Advantages of Outsourcing against Insourcing - Research Paper Example

Outsourcing (buying) and Insourcing (making) Table of Contents 1. Introduction : Page 3 2. Advantages of outsourcing against insourcing : Page 4 a. Focus on core activities : Page 4 b. Cost and efficiency savings : Page 4 c. Reduced overhead : Page 5 d. Operational control : Page 5 e. Staffing flexibility : Page 5 f. Continuity & Risk Management : Page 6 g. Increased competitive power : Page 6 h. Exploitation of better technology : Page 7 i. Tax benefits : Page 7 3. Problems of outsourcing : Page 7 a. Lack of managerial control : Page 8 b. Hidden costs : Page 8 c. Threat to security and confidentiality : Page 10 d. Quality problems : Page 10 e. Loss of flexibility in reacting to changing business conditions : Page 10 f. Tied to the financial well-being of another company : Page 11 g. Bad publicity and ill-will : Page 11 4. Conclusions : Page 12 5. References : page 13 Introduction “Outsourcing is the process of shifting/delegating/transferring a service/process/function to a third-parties/external service provider which would otherwise be an in-house function/service/process. Outsourcing is different from contracting in the sense that in contracting there is no transfer of control where as in outsourcing there is transfer of control” (bizbrim.com, 2008) Outsourcing is one of the most popular methods of getting the services done by outside sources by the business world currently. Globalization and liberalization policies adopted by different countries made the formalities of outsourcing easy and big corporate companies are on the lookout of exploiting the cheap and efficient labour market of the foreign countries. In fact globalization has revolutionized the whole world of business and most of the organizational principles and business concepts are undergoing changes at present. Outsourcing and offshoring are common business activities at present and the boundaries of a country do not offer much resistance to the outsourcing or offshoring activities at present as t it did earlier. When we analyse the popularity of outsourcing against insourcing we can see lot of advantages for outsourcing activities even though some disadvantages also there. Focus On Core Activities, Cost And Efficiency Savings, Reduced Overhead, operational Control, Staffing Flexibility, Continuity & Risk Management, Develop Internal Staff etc are some of the advantages of outsourcing over insourcing. (Bucki, 2009) World-class technology at lower rates, Skilled manpower at affordable prices, Increased productivity, Beat Competition, Tax benefits are some other advantages of outsourcing (Advantages of Outsourcing, 2004). Loss of managerial control, hidden costs, threat to security and confidentiality, quality problems, loss of flexibility in reacting to changing business conditions, lack of internal and external customer focus and sharing cost savings etc are some of the disadvantages of outsourcing. (Disadvantages of Outsourcing, 2009) Advantages of outsourcing against insourcing Focus on core activities Outsourcing helps an organization to focus on its core activities. Normally an organization concentrates heavily on the production area in order to ensure the quality and timely delivery of the products or services they deliver to the customers. Once an organization handed over their responsibility of producing products or services, they can concentrate more on other areas of their business like marketing, planning, strategy making etc. Moreover, outsourcing increases the purchasing capabilities of a company. For example, an American software company is able to take more businesses than its capacity if they outsource their works to some other countries. Thus their capacity to undertake big projects will increases through outsourcing. Cost and efficiency savings Another important advantage of outsourcing is the cost and efficiency saving. America and Britain like countries at present facing severe skilled man power shortage in critical sectors. On the other hand India like developing countries have a handful of excess skilled manpower resources and outsourcing help the American business organizations to exploit the cheap and efficient Indian labour market. Medical billing and insurance claim processing are some of the common areas of services which are outsourced. Processing of these types of clerical jobs is difficult and expensive in America like countries and they outsource such works to India like countries. Reduced overhead Overheads of an organization will be reduced considerably through outsourcing compared to insourcing, if they outsource their jobs. For example, a company cannot take large volume of works or works beyond its capacity if it is strictly adhere to insourcing. On the other hand through outsourcing a company can take large volume of works and at the same time they will be able to keep their overheads almost constant since most of their production is done by outside sources. In fact, production people are the large segment of an organization compared to the administrative staff and reduction in number of production people without reducing the size of production is always advantageous to an organization. Operational control Operational costs are one of the main areas of expenditure which a company may find difficult to control. For example, in a software development company, they may have too many projects and not enough people. The operational costs of the available people may far exceed their contribution to the company. In such cases the organization can outsource their jobs in order to attain better control over their operations without incurring many expenses. Staffing flexibility Outsourcing will help an organization to keep only the required staff permanently and there is no need for an organization to keep more production staff even at off seasons. They can hire the services of outsourcing whenever they require and need to pay only for the services they receive. In other words, organizations need not pay the production staff even if there is not work and hence their nonproductive costs will be considerably reduced. Continuity & Risk Management It is possible for an organization to sustain its functions through outsourcing even when some of their critical employees may resign or on taking holidays due to some reasons. Outsourcing is a reliable source for organizations whenever or wherever they require services. The large work force of the people who engaged in outsourcing, offers wide diversity and expertise to the seekers of the outsourcing services. Organizations can even ask for the services of a particular person or a company through outsourcing. Increased competitive power “Outsourcing can give your business a competitive advantage as you will be able to increase productivity in all the areas of your business” (The Advantages and Disadvantages of Outsourcing, 2009) Outsourcing will help an organization to undertake jobs for which their employees may not be skilled, but still they can execute it through outsourcing. The power of competition for an organization increases because of their ability to take services from other countries. In some cases, the regular customers of an organization may bring projects to the company and the company may be able to do only a particular part of that project. In such cases, the company can rely insourcing for the part in which they are skilled and outsourcing for the unskilled part. For example, suppose a customer brings jobs related to offset printing, digital printing and screen printing as a package to a printing organization and the organization have only the offset printing facilities. Still the organization can take the entire package and seek the services of outsourcing for the production of materials related to screen printing and digital printing. Exploitation of better technologies World-class technology at lower rates is another advantage of outsourcing. It is not necessary that all the technologies are developed equally well in a country. But still the country or the organizations can avail world class technology oriented products to their customers through outsourcing. Tax benefits Tax benefits are another advantage for the outsourcing service seekers. The organization who keeps large workforce for insourcing may force to pay substantial amount of money as taxes to the country of their operations. Outsourcing limits their tax liabilities and increases their business capacities. Problems of outsourcing Though, so far we have discussed many advantages of outsourcing, it doesn’t mean that outsourcing have no disadvantages at all. Loss of managerial control, hidden costs, threat to security and confidentiality, quality problems, loss of flexibility in reacting to changing business conditions, tied to the financial well-being of another company, bad publicity and ill-will etc are some of the disadvantages of outsourcing over insourcing. Lack of managerial control Insourcing always offers superior managerial control of all the operations taking place in an organization. Each activity of the organization is controlled by experienced managers in, in house operations and the organizations have better control over their activities. For example, an organization can take conscious efforts to deliver the product or services in time if the operations are running under their strict guidance and control. But in outsourcing the production operations are running in some other country with a different time zone and hence the organization cannot exercise effective managerial control over such operations. Suppose, an organization has taken a printing job and the customer has not satisfied with the quality. The organization can reprint it immediately if it is producing in house. On the other hand outsourcing will take time for delivering the reprint products in time because of the transportation delay. Hidden costs “Outsourcing, though cost-effective, might have hidden costs, such as the legal costs incurred while signing a contract between companies. You might also have to spend a lot of time and effort in getting the contract signed” (The Advantages and Disadvantages of Outsourcing, 2009) Though in principle, outsourcing is one of the cheapest ways of exploiting international labour market, it encloses lot of hidden costs. The transition period is the most expensive stage of an outsourcing endeavour. “It takes from three months to a full year to completely hand the work over to an offshore partner. If company executives aren’t aware that there will be no savings—but rather significant expenses—during this period, they are in for a nasty surprise” (Overby, 2003, p.2). During this transition period between the allotment and the delivery of the job, the organization may not be able to save anything. If the final outcome of the outsourced project may not good, then the organization may suffer huge loss. Because of the outsourcing activities, the organization may be forced to lay off their existing employees. Thus the organization may force to pay the salaries and other benefits of their existing employees even when they are idle and contributing nothing to the organization. Cultural adaptation is another problem in outsourcing. It is not fair to think that an Indian may replicate exactly what their American counterpart may able to do. The language differences and the differences in authority levels or contexting may often reflect in the final outcome of the outsourced project which may not be anticipated by the organization while they outsource their jobs. It is not necessary that the technology has developed and distributed all over the world at the same time. For example, Microsoft has developed Office 2007 package recently and it is not necessary that all the Indian companies which offers outsourcing services may have the 2007 office package with them. They may use the same old 2003 office version which may create problems for the American company which has allotted the job to their Indian counterpart. “Managing the actual offshore relationship is also a major additional cost.”There’s a significant amount of work in invoicing, in auditing, in ensuring cost centers are charged correctly, in making sure time is properly recorded," explains DHL’s Kifer. "We have as many as 100 projects a year, all with an offshore component, so you can imagine the number of invoices and time sheets that have to be audited on any given day." (Overby, 2003, p.7) Threat to security and confidentiality Privacy and security related problems are one of the major concerns of outsourcing. The outsourcing company may be forced to provide lot of confidential information regarding the company and their employees to their counterpart in India or China and thus the confidentiality of the information may not be preserved. “Security of the outsourcing provider's computer system is one area of concern. Another area of concern is unauthorized access to information, whether such access is by unauthorized personnel or use of the information in an unauthorized manner” (Greble & Millstein, 2003) It is difficult for the outsourcing company to control the activities taking place in the outsourcer company. Quality problems The quality of the outsourced jobs may often fail to achieve the expectations of the outsourcing company. It is difficult to anticipate the same quality of works done in American environment from an outsourcer from Philippines or India. The technological advancements in America like major outsourcing countries may not happen in the outsourcer countries and hence the quality of the final product may not satisfy the outsourcing company. The cultural and linguistic differences increase the problem further. Loss of flexibility in reacting to changing business conditions Organizational principles and business concepts are changing day by day because of the globalization and liberalization policies adopted by many countries. The acceptance level of these policies may differ from the outsourcing and the outsourcer countries. For example, because of the socialist or communist rule in China, it may not embrace the globalization or privatisation policies same way like the capitalist countries like America. Thus the business environments in the target country may be entirely different from that of the outsourcing country. Tied to the financial well-being of another company The success of outsourcing indirectly related to the financial well being of the outsourcer company. In other words, the company which engage in outsourcing activities must take extreme care while taking the target outsourcer company with respect to its financial capabilities. An outsourcer company with poor financial resources may collapse any time and the company who has given the project to them may be troubled because of that. “In case, your offshore service provider becomes bankrupt or goes out of business, your organization will have to immediately move your business processes in-house or find another outsourcing provider (The Advantages and Disadvantages of Outsourcing, 2009) Bad publicity and ill-will “With outsourcing, your organization might suffer from a lack of customer focus. There can be several disadvantages in outsourcing, such as, renewing contracts, misunderstanding of the contract, lack of communication, poor quality and delayed services amongst others” (The Advantages and Disadvantages of Outsourcing, 2009)Outsourcing is not perceived as a healthy activity and most of the public rate the outsourcing company’s inferior to an insourcing company. Outsourcing always conveys a message about the company’s inefficiency to execute projects domestically. A company which is able to produce the goods and services using insourcing will always be more reputed than an outsourcing company in public’s opinion. The bad publicity about the consequences of outsourcing will affect the image of the company which is engaged in outsourcing activities. Conclusions Outsourcing may help an organization to; increase its focus on core activities, reduce cost and increase savings, reduce overhead, increase operational control, increase flexibility in staffing, effectively control continuity & risk management etc. Moreover it can avail world-class technology at lower rate and skilled manpower at affordable prices. Tax benefits increased productivity and competitive power are also the positive impacts of outsourcing as far as an organization is concerned. Loss of managerial control, hidden costs, threat to security and confidentiality, quality problems, loss of flexibility in reacting to changing business conditions, lack of internal and external customer focus and sharing cost savings etc are the major negative impacts of outsourcing when we compare in with insourcing. References 1. Advantages of Outsourcing, (2004), Retrieved on 7 August 2009 from http://www.cyfuture.com/advantages-of-outsourcing.htm 2. Bucki, James (2009), Top 7 Outsourcing Advantages, Retrieved on 7 August 2009 from http://operationstech.about.com/od/officestaffingandmanagem/a/OutSrcAdvantg.htm 3. bizbrim.com, (2008), Outsourcing Articles, Retrieved on 7 August 2009 from http://www.bizbrim.com/outsourcing/define-outsourcing.htm 4. Disadvantages of Outsourcing, (2009) Retrieved on 7 August 2009 from http://www.softwareprojects.org/disadvantages-outsourcing.htm 5. Greble Thomas C.& Millstein Julian, (2003), Retrieved on 7 August 2009, http://www.hrotoday.com/content/528/security-issues-outsourcing 6. Overby Stephanie, (2003) , The Hidden Costs of Offshore Outsourcing , Retrieved on 7 August 2009 http://www.cio.com/article/29654/The_Hidden_Costs_of_Offshore_Outsourcing?page=8 7. The Advantages and Disadvantages of Outsourcing (2009), Retrieved on 7 August 2009, http://www.outsource2india.com/why_outsource/articles/advantages-disadvantages-outsourcing.asp Read More