Outsourcing – Meaning, Classification, Advantages and Disadvantages of Outsourcing

In the simplest terms outsourcing can be described as farming out of different services to third parties. For example, in case of information technology, outsourcing includes any task such as outsourcing all kinds of management of IT to HP or IBM, or even outsourcing a very easy and small task, such as data storage, data editing, disaster recovery or, and any task in between. No precise definition of outsourcing can be found. The term is often used in an inconsistent way.

Outsourcing is often involved contracting out of business activities to an external provider. Outsourcing is any job, task, process or operation, which could be done by the internal employees of an organisation, but instead of doing so; such companies contract a third party to perform the task. In addition, the tasks which are done by the third party may be done off-site or on-site. In recent years one of the major changes has occurred from the growth of individuals outsourcing as a way to develop a feasible service providing business that can be operated virtually from anywhere in the world using internet and online technologies. Some common areas of this business are marketing services, website creating, analysis and etc. All elements can be performed remotely and delivered through internet.

Classification of Outsourcing:

The following are the important classifications of outsourcing:

1. Print and Mail Outsourcing: Print and mail outsourcing is the contracting of back office services for the execution of printing and mailing services directly from a desktop or web interface.

2. Marketing Outsourcing: Using remote assistance to increase lead generation and conversion.

3. Knowledge Process Outsourcing: The provision of business intelligence based on real-time data analysis of a niche by professionals and experienced players.

4. Business Process Outsourcing: It means the use of another organisation to manage non-core competencies such as customer support.

Advantages of Outsourcing

With the benefits of outsourcing a company will be able to see big increase in its profits, productivity and level of quality, business value, business performance and much more. Some of the advantages of outsourcing are listed below;

1. Reduction and Control of Cost: Outsourcing helps companies reduce their cost on resource management labour, space, etc. According to Accenture, outsourcing leads to a cost saving of 25% to 30% while outsource partners international estimate the cost savings to reach 50%. Getting an access to high-quality services at cost-effective price is the biggest benefit that you can get while outsourcing.

2. Time to Market: It offers round the clock work benefits and therefore reduces the time to market, that is, if the outsourcer has skills and expertise. It enables faster start-up, development and scalability for new operations. It gives the company a competitive edge, the company gets access to specialized services for different business processes and so provides their customers with best of breed services.

3. Increasing Efficiency: The company’s non-core business functions will be performed efficiently by the outsourcer, while the core business functions will be performed by the workers in the company. With the help of an expertise, along with the specialized processes and technology, it ensures better quality of output for the customer. This increases company focus.

4. Flexibility: It provides feasibility for instance, the most well planned project may suddenly end up behind schedule or under a time crunch due to minor errors, changes in plans or other incidental activities. Outsourcing thus provides opportunity for operations that have seasonal or cyclical demands to bring in additional resources whenever the company needs them and releases them when they are done with it.

5. Access to Diverse Technology: Outsourcers have focus on particular services and play in volume and this enables them to keep to date with the technology required in these services and this helps them avoid technology obsolescence and leverage the access to diverse and advanced technologies.

6. Focus on Core Competencies: This enables the workers in the company to divert attention from supplementary tasks and focus on their core business functions.

7. Making Faster Deliveries to Customer: The outsourcer to the company will be able to provide faster deliverables and the company in turn will be able to make quick deliveries to the customers. This in turn can also save time.

Disadvantages of Outsourcing

Despite the benefits a company gains from outsourcing, there are definitely drawbacks that the company has to be aware of in order to make a good evaluation.

1. Managerial/Control Problem: Since an outsourcer is working for the company, it is more difficult to manage the services that the outsider provides than managing the services of the employees in the company.

2. Threat to Security and Confidentiality: There is every tendency that the confidentiality of the company may be compromised. All companies have a secret or information that is bent of keeping them running. If the job to be outsourced involves sharing of confidential information, then security must be taken into consideration, therefore every outsourcing should be accessed by the company to ensure that the confidential data of the company are protected.

3. Loss of Flexibility: If there is change in business conditions, it might lead to a loss in flexibility.

4. Failure to Deliver: If a certain quantity of deliverables is trusted to an outsourcer to deliver and the outsourcer fails to deliver it, the company is likely to suffer the consequences despite the agreements it might have had with the outsourcer.

5. Loss of Jobs: If a job is outsourced to a foreign country, it saves a lot of wages but yet it has reduced the local workforce of the country in which the company is located.

6. Company Value: The company may not be building its value in terms of personnel, in-house knowledge and infrastructure thereby causing the value of an outsourcing agreement to be less effective than an internal department.

7. Undesirable Results: There is every possibility that the finished results might not meet the quality standards and this leads to wasting of time and materials. Take for instance when the finished job does not meet the required results or outcome of the company, the company will want to outsource it again to get a perfect result for the job and therefore the company will be automatically paying twice for the job.

8. Negative Reputation: Most people see outsourcing as a bad option for a company because it eliminates domestic jobs. Outsourcing has brought about bad publicity and ill will.