The Pros and Cons of Outsourcing

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.