Advantages and Disadvantages of Outsourcing - Assignment Example

Summary In this report we will discuss the term Outsourcing, exercised by a business when an Organization experiences large growth. The topics related to Outsourcing would be discussed as follows: Why Outsourcing? Advantages of Outsourcing Disadvantages of Outsourcing Steps in successful Outsourcing Table of Contents Introduction …………………………………………………………………………….3 Why Outsourcing……………………………………………………………………….4-5 Advantages of Outsourcing……………………………………………………………..5-6 Disadvantages of Outsourcing………………………………………………………….7-8 Steps in successful Outsourcing………………………………………………………...8-9 Conclusion……………………………………………………………………………….10 Appendix-A………………………………………………………………………………11 Work Cited……………………………………………………………………………….12 Introduction First of all you should know what does Outsourcing means. Outsourcing is subcontracting a process, where a company purchases the products or services from an outside supplier or a third company, rather than producing them within the company. The company performs this arrangement to cut down the costs. Let us look at the example; Dell Computers have outsourced the function of troubleshooting call centers to Indian Company. Similarly, IBM manages IT services for Xerox Company. (Rouse) Why Outsourcing Here we will discuss that why a business needs to do Outsourcing. What causes occur which pushes a business to go for this option. First of all Outsourcing decision depends on the company as a whole, when a company wants to lower the costs by associating with the third party to make the better usage of company’s land, labor, capital, technology and its resources, time and energy. The term Outsourcing is becoming more common in the business world, nowadays. Even, there are some companies in which the entire information management is outsourced. The Companies are outsourcing to fully focus on the core process of their business, by consuming time to provide their best services to external agencies. Outsourcing also allows a company to free their most of the internal resources, which can be easily used for other purposes. The research has shown that sometimes the internal resources of a company get short, where outsourcing helps them to avail the required resources within the company. although in several cases the company finds it much difficult to manage particular functions related to the production, therefore companies outsource by delegating the powers to the third party to manage and control the functions performed. The functions performed by the third party could be beneficial for the business. We have come to know that the Companies are also outsourcing to cut down the risk factors involved with their production or services. Outsourcing even helps a company to realize the benefits of re-engineering. Outsourcing also enables the companies to expand more in new market areas, where they can easily fasten their delivery to the end users. The research has proved that however, outsourcing provides much profit to the organizations, they need to endure. (The Top 10 Reasons To Outsource) Advantages of Outsourcing When outsourcing you should know what advantages it can provide to your business. The research has analyzed several advantages. Some of them we will discuss. The research has shown that when a rapid growth period hits a company, the back-office operations of a company expand too, automatically. Therefore this expansion consumes the core activities of a company, both in terms of finance and human. So, the company outsources to overcome this problem. Outsourcing also helps a company to focus on its core activities which are taking place in the back-office. Let get this point clear through an example; if a company lands a large contract, this will automatically increase the volume of purchasing in a short period of time. That causes business problem, dealing with the operations. Therefore to manage this company outsource, which helps out to deal with such a situation. It has also been seen that in a company, there are some complex functions going on in back-office, and the size of a company isn’t enabling to perform those operations within the reasonable source. Such issue again creates a problem for a business to proceed further. To overcome this problem the company outsource, which will provide the benefit to them to gain the advantage of cost and efficiency savings. Let’s clear it with an example; there is a small doctor’s office wanting to accept a variety of insurance plans, but the problem is that a single part time worker can’t keep up with all the providers. Therefore the doctor will choose the Outsourcing option. He will outsource in terms of hiring more workers who would be specialized in managing the medical billing of the office. Let’s look at another situation which provides an advantage of outsourcing. If a company’s overhead costs of back-office are high then also a company outsources. For an example; at time of growth requirement the office space of a company increases too, but the location is expensive and has no space to expand. Again outsourcing would be advantageous for the company to reduce its overhead costs. Advantage of outsourcing has also been seen in a situation like if there is an informational technology department, containing too many projects. But the problem is that a company is undergoing the crisis of lack of labor. Even the budget shoots up more than the organization’s contribution. Again outsourcing option will be beneficial by managing and controlling the poor operations of a company. Usually it’s a fact that during the tax season and auditing periods an accounting department gets shorthanded of the working staff. Outsourcing option again brings an advantage to a business, in managing the function of staff flexibility. Sometimes in a company the HR manager takes medical leave, where suddenly the other two administrative assistants’ leaves too for some new job. In such situation the company outsources its HR function. This will help a company to overcome the risk management and continuity of a business. The research has shown that if suddenly a large project is allotted to a certain company, ten it is obvious that a company would require the skilled and efficient staff. The problem is that the company doesn’t have skilled staff. Outsourcing decision made by the company would help by developing the internal staff, to work with the existing staff of a company. These are some advantages proved by the study that would always bring advantage to a company, if it endures any of the above situations. (bucki) Disadvantaged of Outsourcing The studies has proved that outsourcing does have disadvantages also, which would be harmful for any business. Let’s discuss some of them. First we’ll discuss the loss of managerial control; how does it happen? When a company signs an agreement with another company then it generally hands over the control of its entire department or of a single task. The company actually hands over the managerial controls of that department to a third party. This could be risky and will result into the loss of managerial control. Secondly comes the Hidden Costs; that is when a company assigns a contract to an outsourcing company then they are to perform the only stated services mentioned in the contract. It might be possible that the third company finds the uncovered additional charges out of the contract. This would be a disadvantage to a company in terms of hidden costs. Third we’ll discuss Threat to Security and Confidentiality; usually in any business there is certain information such as; payrolls, medical record etc. which company’s confidential information are. No company wants to leak out its private information to the third party. The companies take the risk of outsourcing. Quality Problems is another disadvantage. The goal of outsourcing agencies is to gain as much profit as they can. The outsourcing companies might gain the high profits by decreasing the expenses. When signing an agreement, the prices are set fixed. This involves the risk of low quality production or services by the outsourcing company. While associating with the outsource company you are handling the part of your operations to the company. Therefore your annual turnover also depends on the well-being of the outsource company. It might be possible that the outsource company would go bankrupt, leaving you with loss & liabilities which would be a disadvantage for a company. Bad Publicity and Ill-Will outsourcing company could also be the disadvantage to a company. For an example; if you are residing in a community where outsourcing has provided jobs to various people. And suddenly the outsource company ships across the country, state etc. This would leave the bad impression on the fired people. If you outsource such a company, your company would also bear the cost of bad publicity, along with the outsource company. (Bucki, Top 6 Outsourcing Disadvantages) Steps in successful Outsourcing The research has proved some steps that help a business to outsource successfully. The effective primary communication tools must be used, to save the cost. For an example; if you are choosing internet media to connect over with the outsource company, then there are chances that your communication would struggle with what was ‘said’, what questions or concerns have been addressed. To save your time and energy you must use the project management software. That is because it will store, ease and simple the company’s communication. When outsourcing a company should never behave dominant & rude to the outsource company. A company should always try to explain the contract simple by using the descriptive words to paint a visual picture of product or services. A company should always treat the third party with generosity to minimize the risk of misunderstandings. A company should never get so intense & tied up in explaining the project. The company should keep its main focus on the ideal outcome of the project. Usage of the graphical explanation of the project’s outcome would be effective, because it will clear the exact look and shape of the project. Graphical explanation is far much effective than the verbal. When a company finishes explaining the project to an outsource company, then it should always confirm that what have they understood. It can be done by asking them to write two paragraphs of project’s summary. A company should never wait for the final product to reach. Instead it should always get update after the completion of the 20 percent of the product, so that they can check what has been done & what’s more to be done. On receiving the 20 percent of the product, it is important for the company to provide feedback to an outsourcing company. If the outsourcing company is doing it in wrong way, a company shouldn’t panic at once. A company should the theory of sandwich. First give a few compliments about the product, then the constructive criticism, and again end with compliments. A company should keep providing the feedback to an outsourcing company often. And after receiving the delivery of the final project, a company should brief the project with what’s done well and what’s not. That is because; it would help an outsourcing company to analyze its mistakes by eliminating the errors in the next project. A company should always appreciate the work done by an outsourcing company. Tough the project didn’t meet the company’s expectations; still the company need to reward an outsourcing company. (MULLINS) Conclusion and recommendations The overall survey shows that Outsourcing occurs when an organization recognizes its production process, and buys instead of producing. The organization’s whole operation is done by another firm, to get the advantage of cost savings. The survey also shows that the Outsourcing services are taking much peak among the industries, today. The service industries have gone from single establishment entities to multi establishment firms, by providing the business services at low cost. All this is happening due to the exploitation of economies of scale. The industries interested in Outsourcing often discusses the offshoring. Offshoring means outsourcing abroad. I would recommend that, Outsourcing is not a bad idea at all if a company wants to gain profits by cutting down its costs. Yes, the outsourcing decision is a very complicated decision, and it shouldn’t always be taken lightly. A company should fully analyze its needs to outsource along with the risk factors involved in it. It’s not always mandatory that outsourcing would go in favor of a company; there are equal chances that it can throw a company into much deeper financial crisis even bankruptcy. It’s not necessary that the output of outsourcing would always be up to the mark. Outsourcing is a short term idea; it can weaken the company’s potential for long term success. Before outsourcing an organization should have the sufficient management skills and also the ability to adopt and welcome the new processes and behaviors in their business processes. Sufficient knowledge must be considered before making the outsource strategies, so that the valuable institutional knowledge within the organization doesn’t get lost. Decision of Outsourcing should be made on mature level, and only in the critical crisis. Appendix: A Here is a graphical explanation of Outsourcing within a Business Works Cited Bucki, James. Top 6 Outsourcing Disadvantages. n.d. 19 March 2014 . bucki, James. Top 7 Outsourcing Advantages. n.d. 19 March 2014 . MULLINS, WAYNE. 10 Steps To Successful Outsourcing. 07 October 2011. 19 March 2014 . Rouse, Margaret. outsourcing. June 2007. 19 March 2014 . The Top 10 Reasons To Outsource. n.d. 19 March 2014 . Read More