Pros and Cons of Outsourcing Some Of Your Business Activities
Every company regardless of size and industry can take advantage of outsourcing some of its business activities such as IT, production, distribution, delivery, call center service, etc.
Any value chain activity in your business model can be outsourced – however it is up to the business management to make decisions whether outsourcing is a smart decision and what should be outsourced.
Generally, business activities which are not critical to the company’s success and competitive position can be outsourced without high business risk. On the other hand, those activities, processes and departments that are important to your business success – the ones that create your competitive advantage should be kept in-house.
Let’s take a look at the following outsourcing pros and cons:
Businesses generally make decision to outsource some of its business activities and processes for the following major reasons for outsourcing:
* Improved Business Focus (now we can focus on our core business activities by outsourcing all activities that are not critical for our business)
* Reduce Production and Operating Costs (by outsourcing our production overseas we will cut our operating costs by more than 30%)
* Gain better capabilities (our outsourcing partner has a better know how and experience so by outsourcing we are improving the quality of our products and services)
* Resources are not available in the company (we have to outsource some of the activities since we are not capable of performing them internally)
* Reduces the time to market (by outsourcing this process we can improve our time to market and responsiveness which will help us create a better competitive position in the marketplace).
Sometimes outsourcing can turn out to be a business failure because of the following reasons:
* Quality Suffers (since we outsourced our production the quality level of our products has suffered and we have lost some customers and our brand and reputation is at risk)
* High Switching Costs (we were not able to predict all costs of switching our operations to our outsourcing provider – there were many unpredictable costs and hidden costs including legal costs)
* Loosing Control over Business Operations (it is one thing to manage your own employees and it is very different to control your outsourcing partner including controlling and managing the productivity and quality)
* Communication Issues (Communication is very hard because of time zone differences, expensive travel, misunderstandings because of language and cultural barriers, etc.).
Outsourcing can be very beneficial but on the other hand it is a risky move for some companies. Outsourcing decisions require performing careful analysis and what-if scenarios by decision makers in order to minimize risk, time and cost with outsourcing. What works for one company can be a failure for another.