Outsourcing risks and benefits
Filed Under Blog
Outsourcing can be defined as a company contracting another firm to do provide a service which is essential in the company’s production and function. This may be in the form of outsourcing things which are not in direct involvement with production, such as accounting, advertising or other jobs which require extremely specialized knowledge. Thus, outsourcing could be considered to be a division of labor, only the labor is divided outside the company.
However, due to its counterintuitive nature, outsourcing is considered to be an extremely sensitive political matter. Many people consider outsourcing to be an unfair trade practice, especially since it allows companies to take advantage of cheap labor elsewhere, leading to unemployment in the home country. Thus, outsourcing has been a very hotly debated matter. Below are some benefits and risks of outsourcing:
Benefits
• Labor Arbitrage
Outsourcing allows you to take advantage of wage differentials from all over the globe. This is called labor arbitrage. Less developed countries have citizens which generally charge less than their counterparts in the First World, hence many companies outsource jobs to them, to earn more profit. However, given the current trend, there will be less advantage with arbitrage since the wage gradients are now lessening, until it becomes equal the world over.
• Focus
Supply chain optimization calls for focus in your field. It would be best if you can hire more people to do the end product, and not being muddled up in tasks which do not directly affect the production. For instance, a polymer factory will find it prudent to outsource its accounting than to hire a resident accountant full time, since accounting is only done sparingly and does not affect the quality of the end-product. However, accounting is a necessary activity for any business, so you would save if you hire an accountant only when you need to.
• Cost Savings for Specialists
Some jobs require extremely specialized knowledge in different fields. This is particularly true in technology and science. For instance, you may outsource the design of a power plant to an engineer, and have him do jobs for you on contract. This is cheaper than hiring him full-time, particularly if his skills are very particular.
Risks
• Dispute Resolution
Outsourcing is a relatively ambiguous field in law. Contracts may be signed but you may never know when either party may have a differing interpretation of the contract, necessitating litigation. This is also complicated when you outsource offshore, since the jurisdiction itself will be under question. It would be best if you agree fully on how to go about the contract and ensure that both parties are respected and well-compensated.
• Differing Cultural and Trade Practices
Different cultural and trade practices may also result in supply chain risk. This may be due either to differing marketing practices, or even existing law. Religion sometimes would play a role, such as the prohibition of lending with interest in Muslim countries. This may affect the supply chain, since complications may arise from the handling and the procurement of the goods and supplies.
• Lack of Tenure
The most often point of contention in outsourcing is the lack of a sustained job or tenure. This tenure provides security for the employee and will be able to attract him or her to stay in your company. Also, secrecy may be compromised when a former consultant joins a competitor. This may expose your plans and will preempt your efforts. Thus, precaution must be taken in order to keep these freelancers loyal and a tight policy on trade secrets must be enforced.