Definition of outsourcing
Outsourcing is an arrangement through which a company contracts another company to render it specific services that were originally done inside the company or that could be done inside the company. By definition, therefore, outsourcing is when an organizaiton transfers ownership of a business process to a supplier where the supplier becomes in control of the process.
When a company decides to outsource, it should first discontinue the operation that it wishes to outsource if this operation is run by the company in-house. If the operation is not in-house, management will simply move to step two, that is, contracting another company to run the service for it.
Advantages of outsourcing
The most important advantage is that outsourcing gives a company the ability to focus on its core operations and get rid of the responsibilities of the outsourced operation. From a strategic perspective, this is a very important advantage especially for corporations for two major reasons. First of all, the employees of the organizations will be learning the core comeptencies in the organization rather than focusing on learning tasks or skills that are unrelated to the core processes of the organization. Secondly, Human Resources management will be able to focus on improving its functions by making more time and resources available for improving the competencies of employees in the core processes of the organization.
In addition to this, when outsourcing, an orgnaization will be able to cut its costs considerably. The first set of costs to consider are the production costs. By tranforming the ownership of a process to the supplier, the organization will no longer have to be responsible for the costs of expanding or reducing, monitoring, and implementing performance policies. This includes financial costs such as salaries and related costs, costs of productions, costs of inventory, costs of management, and other costs.
In many cases when an organization has to manfacture its own supplies, this processes cannot reach economies of scale, mainly because the organizational needs are not that large, and secondly because the organization cannot market or sell these supplies since this is not its main line of business. When the organization outsources such a process, it will be cutting costs because the supplier who now owns the process can reach economies of scale, achieve lower cost positions, and hence provide the suppliers to the organization at lower prices.
Disadvantages of outsourcing
Despite the advantages of outsourcing, some disadvantages can be serious and have to be taken into consideration.
A serious disadvantage is that the company will have to rely on other companies for outsourced services and if suppliers fail in meeting the needs of the organization, disastrous outcomes may arise. For example, if a car-making company outsources the manufacturing of certain parts and these do not arrive on time, the entire marketing and production plans of the organization will be stopped as a result, hence resulting in a disaster for the company. Moreover, suppliers will have control over prices and if they increase the prices, the organization will have to face a higher cost of production which betrays the original purpose of outsourcing.
Another disadvantage relating to outsourcing is the area of sharing knowledge. Organizations often develop technologically, scientifically and strategically over time. Organizations accumulate a vast amount of learning, knowledge and experience which they add to their processes, and which in turn gives them strategic advantage over their competitors. When an organization decides to outsource, it will first have to share the information it has accumulated with its supplier in order to receive the same quality of supplies. Secondly, it will have to take the risk of receiving lower quality supplies if the supplier does not invest in research and development. These two problems can put a company at a disadvantage against its competitors. This is not to mention the fact that the supplier will also be offering supplies to other companies, some of which may be competitors to the organization.
The long experiences of organizations such as Xerox and IBM in outsourcing have yielded mixed results. On the one hand, many problems have been resolved. For example, outsourced operations and supplies have been less costly for organizations. Moreover, the specialization of suppliers in the processes that have been transformed to them have resulted in better quality of supplies at lower costs for the organization. But this was also at a cost. The major problem that Xerox for example faced with outsourcing was the sharing of knowledge and information. Xerox management was very protective about sharing information with an outsider and as a result, the company’s new suppliers were not always able to offer supplies that met the quality standards of Xerox. This has forced Xerox to re-possess some of the operations that it had previously outsourced, or it had led to lower quality Xerox products.
Re-possessing the previously outsourced operations was not a solution however because outsourcing was a strategy that had potentials for success. Accordingly, Xerox had one possible choice to take, namely to build strategic relationships with its suppliers. To start with, the company had to send quality, management and engineering teams to its suppliers to monitor production processes and at the same time, to make sure that necessary knowledge owned by Xerox was shared with these suppliers. This strategy seems to have a lot of potential, but it has not resulted in big successes for Xerox. The reason so far is that the company’s culture is very protective about sharing knowledge with outsiders. If this protective attitude towards sharing knowledge and information is not resolved, Xerox will not be able to solve the problems of its resourcing strategy. On the other hand, Xerox is worried about the theft of information or its access by competitors. This will always continue to be the paradox of outsourcing.
Outsourcing is a solution for numerous organizational and strategic problems, but it is also a big challenge for organizations. It is true that outsourcing can save organizations a lot of expenditures, efforts and time, but it can also be very costly if it is not planned very carefully. Successful outsourcing also demands the adequate organizational culture, especially in what relates to the sharing of knowledge, information and experience. Once a process is out of the organization, many risks are involved, but then, an organization cannot expect solutions through outsourcing without facing new risks or costs.
Outsourcing is a very strategic decision, and therefore, it is necessary for any organization interested in outsourcing to make its calculations not only in terms of costs and benefits, but also in terms of culture. An organization cannot expect outsourcing to succeed if it does not establish an alliance with its supplier, and this alliance should be based on trust, otherwise it will simply betray the purpose of outsourcing altogether.