Advantages and Risks of Outsourcing

Outsourcing is the transfer of services of a company to a third party. There are certain advantages and risks associated with outsourcing, which will be covered in this article.
BusinessZeal Staff
Business outsourcing has become very common in recent times (since the 1980s). By outsourcing, we mean the transfer of daily business execution and/or management, either partly or completely, to an external service provider. Over here, the organization is referred to as the 'client' and the service provider as the 'supplier'. Both parties sign a contractual agreement, which enlist the services that are to be transferred by the client company. Outsourcing management is required to maintain a healthy relationship between the client and the supplier companies.

In general, outsourcing is implemented to lower the financial cost of the company. Some of the business domains that are normally engaged in outsourcing include accounting, information technology, and human resources. Some companies do transfer their services like customer care (call centers), telemarketing, market research, and data entry. Though, there are many advantages of business outsourcing, there are also certain associated risks. Let's discuss in brief about the advantages and risks of outsourcing.

Advantages

Among the many benefits of outsourcing, the primary advantage is saving money. The client can achieve maximum productivity with minimum cost. Other boons of outsourcing are:
  • Outsourcing is a way of risk sharing. By outsourcing your business enterprise to a third party, you are minimizing the risk. This works in the same principle as that of diversifying investments in various plans.
  • By outsourcing some of the services, the existing experienced employees can concentrate on critical issues and/or core business activities of the company. In other words, it helps in problem solving and the overall growth and development of the company.
  • In business outsourcing, skilled employees are hired at low rates, which, in turn, makes it possible to hire employees in large numbers, thus, increasing the productivity of the company.
In addition, the quality and speed of the outsourced activities are increased. The client companies can save on taxes by hiring the right outsourcing companies. The client can continue their business operations without worrying about updating technology, which is a costly affair.

Risks

After the contractual agreement is signed, it is the responsibility of the supplier to look after the day-to-day business operations. With business outsourcing, the client company has less control over the services that have been outsourced, and also the people who are rendering these services (to some extent). Following are some of the outsourcing risks:
  • There are chances of fraud by the third party. For example, there may be risk of data leakage, especially in IT companies.
  • One of the major risks is the failure of delivering products on time. The third party may fail to deliver the products before the deadline, incurring substantial losses to the client company.
  • Many times, the cost of transferring knowledge is very expensive. It is also observed that the productivity of the outsourced services is less in the first year of the agreement.
Some new companies opt for outsourcing in order to speed up the establishment process. For example, initially, the company may not have enough manpower to handle the services or may be the company does not have sufficient money to invest in advanced software for the company to perform effectively. In such a situation, outsourcing comes to the rescue. Outsourcing is also the best option, in case a company decides to expand and establish outside the residential country. Nowadays, there are even professionals who can assist in determining whether a company requires outsourcing or not.