The Advantages And Disadvantages Of Insource And Outsource - Essay Example

The Advantages And Disadvantages Of Insource And Outsource The debate on which is better, to insource or to outsource has generated so much debate over the past decade. There are a lot of good and bad reasons that can be raised with regards to both but at the end of the day what one needs to realize is that it really boils down to the specific characteristics of a business and the needs that the business seeks to be met. Insourcing is the assigning of a project to an entity within the same company rather than hiring an outside entity whereas outsourcing is the delegation of non-core functions by one company to an external company that is specialized in providing that particular service or function. In this paper we shall evaluate which of these two strategies would be better for a small insurance company. The arguments will be specifically restricted to either strategy’s effects on costs, employee impacts and customer impacts. Effects on costs As a small insurance company there are pertinent functions that the business needs which are not core to either its growth or for gaining competitive advantage. These functions include human resource, payroll, IT and partly finance. Outsourcing here would offer a better choice than insourcing because the company would be able to save on employee compensation, office expenses and other associated costs. Outsourcing essentially converts fixed costs into variable costs, which will enable the small business to use these resources for investment elsewhere in the business (AllBusiness.com 3). On the flip side, small companies must be very careful when negotiating the terms of service with an outsourcing firm. Knowing the challenge that small businesses face with regards to weighing their cost options, an outsourcing company could trap the small company with terms of service that have numerous hidden charges. However, unless the outsourced services provider has numerous ridiculous charges, when it comes to managing costs for a small insurance company, outsourcing offers a better solution than insourcing. On the outset, insourcing does seem like a cost-effective strategy for a company to use because it will simply rely on resources that it already has. This may be true for large organizations that have numerous departments and employees. Small companies are already constrained in terms of staffing, and to manage costs they tend to have employees with flexible role profiles. Adding an additional project to a small company’s present resources would therefore only make their efforts to control cost more difficult. Employee impacts Herzberg’s theory states that there are two sets of factors, hygiene and motivating factors, which affect motivation and job satisfaction. Motivation is largely affected by the factors known as motivators that are related to the job content (Mullins 280). Insourcing in a small company would offer staff increased responsibilities and opportunities for skill variety which increase motivation and job performance according to Hackman & Oldham’s Job Characteristics Model. The disadvantage of insourcing in a small company, however, is that it could lead to the few employees in such firms to be overworked as they take on multiple roles. On the other hand, outsourcing would benefit the staff through skills transfer, skill specialization and flexibility. On-site outsourcing implies that people with different sets of skills will come and work in the company alongside the small company’s employees. This provides one’s company staff with a platform to acquire new skills from the outsourced staff. Also, when a company outsources it remains with skeleton staff that are charged with executing its core activities. Due to the single function these staff members perform everyday they grow to become highly specialized. Finally, outsourcing allows operations that have seasonal demand to bring in additional resources when needed and released when demand goes down. The knowledge that additional personnel will be availed during peak seasons has a motivating effect on the staff that may not look with dread at the oncoming peak seasons. Customer impacts Outsourcing could lead to positive customer impacts in three ways. Firstly, outsourcing enables organizations to focus on their core activities. These lean organizations due to their focus are able to provide their customers with better value propositions. This implies that outsourcing could increase the strength of a brand which would lead to more satisfied customers. Secondly, the reduced overheads and increased cost savings that result from outsourcing could be transferred to the customers in form of price reduction which would improve the competitiveness of a product in the eyes of its customers. Thirdly, outsourcing can help small firms level the playing field by giving them access to the same expertise, efficiency and economies of scale that large competitors enjoy (AllBusiness.com 8). Small firms can therefore exploit outsourcing to reshape Porter’s five industry forces in their favor. This would lead the small firms to be able to improve their customer value proposition. On the other hand, outsourcing could also have great negative customer impacts. For starters, the word itself conveys different meanings to different people. For example in communities where people lost their jobs due to outsourcing, customers would not be too keen to patronize that given brand. Secondly, outsourcing raises the question of sustained quality. There have been reported cases of several outsourcing companies cutting corners so as to increase their margins. Quality problems may lead to the loss of part of one’s market share. Thirdly there is the problem of security, privacy and confidentiality. There is always the risk of data getting compromised when they are moved from one company’s database to the outsourcing company’s. Insourcing is more favorable in terms of customer impacts. With insourcing the organization is assured of the quality of service or goods produced, confidentiality and managerial control. Managerial control is important because it determines the strategies to be followed to improve customer value proposition. My position As the president of a small insurance company I would opt to outsource rather than insource. From our discussion above it is clear that for this kind of business in the service industry outsourcing offers a greater variety of benefits in the value chain than insourcing namely: (1) it will enable the small firm access expertise, efficiency and economies of scale: (2) it reduces labor and capital costs; (3) increases efficiency; and (4) it develops internal staff who learn from on-site outsourcing experts. Works Cited AllBusiness.com. “The Benefits of Outsourcing for Small Businesses.” New York Times 1 Jan 2008. Web. 8 Aug 2011. Mullins, Laurie J. “Chapter 7: Work Motivation and Job Satisfaction.” Management and Organizational Behaviour. 9th ed. Harlow: FT Prentice Hall, 2010. Print.  Read More