Concept of Outsourcing and Risks Associated With Outsourcing

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Concept of Outsourcing and Risks Associated With Outsourcing

Outsourcing arises when a company or organization purchases services or products from an outside supplier or a vendor, rather than performing the same tasks or work within its own facilities. The main reason why companies engage in outsourcing is to reduce capital expenditure over a business process and to allow the managerial team to have more time to concentrate on the core business of the company.

There is reduced dependency on internal resources and increased flexibility to meet the ever changing business conditions. Examples of outsourcing are; Customer service, payroll, products transportation, administration training, computer programming, Accounting, data entry and components manufacturing.

There exist many draw backs and risks associated with outsourcing, which when overlooked have long term negative effects on a company or organization that is outsourcing and the economy of a country especially when the third party providing services and production is an offshore company. These drawbacks which no company can dare to overlook are:

Loss of jobs
Loss of managerial control
High hidden cost
Security and confidentiality threats
Lack of flexibility
Quality problems
Decline in Customer focus
Communication problems
Slow response time
Over dependencies
Stifled innovation

Through outsourcing, service provision and production that could be done within the organization or countries are transferred to offshore destinations outside the organization or country. This leads to unemployment and massive lay offs of employee in both low end and high end jobs.

In most cases, the companies, Economies of country and individual need clash as a result of unemployment. The employees in the organization that is outsourcing may feel that their job security is threatened leading to declined production as they fail to work properly fearing that their job may soon be taken over by offshore companies.

With outsourcing, it is harder to manage those services and products that are being outsourced compared to internal service provision where employees and process are monitored constantly. Besides every company or organization has its own styles and standards, therefore the company outsourcing can not expect that the company from whom they are outsourcing to work according to the company method and style of production.

The notions that outsourcing reduces capital expenses make many companies fail to take care of many hidden costs. These include the cost of putting up a written contract between the organization and the party from whom the services are being outsourced and the time taken to come up with such contracts. In most cases, these hidden costs are not easily predicted and as such the overall outsourcing cost can be very high.

It is risky and a threat to an organization security when crucial and confidential information are being outsourced. This includes business process like payrolls, salary information, medical transcriptions etc. The recent past have seen incidents where vital customer data have been misused or leaked to the public. In such cases, the company or organization will have to be very careful when choosing the external party to handle such business process.

When production and service provision are being sourced from external parties, it becomes very hard to react swiftly to changing conditions in business and markets, besides the external and internal customer focus decline at a high rate through outsourcing leading to loss of business.

Outsourcing requires constant communication between the organization and the vendor who is providing the services. These communications will include telephone conversation and email communication. Besides the high communication cost, there is time zone problems especially when services are outsourced from an offshore destinations with a difference of seven to ten hours.

Its become extremely hard to communicate effectively as the time difference means that the employee of the vending company are leaving office when the employee of the company outsourcing are starting their work in the morning. In such cases, both parties will have to make special arrangement for online meetings and telephone conversation to avoid inconveniencing each other.

Sometime cultural and language problems bring about a lot of mix up especially during the communication process. A good example is where some English language fundamentals are understood differently by the parties concerned.

A client communication might be perceived differently by the service vendor from what the management perceives. Other mix-up arises when foreign accents are not well understood. These mix-ups may lead to dissatisfaction of the clients leading of loss of business.

Some service vendors take up projects which they have little expertise and experience in. In such cases, they may tend to sub contract, in which case the outcome may be different from the organization expectation.

There is a tendency by services vendor to serve many organization leading to accumulation of projects and orders. The service vendor may not realize that his strength does not allow them to take projects and order beyond a certain limit, until the deadline start closing in on them. In such cases, the vendor will be motivated to meet the deadline rather than the quality.

Outsourcing brings about dependencies from a third party. Increased dependencies usually leads to increased market expenses as the company from whom the services are being sourced will take advantage of these over-dependencies by demanding more money to provide the same service.

Most service vendors are not flexible to changes and in many cases are not willing to apply new innovative idea in their operations and training. This may lead to poor quality service especially where modern technologies need to be used.

Where Information Technology services like the Server system controls are outsourced, the resolution time incase of a technical hitch may take long.

This is because the organization does not have access and direct control to the server. Further complication arise when the server is upgraded making the organization stuck until that time when the service provider rectify the problems, this may lead to loss of business.

Outsourcing leads to a considerable drop in a country labor rate, this leads to protest by trade unions, and in many countries the government is forced to pay allowances to the unemployed citizens. All this creates society unrest and in some cases, leads to economy recession.

In some cases, the service and products vendor may upgrade business process by using new technologies and innovations, but due to the fact that the contract that the organization had with the outsourcing company had no provisions to provide products and services using the new technology, the organization will likely continue getting uncompetitive products and services until that time when they sign a new contract or cancel the current contract, in which cases, both options will cost the company that is outsourcing a lot of money.

Where the contracted third party product and service vendor goes into bankruptcy or lack production funds or labors, the company outsourcing will likely get into a lot f trouble as this will mean that the products and services are not being provided.

All these disadvantages give good reasons why companies should not rush to outsource simply because they want to beat the competition and save cost. In most cases the capital expenditure is high when the business is outsourcing than when the company is handling the business process.

The services and products outsourced may not be superior enough to compete in the current markets. This leads to loss of income as customers become dissatisfied. Besides, the interest of the employees, the community and the customer should be taken into consideration before a company makes any step towards outsourcing.

Reference:

Beth M. Schnaper Osmond, and Thomas A. (2000) Tips, Traps, and Travails: How to Hire the Right Outsourcing Vendor for Your Organization. Penguin Publishers, New York

Scully, Ethel (2005) Many Factors to Weigh in Decision to Outsource. National Underwriter Journal, summer 2005 Edition

Springsteel, Ian (2004) Outsourcing Is Everywhere. CFO: The Magazine for Senior Financial Executives. December issue

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