Outsourcing is a business strategy that involves an organization contracting the services of another organization or service provider to perform specific activities related to operation and business processes. Examples of these activities include manufacturing, sales and marketing, distribution, accounting and auditing, and customer service representation or after sales support, among others.
The benefits and advantages of outsourcing serve as the motivations or reasons for pursuing this business strategy. It can provide an organization with a decisive competitive advantage against their competitors. However, it is important to note that there are limitations and disadvantages to this practice.
The Pros: Benefits and Advantages of Outsourcing
1. Cost Efficiency
One of the primary motivations why organizations outsource is to reduce costa or business expenses. This advantage stems from the fact that an outsourcing organization can select among different service providers that can provide them with the best cost savings. Competitive pricing is a standard selling proposition of service providers that are competing for contracts. They need to convince an outsourcing organization that they can bring forth cost savings.
It is also worth reiterating the fact that outsourcing to different countries can result in specific and substantial cost savings. For example, Apple has been outsourcing the production of products such as the iPhone and MacBook computers to manufacturers from China. Banks and service-oriented businesses in the United States have been outsourcing their customer service and technical support requirements to call centers in India and the Philippines.
Cheaper labor costs and operational efficiencies are the key reasons why outsourcing to another country can reduce business expenses. Take note that the salaries of factory workers in China or call center agents in India are about 50 percent to 75 percent cheaper than the salaries of similar workers in the United States. The specialized capabilities of service providers also translate to cost efficiencies.
2. Productivity Improvement
Another benefit or advantage of outsourcing centers on improvement in productivity. An organization can focus on their core competencies or strengths and outsource some of their operational requirements, especially its non-core competencies to other organizations. It is more efficient to outsource than invest in building capabilities on non-core competencies.
Marketing and advertising serve as a prime example of the aforementioned advantage. Rather than allocating resources in maintaining in-house marketing capabilities, most large organizations have resorted to hiring the services of marketing and advertising agencies. The same is true for other operational requirements such as accounting and legal representation that are outsourced from accounting and law firms.
Another example is manufacturing. Remember that Apple outsources manufacturing in China. Other companies such as Nike and Levis Strauss outsource the production of their products to China and other Southeast Asian countries. What is interesting to note about these companies is that they are primarily focused on product development. Hence, research and development, product design, and marketing are the core competencies of these companies.
3. Access to Technology and Talent
Similar with cost efficiency and productivity improvement, another benefit of outsourcing is that it provides small and large organizations with regional and global access to technology and talent, as well as other resources that can build and improve their competitive advantage. This advantage comes from the fact that service providers are specialists of the outsourcing solutions they provide.
China has become a provider of world-class manufacturing capabilities. The country has essentially become a global manufacturing hub. To be specific, Chinese manufacturers have the technological resources and affordable labor resource to make manufacturing not only cheaper but also more efficient. Outsourcing production requirements to China allows an organization to access these technological and labor resources.
India and the Philippines have become providers of business process services. Note that both countries have a large and highly educated workforce with specializations in the fields of customer service and information technology. There are existing industries or sectors in these two countries built around the provision of call center support and technical service supports.
The Cons: Limitations and Disadvantages of Outsourcing
1. Labor Issues
There have been negative offshoots associated with outsourcing. Companies such as Apple and Nike have been criticized because of the poor labor practices of their outsourced service providers. There have been several reports that manufacturers in China and countries in Asia and Africa have been exploiting their workforces through extended work hours, unsafe working conditions, and the hiring of minors as laborers. These issues can negatively affect the image of outsourcing organizations.
Outsourcing organizations have been required by the public and to a certain extent, by governments to extend their business practices to their outsourced partners. In an effort to protect their corporate image, organizations have audited the practices of their service providers and have subjected them under performance monitoring as part of their corporate social responsibility. These requirements can bring forth additional costs.
Another issue related to labor involves contentions that outsourcing leads to loss of jobs. For example, certain sectors in the United States have complained that outsourcing has led to the weakening of American manufacturing capability and that the jobs that should be given to Americans have been outsourced to other countries. Some of these sectors have blamed outsourcing as one of the causes of unemployment and an overall decline in economic activity.
2. Standards Monitoring
Another limitation or disadvantage of outsourcing centers on the need to monitor standards and quality. Remember that an organization loses substantial managerial control whenever they outsource some of their activities or operational requirements to other organizations. The lack of direct control can bring forth issues related to standard compliance and quality assurance.
The stipulations in well-articulated contracts provide a way for service providers to be mindful about their roles and responsibilities. However, there are unavoidable instances of mishaps, and some service providers can justify their underperformance or simply choose to pay the costs associated with their failure to meet standards. A notable example of poor product quality is the defective Galaxy Note 7 smartphone of Samsung Electronics. Note that the company outsources the production of its smartphones in Vietnam, Indonesia, Brazil, India, and China. Another example is poor reception of customer service from outsourced BPO companies.
Another issue related to standards monitoring is the possible breaches in security. Because of the lack of managerial control over the outsourced service providers, an organization is at risk of getting some of their best-kept strategies and plans out in public. Note that companies such as Apple and Samsung have to deal with leaks of their upcoming products constantly. Companies that outsource their IT requirements are also at risk of data breach.
3. Erosion of Internal Capabilities
Erosion of internal capabilities is another disadvantage of outsourcing because of the simplest reason that outsourcing practices lead to dependence. Although focusing on core competencies can bring forth cost and productivity advantages, the inability to attend to non-core competencies can sometimes result in a decrease in the flexibility of an organization.
Consider outsourcing marketing and advertising, accounting, and legal requirements as an example. Although these requirements are non-core competencies for some organizations, there could come a time when a specific organization needs to hire the services of a third-party for fulfilling simpler tasks or activities because they lack the internal capability to do so. The erosion of internal capability can also leave an organization unable to make their own decision about marketing strategy, accounting practices, and legal directions, among others.
Outsourcing of manufacturing is another example. Companies such as Apple and Nike are dependent on third-party manufacturers. These organizations do not have the internal capabilities to manufacture their own products. Although they enjoy the cost savings and other aspects of operational efficiency that tag along with outsourcing, the fact remains that their survival has now become dependent not only on the survival outsourced manufacturers but also on the economic situations of the countries where these service providers operate.