Advantages And Disadvantages Of Outsourcing

Advantages and disadvantages
of outsourcing

What is 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 pros and cons of outsourcing before
deciding to contract out any activities or
business operations.
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Common Types of Outsourced
Work

The type of outsourcing work depends heavily on the needs of the
business and the industry they operate in. The most common
outsourced activities include:
Content writing
Customer support service
Marketing
Supply chain management
Human resource management
Accounting
Engineering
Research and design
Computer programming services
Tax compliance
Finance
Training administration
4

“
Reasons for Outsourcing
The most common reasons to outsource include:
▪ Reducing operating, labor, and overhead costs
▪ Focusing more on the company’s core competencies, and
thus improving its competitive advantages by outsourcing
time-consuming processes to external companies
▪ Freeing up internal resources and using the resources for
other purposes
▪ Mitigating risk by sharing risks with external parties and
building meaningful partnerships
▪ Improving flexibility and efficiency by delegating
responsibilities that are difficult to manage and control to
external companies.
5

Examples of Outsourcing
Below are several examples of how companies outsource certain functions:
▪ Company A is rapidly growing and is in need of more office space. However, the company is situated in a
very expensive location and there is no room to expand. The company can outsource some of the work
that takes up office space (for example, data entry or customer service support) to reduce the need for
additional space.
▪ Company B enjoyed great success over the past year and is currently looking to expand its product line.
However, the company is constrained by the limited amount of workers. Therefore, to expand its product
line in-house, Company B would need to slow down production on some of its existing products. The
company can outsource the work to an external local factory to lessen the labor constraint.
▪ Company C is a car manufacturer facing increasing raw material and labor costs. Therefore, the profit
margin on the manufactured goods is steadily decreasing as costs increase. The company can outsource
part of its production process, i.e., the manufacturing and installing of windows in their cars. Assembling
time and costs can be saved by outsourcing an expensive production process to an external company
who can do it at a cheaper cost.
6

What are the Advantages and Disadvantages of Outsourcing?
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Everything in this world has 2 sides
and outsourcing is no exception to
the rule. Though certain things about
outsourcing can give you edge over
your competitors through cost
efficiency, scalability, availability of
skilled talent pool, focus on core
business and many more, there are
certain areas, which if handled
correctly, can reduce the risk
involved in the business. Here are
some do’s and don’ts for you to be
prepared before you set your foot into
your next venture.

1. Swiftness and Expertise: Most of the times tasks are outsourced to
vendors who specialize in their field. The outsourced vendors also have
specific equipment and technical expertise, most of the times better than
the ones at the outsourcing organization. Effectively the tasks can be
completed faster and with better quality output.
2. Concentrating on core process rather than the supporting
ones: Outsourcing the supporting processes gives the organization more
time to strengthen their core business process.
3. Risk-sharing: one of the most crucial factors determining the outcome
of a campaign is risk-analysis. Outsourcing certain components of your
business process helps the organization to shift certain responsibilities to
the outsourced vendor. Since the outsourced vendor is a specialist, they
plan your risk-mitigating factors better.
4. Reduced Operational and Recruitment costs: Outsourcing eludes
the need to hire individuals in-house; hence recruitment and operational
costs can be minimized to a great extent. This is one of the prime
advantages of offshore outsourcing.
Advantages of outsourcing
10

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 increased efficiency
 improved focus on core
business activities
 controlled costs
 increased reach
 greater competitive advantage

Disadvantages of outsourcing
1. Risk of exposing confidential data: When an organization
outsources HR, Payroll and Recruitment services, it involves a risk if
exposing confidential company information to a third-party.
2. Synchronizing the deliverables: In case you do not choose a right
partner for outsourcing, some of the common problem areas include
stretched delivery time frames, sub-standard quality output and
inappropriate categorization of responsibilities. At times it is easier to
regulate these factors inside an organization rather than with an
outsourced partner.
3. Hidden costs: Although outsourcing most of the times is cost-
effective at times the hidden costs involved in signing a contract while
signing a contract across international boundaries may pose a serious
threat.
4. Lack of customer focus: An outsourced vendor may be catering to
the expertise-needs of multiple organizations at a time. In such situations
vendors may lack complete focus on your organization’s tasks.
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•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

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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.

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Benefits of outsourcing And help to increase economic skill

Creative Process Outsourcing (CPO)
19
Pure Production
( Edit / Revisions / Templeted work )
3
Design Production
( Execution of previous work
across deliverables)
2
Create Development
( conceptual work )
1

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Final word
Outsourcing presents a variety of
advantages, but it could also pose
difficulties if not done correctly or
outsourced to the right third-party provider.
Many of the potential problems could be
avoided by having a solid outsourcing
contract which examines service level
agreements, timeframes and
measurement, penalties, rewards, regular
reviews and exit strategies.
You might be considering outsourcing to reduce
operating costs or streamline your efficiencies.
However, before outsourcing any component of
your business, you need to understand the
advantages and possible disadvantages that
outsourcing brings.
To assess whether to contract or avoid
outsourcing certain operations check the below
lists of outsourcing advantages and
disadvantages, and decide what impact each
would have on your business. If the outsourcing
disadvantages outweigh the benefits, then you
should avoid outsourcing those tasks.

24
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▪ subarnashirinsusmita@gmail.com

Advantages And Disadvantages Of Outsourcing

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