourcing, which may include cost-effectiveness, provision of expert workers and timely completion of projects.
Outsourcing most commonly known as offshoring has pros and cons to it. Most of the time, the advantages of outsourcing overshadow the disadvantages of outsourcing, which is the main reason that the outsourcing is becoming really popular day by day. Outsourcing allows management to defer the details to a specialized company. Removing these details permits management to focus on the bigger picture and some other larger issues within the organization and use their quality time focusing and planning for something bigger. Typically, the specialized company that handles the outsourced IT work boasts technological capabilities superior to the organization. Organizations view outsourcing as a cost-effective means to expand into other countries and new markets. Outsourcing, when done for the right reasons can help organizations increase profits, reduces the cost of doing business, and improve the efficiency of all business processes. Various other advantages associated with outsourcing are:
One of the main advantages of the outsourcing can be that management may get a lot of their burden eased by giving away their project to some other reliable source and utilize their quality time to plan and focus achieving other organizational goals. By outsourcing non-core business activities to a third party, managing staff tend to manage their time and limited workforce more efficiently and focus completely on their core business processes. Every company has limited resources in terms of time and workforce. Moreover, it becomes even more productive for any business to use all resources at their disposal in performing activities that directly increase the profits, rather than learning and performing some activities that are not from their domain.
When you outsource you save on capital expenditure, workforce, infrastructure, hiring costs, operating costs, and training costs. If you are outsourcing form some foreign country where labor is comparatively inexpensive, then you tend to save a lot of costs. Additionally, as you don’t have to invest in infrastructure or spend money on hiring and training employees you can pump more capital into revenue-generating activities of your business. There is also no need to waste time giving training to your employees on certain skills that do not form their related field. This saves in a lot of time, money and energy. Also, there is no risk of something going wrong from your part, as in the case if something goes wrong then the third party would be responsible. Sometimes when outsourcing from a foreign company or a company from some other state may also lead to a difference in tax slabs and offer some tax-related benefits also.
Most of the organizations focus only on their concerned objectives and are not really cared about other stuff. Most of the organizations do not have the required expertise, infrastructure, and technology to perform various non-core business activities, such as Human Resources functions, Accounting and Payroll functions, Tax Compliance functions, Employee Benefits Administration functions efficiently. When companies hire in some outsourcing companies for these domains, they tend to gain in a lot from their experience and their expertise in their respective field, which in turn helps the organization in increasing their efficiency and productivity.
Outsourcing tends to increase the overall efficiency of a business. Outsourcing allows organizations to achieve greater efficiency in all of their business processes—both core and non-core. In such cases, the outsourcing partner tends to perform all non-core business activities efficiently which is his expertise field, while the organization itself performs the business’s core activities efficiently by themselves. Through this mutual benefitting arrangement, organizations can achieve overall efficiency and increase their overall profits.
Outsourcing comes in with a lot of advantages, but it is also true that associated with these advantages are also some disadvantages. Outsourcing reduces or completely eradicates direct communication between the organizations and clients and may sometimes lead to confusion about the client’s expectation. Limited communication impedes the relationship building process, which may sometimes lead to the overall dissatisfaction of the organization and the client. The outsourcing organization loses complete control over all areas of the company. Project implementation timelines may suffer as a result. If the organization terminates the agreement with the outsourced entity, confidential, sensitive information may get risked, which is one of the biggest disadvantage of the outsourcing. Other disadvantages can be:
Giving a contract to another company obviously leads to a loss of managerial control; you cannot interfere into the internal matters of some other company. Whether you sign a contract to have another company perform the function of an entire department or single task, you tend to turn the management and control of that function over to another company who will be responsible for the job. You may have a contract, but the managerial control will belong to another company in charge of completing the job. Your outsourcing company will not be driven by the same standards and mission that drives your company and sometimes may not possess quality levels as observed by the contract giving the organization, and are sometimes driven to make a profit from the services that they are providing.
The major limitation of outsourcing is the threat to confidential information. The blood of any business organization is the information that keeps it running. There is a lot of information like client details, project costs, payroll, medical records or any other confidential information that will be transmitted to the outsourcing company. There is a risk that the confidentiality may be compromised if this information is accessed by the outsource company against the contract giving organization to make some business contacts by the third party. It is advised to evaluate the outsourcing company carefully to make sure that the data of the organization is protected and the contract has a penalty clause if an incident occurs.
There can be some quality related issues also, the outsourcing company will be motivated by profit and may sometimes provide with a low standard solution. Since the contract will fix the price, the only way for the outsourcing company to increase profit will be to decrease expenses and compromising the quality. As long as they meet the conditions of the contract, you will pay. In addition, you also tend to lose the ability to rapidly respond to changes in the business environment. The contract will be very specific and you will pay extra for changes. You can specify the quantity in your contract but very hard to define the ever changing need of quality in your contract.
Outsourcing can give business a competitive edge it requires to move forward in this competitive world. As already mentioned, the advantages of outsourcing are far more than the disadvantages. And probably this is the reason why so many companies today outsource their non-core business operations and most of the time benefit a lot out of this. If anything, the disadvantages of outsourcings give you the opportunity to think before-hand about the things you need to keep in mind when selecting an outsourcing partner. Hence it would be helpful to review these disadvantages as a precautionary measure and to prepare a contract that includes all these aspects.
