What are the Pros and Cons of Outsourcing?

Outsourcing is often undertaken to provide enterprises a competitive advantage by delegating business process to external agencies and realizing the benefits of low labor, better quality and improved innovation. While this provides a good picture of the fair side of the coin, most managers however need to grope with the possible shortcoming of the process and the corresponding impact on the company’s core processes. To best analyze the opportunities presented it is essential to reflect upon the advantages vis-à-vis the disadvantages of outsourcing. The pros of outsourcing

The pros of outsourcing often positively reflected by enterprises across industries include: Better revenue realization and enhanced returns on investment Lower labor cost and increased realization of economics of scale Tapping in to a knowledge base for better innovation

Frees management time, enabling companies to focus on core competencies while not being concerned about outsourced routine activities Increases speed and the quality of delivery of outsourced activities Reduces cash outflow and optimizes resource utilization

The cons of outsourcing
Often weighed with the advantages before any decision on outsourcing is undertaken, the following represents some of the possible disadvantages often dwelled upon: Possible loss of control over a company’s business processes Problems related to quality and turnaround time

Sluggish response times coupled with slow issue resolutions
Shortcomings in performance vis-à-vis expectations
Lower than expected realization of benefits and results
Issues pertaining to lingual accent variation
An irate customer base coupled with enraged employee unions

Outsourcing brings in a lot of flexibility and financial freedom but it also has its pitfalls. Any company looking to outsource must keep in mind the pros and cons of outsourcing before deciding to take the plunge. Take a look at this list of advantages and disadvantages of outsourcing. Advantages of Offshore Outsourcing

Core activities of the business take center stage. Outsourcing non-core activities such as administration and back-office operations helps to put the focus back on the core functions of the business, such as sales and marketing. One of the biggest advantages of outsourcing to India (or any other location) is cost savings. The lower cost of operation and labor makes it attractive to outsource. Outsourcing reduces overhead costs that usually come with running back-end operations. When certain functions of an organization become operationally uncontrollable, outsourcing helps to overcome such difficulties. A company’s cash-flow can be streamlined.

By increasing productivity and efficiency, a business can be more successful and better-prepared for market challenges. Outsourcing frees an organization from investments in technology, infrastructure and people that make up the bulk of a back-end process’ capital expenditure. Outsourcing gives businesses flexibility in staffing and manpower management. Since the service provider is responsible for managing the workforce, you save costs and can also pick the best people to run your core functions. Offshore outsourcing gives businesses the ability to develop new competencies and skill-sets that can be used as a competitive advantage.

Disadvantages of Offshore Outsourcing
As we know, outsourcing brings us a lot of advantages but it also has its pitfalls. One of the biggest disadvantages of outsourcing is the risk of losing sensitive data and the loss of confidentiality. It is important, therefore, to have checks in place to avoid data loss. We may also face Possible loss of control over a company’s business processes （mean that you may no longer be able to control operations and deliverables of activities that you outsource.） Problems with quality can arise if the outsourcing provider doesn’t have proper processes or is inexperienced in working in an outsourcing relationship. Hidden costs and legal problems may arise if the outsourcing terms and conditions are not clearly defined. Not understanding the culture of the outsourcing provider and the location where you outsource, that may lead to poor communication and lower productivity.

Possible loss of control over a company’s business processes Problems related to quality and turnaround time
Sluggish response times coupled with slow issue resolutions
Shortcomings in performance vis-à-vis expectations
Lower than expected realization of benefits and results

Outsourcing Locally vs. Overseas
We said earlier that one of the main advantages to outsourcing is that it allows companies to access the world class talent — that is, a company could hire the best widget engineer, not just settle for the available one. But when does it make sense to hire someone overseas, as opposed to one across the street or even a nearby city? It’s a balance of several things. In general, companies typically cite factors such as quality commitment, price, reputation, business culture compatibility and location when selecting a vendor for outsourcing. Additional factors like understanding goals, constant management of the business relationship, well-written contracts and strong communication are also important for the ongoing success of an outsourcing relationship. The choice to go offshore or hire locally can hinge on these factors as well as language compatibility, the labor pool’s skill and size, security and privacy, the local education systems ability to support the labor pool and the legal culture and stability of a country. People who live and work near one another or at least within the same state or national boundaries will have more in common in terms of language, business culture and background. This can make communications and management easier.

Also, it’s simply easier to conduct on-site meetings and inspections when one doesn’t have to travel overseas to do so. If the particular expertise a company is seeking can be found nearby at a good price, it seems logical most companies would select that option. As always in business, however, price can be a major concern. Outsourcing overseas can be less expensive for a company and is just one of the advantages to going offshore for outsourcing needs. This is true for several reasons. Wages in many countries are lower than in the United States. Labor is one of the prime costs in manufacturing or the service industry, so that alone can mean a substantial savings to a company. In the case of manufacturing, raw materials may also be less costly in certain countries. Also, foreign countries may offer a more business-friendly regulatory environment, lower corporate taxes and tax shelters and financial incentives for American business to invest in their countries.

Often when a company opens a factory overseas it ends up selling the products made there in that country. This allows the company to access a foreign market more economically. Overseas outsourcing shows no signs of slowing down. NetworkWorld.com reported in January 2008 that research firms predict more overseas outsourcing companies will open this year, giving companies in both the United States and Europe more selection. The research firm Gartner predicted offshore spending to increase by 60 percent for European companies and 40 percent for U.S. companies. India is a leader among countries that receive outsourcing work from overseas. But other countries, including Russia, China, Ireland and South Africa are also elbowing their way up the list, the article stated. In the next few sections, we’ll look at some of the fields that are beginning to rely on outsourcing more and more.