When businesses consider cutting costs in almost any area, often the first thing that comes to mind is outsourcing, particularly to overseas employees or consultants. It is understandable – especially in this economy – that companies want to reduce costs as much as possible and use fewer employees, but the decision to outsource should not be made lightly. Weighing the pros and cons, as well as considering factors other than cost savings, will help you determine whether outsourcing is the right option for your business.
A recent study from Info-Tech Research Group found that most companies outsource to gain access to specialized skills, which result in faster product delivery. Howard Kiewe, senior research analyst at Info-Tech Research Group, said another good reason to outsource is if a business needs to act quickly to take advantage of a market opportunity but doesn’t have the internal talent to respond. Other advantages of outsourcing include improved business processes and workflow, flexible staff allocation and the ability of internal staff to focus on other important business areas.
Of course, potential cost savings cannot be ignored, although analysts differ on whether it provides a major benefit. “Cutting costs was not the primary reason organizations considered outsourcing, and doesn’t appear to be a driving motivation anytime soon,” said Kiewe. However, Peter Ryan, lead analyst at Datamonitor, emphasized cost reduction as a primary driver. “Currently, [a major outsourcing driver] is cost containment, with many companies desperate to remove as much overhead as possible through the recession and into the recovery.” Cost savings as a reason to outsource will depend on the individual business and its objectives.
While there are plenty of advantages to outsourcing, there are also disadvantages. According to the Info-Tech study, these include misunderstood requirements (outsourcer doesn’t deliver project as specified), cost overruns (actual costs exceed budgeted costs), inadequate deliverable quality, cultural and language issues (particularly with offshore consultants), and problems selecting appropriate and quality vendors. Ryan added that there can be issues related to loss of jobs, especially if the work is to be done offshore.
Fortunately, some disadvantages aren’t necessarily reasons to avoid outsourcing. Although job loss is a key concern, the Info-Tech study found that outsourcing led to very few layoffs, with only 14 percent of companies that outsourced having laid off any staff. As Kiewe explained, “Most companies use outsourcing to augment existing staff, not to replace them.” Also, while offshoring has cultural, language and time-zone challenges that must be considered, it can be more successful at cost reduction than onshore outsourcing. “If your primary motivation is cost reduction, consider offshoring,” said Kiewe. However, a company must know the tolerance of their customer base before using such a strategy according to Ryan. “In the end, there is no right or wrong in either business model, only what will best serve the end-user,” he said.
Kiewe addressed the issue of sending jobs overseas by offshoring and its impact on the economy. At least according to Kiewe, this shouldn’t be a deciding factor. “[Offshoring] is a decision to make on business merits. The recession was not caused by offshoring and it will not be fixed by avoiding offshore business relationships. Today the economy is truly global, and we will all prosper if we work together to fix it,” he said. Given the global nature of the recession, perhaps this idea isn’t too far fetched, although it’s certainly up for debate.
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About the Author: David Cotriss is a business, technology and new media writer, having published 500+ news and feature articles to date worldwide in magazines ranging from PC Magazine to The Industry Standard.
A lot of the cons can be avoided, or at least minimized, if the outsourced workers, whether onshore or offshore, are viewed as part of the team as opposed to a completely separate entity.
Communicate clearly and openly and build a relationship of trust and respect. It takes time for this type of relationship, and the systems to support it, to evolve. But it can be well worth the effort.
David Cotriss: Don’t you think that “insourcing” / “backsourcing” is getting more attention nowadays?
Yeah outsourcing can reduce your cost, time and most importantly headache of managing the complete tasks but it can put one in trouble if he/she selects the wrong organisation for the tasks. And if the organisation fails to deliver the tasks in time then you know what will happen next.
So I think the above posts can be helpful for the people, who’s planning to outsource their business.
Just wanted to say I loved your article on Outsourcing, it really frustrates me when companies outsource their customer services overseas to places that don’t speak English.
Don’t get me wrong it’s not the fault of the companies that are used to provide the service, they work to the best of their ability.
It’s so frustrating especially when you have a technical question trying to relay it to someone who doesn’t understand you or you them.
I think a large number of people would move providers just because of this and thus negating any savings the company has made moving its service overseas.
In the transportation industry, many times, it can be feast or famine. When there is a major event in town, we don’t have enough cars. Other times, we don’t have enough calls to keep our drivers busy. It’s consistent theme between the Trucking, Limousine and Taxi industry.
We rely heavily on independent owner operators to help with overflow. The problem is when you are in a service business, finding people that can maintain the level of service your clients are accustomed to. It’s a very difficult task.
You also run the risk of losing clients by outsourcing to people that are, in essence, also your competition.
Great article. Would like to see some more thoughts from others that outsource business locally, not offshore.
Outsourcing seems to be the way minimize costs, and even save time in certain businesses. Often companies outsource their payroll services, which is a great idea. This is more of a local outsource, because the small to medium size business may need a company to prepare their taxes or handle employee pay. For example, the company Priority Pay Payroll is a company which provides cost effective payroll services to businesses.
Another consideration to make when outsourcing is to ensure that the incentives are in line with company goals. Want to avoid cost overruns? Have a penalty in place for overages and a bonus in place for coming in under budget.
Thanks for weighing the pros and cons in outsourcing.
Amazon Mturk is also a great place to outsource your projects for a very competitive price, and it does produce great results.
Thanks David for this great post. This help readers understand the pros and cons of outsourcing. They will gain knowledge from this.
Seen many cases where you have outsourced development of some key business function. The initial project was fine, came in on time and on budget – everybody was happy. BUT, 6 months later, you need to make changes. You are now charged an arm and a leg for changes since the only one who knows this complex system is the consultant company that made the initial development.
I think outsourcing can be a great way to cut costs and improve efficiency for your business if it is the right fit for your business. I have played around with outsourcing a few things for my business and I have to say that thus far I have found that using a telephone answering service has been my favorite use of outsourcing. I have been very satisfied with the local Arizona company called A Better Connection that I have been using now for over a year. They have been wonderful.
Great post. This will certainly relieve the tension for both cons and pros in offshore outsourcing. I strongly believe that in every business, there will always be a unique business model that will surely keep their businesses running. Either hiring an in-house employee or venturing on offshore augmentation for their business work flow, it doesn’t matter if all goals are met.
Yes, I agree with your points. But you have written disadvantages of outsourcing are not entirely accurate. Lot of companies that provide very good services in outsourcing. You should be careful to choose the company with better reputation. There are some useful precautions to choose a better outsourcing organization.
1. Do your homework properly. Find out for how many years the company has been outsourcing. Get adequate information on the company as to the strength of the company and their financial situation.
2. Find out about the quality of the services provided by them e.g. whether they have an ISO and CMM certifications. Customer reference and recommendation are the best way to figure out a company’s services.
3. Before you finalize the outsourcing company it is pertinent for you to take into consideration all the hidden costs from maintenance, training, connectivity/infrastructure, transition etc. instead of just the obvious costs such as licensing and consulting costs.
4. Ensure that the company does not make unrealistic promises and keeps them.
5. The outsourcing company should meet requirements in respect to data privacy including infrastructure security (Firewalls, Access Controls, Data Encryption, etc) and human resource related like Pre-Recruitment precautions and checks, Non-Disclosure agreements, etc.)
6. Ensure that the company offers business continuity and disaster mitigation plans as a means of reducing your business related risks.
7. Companies have to be honest when dealing with invoicing and material type of contract. Always check for referrals of customer for ensuring that the company is honest in financial dealings.
8. Ensure that the company chosen for outsource work is compliant with statutory laws.
9. The company chosen should match work culture and ethics. This will help offshorer in carrying out smooth communication with the company.
10. Ensure that the chosen company has well trained professionals on their staff and good capacity to handle the work.
This is truly an interesting article. One point I would like to highlight is that outsourcing typically opens the door for workers to learn new skills are improve the ones why already have. This actually can strengthen an economy over time. Additionally, the jobs outsource can open up the opportunity to the creation of better products and services.
Outsourcing certainly cuts costs than getting an internal staff to do the work. You have to pay for medical, dental and other benefits for permanent staff as compared to offshore virtual assistants to complete the work.
Great guide on the pros and cons of outsourcing. pretty much sums it all up. I find that a lot of the cons can be minimized with proper planning and implementation.
I think one of the main reasons outsourcing isn’t successful because of loose commitment. More often companies use it with the mindset we’ll try this and see. You need to consider the outsourcing team as part of your company, put guidelines in place to measure their output etc.
Also now most companies that offer outsourcing service realize that communication is a big barrier for success. Its now common to find web development, software development companies in India, Philippines, Sri Lanka etc where they provide you with an British or an European manager who speaks good English and has project management capabilities.
Thanks for sharing the post. I believe that there are more advantages on outsourcing than disadvantages. Outsourcing, without a doubt, has many advantages. It allows you focus more on expanding your business while saving time and money at the same time.
Really great post. This answered the majority of my questions. When I read this I actually opened up a word document and started taking notes.
Though outsourcing comes has some disadvantages but I would still prefer it. By the way great article with detailed information. Thanks a ton for posting.