Posted January 6, 2014 by Antonio Ferraro in 5s For Business
 
 

Do Companies Save Money by Outsourcing?


Outsourcing is when a company chooses to contract work out to a third-party. This work is often completed in other countries, where wages tend to be much cheaper. Outsourcing often involves off-shoring a business function to another company.

Years ago, outsourcing was only utilized by big companies, such as the Fortune 500 companies. Nowadays, however, many companies are outsourcing work in order to save money. There are many ways a company can benefit from outsourcing, but there are also some disadvantages to outsourcing as well.

What are the Advantages of Outsourcing?

Advantages of OutsourcingThe main advantage of outsourcing is that a lot of money can be saved. Outsourcing enables companies to get work done, yet only at a fraction of the price. In almost all cases, businesses can also avoid costs like vacation pay and health insurance by outsourcing. Based on research, a business can expect to save around 50 to 60 in operational costs per employee outsourced.

Outsourcing is a great source of skilled expertise at a reasonable price. Often times, the quality of the outsourced work is equal to, or even better than, the quality of work that a company would get at home. Also, the price of outsourced work is almost always cheaper.

A great way to improve customer service is by providing it to customers 24/7. Unfortunately, this can be difficult and very expensive to accomplish if you don’t outsource. When you outsource, you get people working for you from different time zones, which makes 24/7 customer service much easier to achieve.

Liability and risk is a big and potentially expensive issue for companies. However, if a business chooses to outsource, they basically give away all the risk and liability that is associated with a particular task. For example, if you choose to outsource payroll management, your business has the freedom to focus on other, more productive tasks. Outsourcing will lower the cost of your liability insurance and you will lower the risk of your business getting sued.

Outsourcing can improve the productivity and efficiency of your business. There are many tasks involved with business that are necessary, yet don’t result in any growth in profit or in sales. Generally, these back-office and administrative tasks are simply redundant and repetitive. These tasks should be outsourced, so your business can have the time and energy to focus on what’s really important when it comes to increasing sales and profit. Outsourcing does cost money, but the profits will far outweigh the costs of outsourcing.

When it comes to outsourcing, time zone difference can definitely be a hassle. However, if you manage outsourcing correctly and play your cards right, the time zone difference can actually become a benefit for your company. Even when your business is closed, there will always be work getting done, which will increase the productivity and efficiency of your business. Of course, this will lead to increased revenue and profit.

Sometimes, businesses spend so much time and effort trying to efficiently manage a staff that they don’t put much effort into managing their customers. Many times, businesses forget to manage their customers at all. If you outsource, a company will have the resources to provide their customers with hands on attention. The company will also have the resources to research and improve the customer experience.

What are the Disadvantages of OutSourcing

Disadvantages-of-outsourcingAs you consider outsourcing, remember that there are also disadvantages associated with outsourcing, even though it has many, many potential advantages. Consider both disadvantages and advantages of outsourcing before making a final decision.

Every time you outsource, you lose managerial control. It doesn’t matter whether you choose to outsource a single task, or the work of a whole department. When you outsource, you give all control and management over to a third-party company, which may not have your best interests in mind. No matter what you do, the third-party company will not be driven by the same mission or standards as your business. Their primary goal will be to make as much money off of your business as they possibly can.

Unfortunately, outsourcing can also come with many hidden costs that won’t be evident until the bill comes along. In general, when you outsource, you sign a contract that details exactly what services they will providing you with. Any services that you receive that were not included in the contract are likely to induce extra costs. Also, you will also have to pay legal fees to have a lawyer to review the contract between you and the third-party company. Since the third-party company wrote the contract, they will be at an advantage when it comes to negotiations.

If you deal with confidential information, such as medical information and payroll, outsourcing may be a threat to security and confidentiality. When you outsource, always consider that there is always a risk that confidentiality may be compromised. Also, be careful if the outsourced function requires you to share company data or knowledge, such as product drawings. Do your research and protect your data by including a penalty in the contract if sensitive information is compromised.

Quality may become an issue when it comes to outsourcing companies. These companies are motivated for profit, so quality may suffer. The price of outsourced work is fixed due to the contract, so the only way for an outsourcing company to increase profit is by decreasing expenses. You are obligated to pay as long as the third-party company fulfills the conditions of the contract. Unfortunately, it is difficult to monitor outsourced work, and any changes you request will simply result in extra costs.

When you outsource work to a third-party company, the financial well-being of your business becomes connected to the financial well-being of the third-party company. If the outsourcing company goes bankrupt, then you may end up being out of a whole lot of money.

Unfortunately, outsourcing can also bring ill-will and bad publicity to your company. While you may greatly appreciate outsourcing as a business owner, other people won’t. If an outsourcing company is providing jobs for people within your community, then your company will gain good publicity. However, most of the time, outsourcing provides jobs for people in foreign countries. If people within your community are losing jobs because those jobs are being shipped elsewhere, your company may end up getting bad publicity.

Chances are, if you choose to outsource work, you will end up firing at least a part of your workforce. While your company will definitely benefit economically, those you fired will definitely not benefit. The morale of your remaining workforce will suffer, and some of your workforce may even become resentful. This is especially true if the workers fired performed well and were good workers. A resentful workforce with a lowered morale will definitely hurt productivity and efficiency in your company.

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Final Thoughts

Depending on what your goals are and the nature of your company, outsourcing can be an excellent decision, or it can do far more bad than good for your company. Outsourcing has many advantages, such as lower-costs for possibly similar or superior quality, as well as disadvantages, such as a somewhat bad reputation. As long as you consider both the pros and cons of outsourcing, there’s a good chance your business will benefit from it.

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Antonio Ferraro

 
On behalf of Creative Safety Supply based in Portland, OR, I strive to provide helpful information to create safer and more efficient industrial work environments. My knowledge base focuses primarily on practices such as 5S, Six Sigma, Kaizen, and the Lean mindset. I believe in being proactive and that for positive change to happen, we must be willing to be transparent and actively seek out areas in need of improvement. An organized, safe, and well-planned work space leads to increased productivity, quality products and happier workplace. Connect with Antonio on Google+