The Pros and Cons of Outsourcing

Many companies consider outsourcing as a cost cutting measure, particularly when facing a period of economic slowdown or recession. Although, outsourcing can be a valuable tool in some cases there are arguments both for and against outsourcing. Analyzing the pros and cons of outsourcing include considering financial costs, labor relations, customer opinion, quality control, and data security.

The pros of outsourcing frequently include a substantial cost savings, either from outsourcing part of your operations to another company or moving production overseas to take advantage of lower costs. Outsourcing a part of your operations can give you access to technology and expert professional services you would not otherwise have. It can allow you to concentrate your efforts, energy, and resources on your core business, and leave non-core business aspects to specialists who can do the work more efficiently. Outsourcing frequently allows you to save money on capital expenditures, technology and software upgrades, and infrastructure. Outsourcing part of your operations shifts those burdens to your outsourcing partner and allows you more cash flow for expansion and growth.

Shifting manufacturing overseas likewise can save money though cheaper labor costs and significant savings in training and benefits costs. Outsourcing production or manufacturing can give your business a competitive edge and increase profit margins. Management costs and operations costs are significantly lessened as executive costs, employee taxes, and infrastructure costs are shifted to an economy where everything from land to building materials to construction to the price of energy are much cheaper. In addition, the lack of labor laws and minimum wage laws, frequently allows outsourced operations to work outside the forty hour, five day work week with substantially lower wages for employees at all levels. Outsourcing overseas also promotes trade and fosters industry growth.

The cons of outsourcing can include poor labor relations at home and abroad, customer backlash, and quality control and security issues. Outsourcing can be a delicate balancing act between the jobs that are being outsourced and the employees who retain their jobs. Hostility on the part of retained workers and uncertainty about their job future can affect job performance. A company that outsources a significant portion of operations may face a decline in productivity and efficiency, as retained employees fear they may be the next ones to lose their job. In addition, outsourcing can lead to the hiring of under qualified and poorly trained employees which can affect the quality of products and services. Quality and service issues that are not quickly and effectively resolved by a company can lead to a loss of customer confidence and plummeting sales and profits.

For companies that outsource operations such as payroll processing, sales and accounting operations, or tax preparation there is always a danger of data theft or loss. Data security problems can again lead to a loss of customer confidence and a corresponding decline in profits and sales. In addition, outsourcing firms are sometimes contracted to several firms and their services may go to the highest bidder or their focus may be on their biggest client. Smaller companies may be the first casualties if there is a problem, leaving them scrambling to find an alternative for their outsourcing needs. Outsourcing also entails a certain amount of loss of control over operations and production. Poor management, political upheaval, or natural disaster can quickly prove disastrous to some outsourced operations.

The savings in technology, infrastructure, and labor provided by outsourcing a portion of operations or moving production overseas, can considerably benefit a company. However, outsourcing can lead to problems with retained employees and customers, and can lead to a loss of control. The quality of production and the security of sensitive information may suffer with outsourcing. Although, outsourcing can provide a substantial cost savings in economic terms, a careful analysis of all the pros and cons of outsourcing is necessary to determine whether outsourcing will truly benefit a company.


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