Q. Explain merits and demerits of outsourcing?
Meaning
The term Outsourcing means ‘to contract out one of more business activities to an external
agency’. The term emerged long back in 1960s where it was just a small scale data process and
now has grown to different levels of BPOs and KPOs. US was struck with economic immobility
leading to very high inflation rates and then companies started outsourcing their service jobs to
locations where they could get cheaper labour, in order to regain their profits.
Outsourcing is one of the cost-saving strategies for the companies by which they do not produce
something that is non-core for them. Hence they focus only on core-activities where they have
comparative advantage. Companies having strengths in other areas may contract out data
processing, legal, manufacturing, marketing, payroll accounting, or other aspects of their
businesses to concentrate on what they do best and thus reduce average units cost. Outsourcing is
often an important part of downsizing or reengineering.
Definition
A practice used by different companies to reduce costs by transferring portions of work to
outside suppliers rather than completing it internally.
Contraction or subcontracting of non-core activities to free up cash, personnel, time and
facilities for activities in which company holds competitive advantage.
Procuring from external suppliers’ service or products that are normally part of an
organization.
Advantages of Outsourcing
Cost
Some other advantage Increased
benifits are efficiency
Focus on
Risk-sharing Advantages core areas
of
Outsourcing
Save on
Develop infrastructure
Internal and
Staff technology
Access to
Time zone
skilled
advantage
resources
The main motive behind outsourcing is to allow a company to invest more time, money and
human resources in core active items without losing quality and name. Thus, cost advantage
followed by increased ability to focus on core competencies is the major driving factor. Some of
the advantages for a firm include:
1) Cost advantage: The most obvious and visible benefit relates to the cost savings that
outsourcing brings about. Companies can get the job done at a lower cost and at better
quality as well. Due to the difference in wages between western countries and Asia, the
same kind of work that is done over there can be done in India at a fraction of the cost.
Plus, the quality of the services provided is high thereby ensuring that low-cost does not
mean low-quality.
2) Increased efficiency: When the companies outsource their business needs to an
outsourcing partner, they bring year of experience in business practices and expertise in
delivering complex outsourcing projects. Thus, they can do the job better with their
knowledge and understanding of the domain. This leads to an increase in productivity
and efficiency in the process thereby contributing to the bottom-line (profits) of the
company.
3) Focus on core areas: Outsourcing the supporting processes gives the organization
more time to strengthen their core business process. Outsourcing the business processes
would enable the companies to focus on building their brand, invest in research and
development and move on to providing higher value added services.
4) Save on infrastructure and technology: Outsourcing eliminates the need for
investment in infrastructure as the outsourcing partner takes the responsibility of the
business processes and hence develops infrastructure for the same.
5) Access to skilled resources: Companies are no longer required to invest in
recruiting and training expensive resources for their business. The resources employed
by the outsourced companies are well educated in the respective business areas and are
experienced in handling the business needs of companies that want to outsource.
6) Time zone advantage: Apart from the cost advantage, the other very important
benefit us the time zone differential between the country of the outsourcing company
and the location they are outsourcing to. The companies can get their job done while
they are closed for the day and the wake up with their being delivered the next morning.
This unique advantage gives the company the benefit of round-the-clock business
operations.
7) Develop Internal Staff: A large project needs to be undertaken that requires skills
that the company staff does not possess. On-site outsourcing of the project will bring
people with the skills the company need. Internal employees can work alongside of them
to acquire the new skill set.
8) Risk-sharing; outsourcing: Outsourcing certain components of the business
process helps the organization to shift certain responsibilities to the outsourced vendor.
Since the outsourced vendor is a specialist, they plan the risk mitigating factors in a
better way.
9) Some other benefits are:
Improved efficiency
Improved operational performance
Productivity improvements Improved accountability
Shorter project delivery times
Enhanced employment opportunities
Access to newer markets (in case of off shoring)
Disadvantages of Outsourcing
Risk of
exposing
confidential
data
Lack
