Myths and Realities of Outsourcing

Outsourcing has been written about in some management journals as if it was a ‘must do’ process. There has been much hype about the need to focus on core competencies, the drives for cost reduction, the ability to access top quality staff and the latest technology, and therefore gain competitive edge. We refer to these as the myths of outsourcing to highlight the need for a critical stance. Outsourcing can work for some, but not for all. So is outsourcing a case of turning lead into gold, or actually a case of giving away the jewel in your crown?

To assess this we will briefly look at each of the key potential benefits.

1. Cost reduction – there is very mixed evidence regarding cost reduction. There are examples of increased costs, and one study showed 40% of respondents classed cost-savings as ‘mediocre’. The problems with this become clear if you bear in mind that economies of scale are not always possible, systems cannot always be shared, and of course, the supplier has to make money on your contract. It has been suggested that only if your existing activity was very badly managed, and overstaffed, will outsourcing benefit you financially. In most of these cases, getting to grips with the in-house function would offer similar savings.
2. Focus on core competencies – there are problems with this concept because many managers have trouble deciding what a core competence actually is, and furthermore, much of the time saved on managing the activity is re-invested in managing the outsourcing supplier.
3. Access to highly trained staff – although this can happen, there have been complaints that suppliers do not always staff a client function well, and in some cases will actually remove the better client staff from the activity.
4. Performance improvement – some have managed to achieve this, but again there is evidence of difficult or even serious service-level problems. Philippines outsourcing

It could be argued that outsourcing remains popular because of the perception that so many companies are doing it, therefore it must work. There is evidence that companies can be over-optimistic regarding the benefits of outsourcing, or misunderstand the potential of the internal function. Others may outsource for political reasons, it can be a useful way to get rid of an enemy, or a headache. These are often the contracts that fail, although thankfully guidelines are becoming clearer regarding how best to gain benefit from outsourcing. As with many processes, one of the best ways to ensure success is to be aware of potential strengths and weaknesses.

Strengths and Weaknesses

Just considering whether to outsource at all can be an impetus to improve a function and increase your understanding and control of it. If you can control the costs of the function, and have an understanding of where it fits into your business, you can make an informed decision about whether to outsource and are far more likely to achieve cost control and other benefits. There are some good examples where access to high quality management skills, and advanced new technology, can happen, particularly with suppliers who have more experience in your area. Some companies have found an improvement in service quality, especially when the supplier has learnt your business and really understands your specific needs. This can take time and demands a solid relationship between the parties. There are of course situations where economies of scale can be found, and where outsourcing can increase the future flexibility of your enterprise.