Pros and Cons of Outsourcing

Is outsourcing right for your company?

Companies often consider outsourcing in an attempt to reduce operating costs or to streamline efficiency. Outsourcing involves enlisting services and products from outside the company, sometimes from abroad. Outsourcing can be much more extensive in larger corporations. On a smaller scale, a family-owned grocery store might outsource bookkeeping responsibilities to an independent accountant. 

As you consider your outsourcing needs and choices, keep in mind that advantages and disadvantages both accompany this approach to addressing your business needs. 

Loss of Managerial Control or Increased Efficiency

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Outsourcing can involve signing a contract to have another company perform the function of an entire department or just a single task. In either case, it means handing over the reins of management and control of that function over to another company. Managerial control will nonetheless belong to another individual or business entity.

You can't assume that your outsourcing company will be driven by the same standards and mission that drive your company, and it probably will not share your passion. The outsourcing company will be primarily driven to make a profit from the services it's providing to you. 

The flip side is that profit is a great motivator, and you can usually trust that the outsourcing company has considerable experience in the service it's offering you. It wants to do the job well because it wants to stay in business. The job might be performed to higher standards than if you kept it in-house, and outsourcing can eliminate the sometimes rocky transition that can take place when training members of your own in-house team.

And when you outsource more mundane tasks, it can free up your employees' time to allow them to deal with more critical key functions of your business. 

Hidden Costs or Lower Costs

Be aware of all the costs involved in outsourcing. Although they should all be cited in the contract you sign with the outsourcing company, covering all the details of the service that it will be providing, anything that's not covered in the contract can constitute additional charges to you.

You'll want to protect yourself by making sure the contract covers just about any cost-incurring eventuality, which means paying legal fees to have a lawyer review and possibly amend it. The outsourcing company will most likely prepare the contract, so you can naturally expect that any gray areas will tend to favor it, not you. You'll also be at a disadvantage when negotiations start if you don't have a full and accurate understanding of the contract's terms. 

By the same token, it can actually cost less to pay an outsourcing company than to employ several individuals to do the same job within your own company. You must deal with the costs of benefits, payroll taxes, and other requirements when you hire your own people. And depending on the nature of the work you're outsourcing, it might save you from having to buy expensive equipment. 

Threats to Security or Contractual Safeguards

The proprietary information that keeps your business running is its lifeblood. Confidentiality could be compromised if you're transmitting payroll, medical records, or any other confidential information to the outsourcing company. If the outsourced function involves sharing proprietary company data or knowledge, such as product drawings or formulas, this must be taken into account as well.

Evaluate the outsourcing company carefully to make sure that your data is protected. Your contract needs to include a penalty clause in the eventuality an incident occurs.

And keep in mind that if you keep the project or job in-house, this does not prevent leaks of information. It's not unheard of for an unhappy former employee to disseminate proprietary or other types of information, although you can require that people with access to certain information sign a nondisclosure or confidentiality agreement. 

You're Partners ... Sort Of

Efficiency is the name of the game with any business. If you outsource to another company in a different time zone, and particularly one in another country, your business could effectively operate 24/7. Business will be taken care of while you sleep because your partner is taking care of certain things during business hours in another part of the world. 

The downside of this form of operation is that you could have communication problems or cultural conflicts with an outsourcing company that's located in a different part of the world. And you'll now be tied to the financial well-being of that company just as you would be with any partner. There's always the risk that the outsourcing company will go bankrupt and leave you holding the bag.

Of course, your outsourcing company is most likely "partnering" with several other businesses as well. Your company might not be the outsourcing company's first priority. 

Weighing Your Options

The word "outsourcing" brings to mind different things to different people and it can be controversial to some extent. If you live in a community that has an outsourcing company and they employ your friends and neighbors, outsourcing can be good. If your friends and neighbors lost their jobs because services were shipped to another state or country, outsourcing would probably result in negative publicity. If you outsource part of your operations, morale may suffer in the remaining workforce. Weigh the pros and cons for your particular enterprise to determine if outsourcing is right for you.