The pros and cons of outsourcing

| January 21, 2018

In my previous article ‘Outsourcing v Offshoring. Let’s clear up the confusion’ I discussed the differences between Outsourcing and Offshoring. Often the mere mention of Outsourcing starts a moral debate as to whether Outsourcing is a valid business strategy.

The best way to have a successful debate though is to arm yourself with objective information. So, what are the advantages, disadvantages and other criticisms of Outsourcing? In doing so I’ll present the arguments for each side of the debate and leave it to you to decide.

Advantages

Allows you to focus core competencies
At it most basic, outsourcing is moving a part of the internal operations of the business to a third-party. This might be moving the entire task to a third-party e.g. the IT functions, of the accounts receivable function. It might also be selling a part of the business to say the supplier of the raw material for that part of the business. The premise is the movement of the activity to allow the business the capacity to focus on its core expertise.

Cost efficiencies
Yes, outsourcing is usually cheaper and often a motivation if not the main motivation to outsource. However, a primary role of a business is to make a profit and a return to investors, and if you’re broke in business you’re not benefiting anyone.

Profitable businesses pay more tax the more profitable they are, spend money upgrading equipment, build bigger plants and offices etc.. So, the third-party company is better off, the client company is better off, the country is better off, and the associated businesses and communities are better off.

Frees up capital and resources
By transferring a transactional activity to a third party can free up capital (both working capital and investment capital) and can also free up time and space within the organisation. This capital, time and space then can by utilised in an activity that is core to the business.

Access third party expertise
No business can in the longer term sustain itself by doing everything itself. At some point every business will need third party vendors, usually as they have the expertise required. Even Business-to-Business transactions can be considered outsourcing if the client business utilises the goods or services on an ongoing basis.

Labour flexibility
One of the reasons Byronvale Advisors doesn’t have employees as such is so we don’t need to have a team of lawyers, accountants, web-designers, marketers, etc and have to pay them even when the engagements don’t require a lawyer, accountant etc for either the whole engagement or at all. This keeps costs down as we’re not paying salaries or renting office space, or buying computers that are not going to utilised or required.

Essentially, we pay for the expertise when we need it, and locate it where it is required. This also translates into being more cost effective but more importantly the best resources for our clients – in the right place, at the right time, for the right length of time. We ramp up and down quickly and as needed.

Disadvantages

Loss of own capabilities
While the business might see a reduction in costs due to outsourcing it does lose it own capabilities at the same time. A typical example of this happens in large technology projects where the business engages contractors and specialists to develop and then implement to project.

When the project finishes the contractors are no longer required and move on leaving those left behind without the expertise and in-depth understanding of the system. Another example might be when a business outsources its productive facilities to a supplier it transfers years of capabilities and knowledge at the same time which, once lost, are hard to replace.

Job losses
Through outsourcing you may end up laying staff off and selling property or leasing smaller property. Staff might be ‘lucky’ and not be made redundant but may face an uncertain future with the new supplier of that activity. Outsourcing within the country (as opposed to offshoring) faces less political criticism however as generally the economic benefits to the country are neutral if not favorable.

Misalignment of interests
The organisation to which you outsource may not have the same culture or interests as your business. Over time this divide can become a gulf and untenantable. Usually as the divide gets bigger the service or product offering to your client or customer deteriorates having a direct, and perhaps an irrevocable, situation for your business.

Data security
When you outsource a lot of information is transferred at the same time. This might be designs, customer information, financial information etc.. Once that information has left your control so has the control of the information and the security of that information. You are reliant of the third-party to protect and safeguard that information – but how certain can you really be that it is safe?

Other criticisms
There are two main other criticisms I hear regarding outsourcing – not directly about the outsourcing but more in the thoughts when thinking about first outsourcing.

The first is ‘What can I outsource in my business?’. Really, you’re probably only limited by your imagination but if just thinking about it gives you a headache you’re probably not ready for outsourcing.

The second is ‘I can’t find suitable people’. As Henry Ford said, “If you think you can, or you think you can’t, you’re right”. If you start with a mindset that you won’t find the right people, then you won’t find the right people. Saying that, just as you would for your own staff, you need to ensure that systems and processes are in place and the outsourced ‘staff’ are well trained, inducted and set reasonable, achievable KPIs.

Stephen Barnes
Stephen Barnes is the principal of management consultancy Byronvale Advisors and the author of ‘Run Your Business Better’. He has spent over 20 years advising clients from start-ups to publicly listed companies across a wide array of industries. He prides himself on understanding client issues and synthesising problems to produce pragmatic solutions.

One Comment

  1. Lucky Selvaratnam

    January 25, 2018 at 9:12 am

    In the construction industry, if you win a large contract, it may be better to share the booty by outsourcing some aspects of the project to a trusted group of competitors, so that there is give and take among a trusted group. This ensures that the project is completed on time, while minimising the need to invest in heavy plant which can only be used for the one off large project. Such a strategy ensures that there is a regular flow of business within the trusted group without the need to invest in heavy machinery and employing unskilled labour which requires further training.

Leave a Comment

Your email address will not be published. Required fields are marked *