Outsourcing: opportunities and challenges

In recent years, outsourcing has gained traction. Most business entities, including SMEs, are either thinking of or are already in the process of outsourcing business operations.

What do we really mean by outsourcing?

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Outsourcing is a strategic decision by an enterprise to reduce costs and increase efficiency by contracting another individual or company to perform tasks, provide services, or handle operations that were previously done by employees within the enterprise.

The changing and challenging face of businesses and the need to stay ahead in the competition have forced companies to look for ways to reduce costs. As a result, outsourcing has become the solution for both the private and public sectors.

Entrepreneurs, who have availed outsourcing services, say it cuts costs and gives them flexibility. The main reason companies outsource is to reduce costs, especially non-core or peripheral business expenses, production costs, labour costs, and high government regulations or mandates.

Other high costs are also included like elevated rates of tax and greater energy costs. They also say it improves service quality and speed because it allows them to use specialist suppliers. By transferring non-core activities to an outside provider, enterprises say they can focus on their core business.

American tech giant Apple's core business, for example, is to design computers so that it has an edge over competitors. It outsources the manufacturing of its iPhones and iPods. The company says that it reduces costs considerably.

For a company to effectively outsource responsibilities, it is important to focus on the business partnership as much as logistics. Outsourcing is mostly managing relationships more than service-level agreements. It is a partnership, not a purchasing project. Preserving and securing a trusted bonding is essential in outsourcing efforts.

Cross-border outsourcing activity is one of the most popular trends in business today because of the benefits it offers. Companies pay less for goods and services, creating more wealth for shareholders and causing prices to go down or remain the same for consumers, raising the standard of living for the whole country.

For the country receiving the work, there is higher employment, more scope for skilled employees, higher revenues for the government in the form of payroll taxes, and a higher standard of living overall. It makes a win-win position for both the giver and the taker.

Although there are several progressive reasons to outsource, there are also some serious limitations to the practice.

At the time of outsourcing, the threat of losing sensitive data and confidentiality to external parties is high. There is obviously less grip on management control and there is the inability to control operations of activities or processes that are outsourced.

Outsourcing companies may impose hidden or unanticipated costs by creating lengthy contractual agreements with lots of troublesome and unforeseen disputes. There might be a lack of quality control as outsourcing companies are often profit-driven and time-bound rather than focused on customer satisfaction.

If we consider outsourcing some of our activities to a third-party supplier, it is important that we evaluate and estimate all the benefits and drawbacks. Outsourcing is extremely beneficial in most cases. However, if we do not choose the right service provider and know the pros and cons, we might end up having serious complications.

The author is a banker.