Outsourcing

Outsourcing is a practice used by different companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally. Small companies don’t have the resources to specialize like that and every now and then, something pops up that requires special attention. When that time comes, you could either hire a new employee or outsource the position to another company. Many times it’s obvious when an internal hire is a way to go, but how do you know when it’s the right time to outsource?

1. The skill required is so specialized that it’s impractical to have a regular employee do it.

2. The task is a need that’s only temporary or that recurs in cycles.

3. The job ends up wasting valuable time and energy.

4. The activity isn’t one that employees enjoy doing.

5. The cost of hiring a new employee is greater than it would cost to outsource.

Types of outsourcing

a. Staff augmentation

b. Project outsourcing

c. Managed services

d. Out-tasking

e. Build-operate-transfer

a. Staff augmentation

This is where are specific outsourced workers with specific skills integrate with your own workforce. this can really help workers learn new skills on the job, help you stay in control, and all with minimal outlay

b. Project outsourcing

This outsourcing model usually refers to shorter-term, project-based outsourcing. If a company has a short-term need for services or skills they do not have (e.g for a certain project), they can outsource it

c. Managed services

In this case, one particular section of a business (a “service”) is outsourced to a company, usually on a longer-term basis.They act as managers of this section and consult on other possible outsourcing areas.

d. Out-tasking

This is a more specialized form of outsourcing, whereby certain skills or set of employees are utilized to fill gaps identified within a company.

e. Build-operate-transfer

The Bot model is where partners are contracted to set up franchises or subsidiaries of the company, usually overseas. This means the partner faces all the problems and risks in setting it up, whilst the company reaps most of the rewards

Pro’s

1. Flexible costs 

One of the greatest benefits of outsourcing is that it's scalable, and can be ramped up and down as required, making the costs extremely flexible. In uncertain modern economies, this is very useful

2. Timescale

Since outsourcing uses a company that specializes in a certain area, the timescale on setting something up is far quicker than training and doing it in-house

3. Business focus

Having a specialist company come into your business and run a department allows other employees and management to focus on the core business activities 

4. Reduced risk

Outsourcing companies take a large share of the risk when taking on a contract, thereby reducing the risk to the business. this, in turn, can lead to a more relaxed and productive workplace.

5. Level playing field

Hiring outsource companies levels the paying field b/w small and large business. That may even use the same company!

Con’s

Work not done on site

With some outsourcing operations, work is done off-site. in this case, you have less control over what is done, and making changes or analyzing problems may take longer and be more difficult 

Risk of exposing confidential material

When outside workers are brought into a company, there is always the risk that sensitive business material could be at risk

Lack of focus

It is unlikely, but if the company you’re dealing with has many other customers it may not be as focused on your tasks and goals because it’s juggling other priorities 

Hidden cost

Again, its unlikely, but there is a small chance that hidden cost could make an outsource operation nearly as expensive as doing it in-house, but this usually only applies in complicated situations across international boundaries.

Loss of Managerial Control. 

When you sign a contract to have another company perform the function of an entire department, or even a single task, you are handing the management and control of that function over to another company. While you'll have a contract, the managerial control will belong to another company. You can't assume that your outsourcing company will be driven by the same standards and mission that drives your company. Not to mention, the passion. The out-scouring company will be driven to make a profit from the services that they are providing to you and other businesses like yours.

Hidden Costs.

You need to be aware of all the costs involved in outsourcing. While you will sign a contract with the outsourcing company that will cover the details of the service that they will be providing, anything not covered in the contract will constitute additional charges on your behalf.

A threat to Security and Confidentiality. 

The main aspect of any business is the information that keeps it running. If you have payroll, medical records or any other confidential information that will be transmitted to the outsourcing company, there is a risk that confidentiality may be compromised. If the outsourced function involves sharing proprietary company data or knowledge (e.g. product drawings, formulas, etc.), this must be taken into account. Be sure to evaluate the outsourcing company carefully to make sure your data is protected and the contract has a penalty clause if an incident occurs.

Quality Problems.

The outsourcing company is purely motivated by profit. Because the contract will fix the price, the only way for them to increase profit will be to decrease expenses. As long as they meet the conditions of the contract, you will be responsible for covering new, unexpected expenses. In addition, you will lose the ability to rapidly respond to changes in the business environment. The contract will be very specific and you will pay extra for changes.

Tied to the Financial Well-Being of Another Company.

Because you will be turning over part of the operations of your business to another company, you will now be tied to the financial well-being of that company. There is always the risk that the outsourcing company goes bankrupt and will leave you holding-the-bag.