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11:45 pm - Thursday September 29, 2016

Outsourcing: Why Outsource? Potential Benefits and Risks

| Economics, Management | Rating: 4.5
by Numan

Outsourcing has quickly become a commonly used tool in organizations. What has made outsourcing so popular? The popularity of outsourcing is well justified as it generates significant advantages. However, outsourcing has some inherent risks which should be identified and dealt with preemptively.

Why Outsource then? Organizations make use of outsourcing when a certain function has a potential to become more economic with little strategic cost to the organization. Outsourcing is usually used if one of the following applies to the specific function required:

1. Special skills are required and it is unwise to invest in their development within the organization – It is wise to outsource if it is not economically sound to invest in developing a set of skills. Another consideration should be the quality of skills developed in comparison to those available outside the organization.

2. Not a core-competence of the organization – If a specific function required to an organization is not a part of its core competencies or core strategy there is little sense in performing that function within the organization. Organizations carefully select focal points in adherence to their competitive advantage.

3. Need for constant technological improvement and upkeep – Technology requires high investments in maintenance, updates and r&d. If a technology is a means and not an end outsourcing should be considered as a specializing company will be more effective.

4. Specialization produces greater effectiveness and advantages to scale – Some functions have significant scale advantages. Outsourcing these functions will often result in better outputs with lower costs.

5. Improving organizational effectiveness by utilizing a third party – Sometimes outsourcing enables using the advantages of the third party company to the organization’s advantage (for example in negotiations, networks etc.)

6. Lowering organizational complexity for increased ‘managementability’– Outsourcing certain function may simplify the organization and enable management to focus on core-competencies and core-functions with greater clarity.

Outsourcing might have many potential benefits. However organizations should also be wary of potential risks. The following is a list of the common risks of outsourcing:

1. Information leaks – Obviously when a function is outsourced interface with another organization are set up. These may be a source for information leaks which might damage the organization’s ability to compete.

2. Losing the ability to re-establish outsourced functions – By outsourcing a function given up on. This results in losing professional know-how and infrastructure in case the organization decides to re-establish the function within itself.

3. Lowered employee loyalty – Obviously outsourced functions are performed by employees with little or no organizational relevance.

4. Inner oppositions to outsourcing – Outsourcing functions results in personnel changes. Naturally organizations should expect employee opposition to outsourcing.

5. Unclear borders for cooperation – Co operating with another organization is not a clear cut undertaking. There is a risk of creating unclear borders between the organizations.

6. Problems with quality, consistency and oversight – Outsourcing requires setting up an oversight function within the organization as there is a requirement for quality and consistency. Keeping an eye on outsourced functions is crucial to ensure the quality of product or service outsourced.

In today’s global and dynamic environment speed and effectiveness is important. Advantages to scale and learning curves force organizations to outsource functions and abilities which are not at the core of their business. Outsourcing holds many benefits but many risks as well.

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