Outsourcing

What is outsourcing?

Outsourcing occurs when outside suppliers are involved in activities that could be undertaken internally by a business.

These suppliers are not directly employed by the business.

Outsourcing moves jobs outside the business and may even replace them with employment overseas (sometimes called ‘offshoring’).

Outsourcing can lead to increased efficiency and lowered costs. The outside businesses who take on the job will often carry out the same work for a lower cost

What are the advantages of outsourcing?

• Significantly reduced staffing costs.

• Well trained staff provided by the outsourcing company will reduce HRM costs such as recruitment and training.

• Existing workload and stress levels are reduced. This is very important if a business is operating near or at full capacity.

• Less investment risk. Instead of investing in new production facilities, let the outside supplier take the risk of investing.

• Capital needs are reduced. Because there is less investment, there is less need to raise finance.

• Lower costs increase profits giving more capital for research and development, therefore speeding the development of new products.

What are the disadvantages of outsourcing?

• Potential of poor customer service (call centre related), with communication made difficult because of cultural differences.

• Existing employees may feel demotivated if they believe their jobs are at risk. This demotivation can increase staff turnover and reduce productivity.

• Quality of production / product cannot be guaranteed. Quality may be maintained, but it is difficult to keep up with improvements in quality from competitor companies.

• More difficult to implement JIT systems, which reduce the need for working capital.

• Breakdown of communication in the production chain. It is often difficult for functional departments to talk to each other when they are not in the same building

Give an example of outsourcing.

For example, the outside suppliers or sub-contractors may deal with phone enquiries, computer processing and production of components or even produce finished products.