Outsourcing, Its Variants, Risks and Benefits

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Introduction

In management, innovation is a factor of the essence. In the early 1960s, the world experienced the highest number of factories closing down due to either market irrelevance or incompetence. This was long before the outsourcing strategy was introduced. Outsourcing can be described as “‘the delegation or handing over to a third party ‘external supplier’, mediated via a contractual agreement, all or part of the technical, process and human resources, including management responsibility for transferred staff” (Taplin 10). In simpler terms, outsourcing can be described as externalizing all or part of a departmental function (Taplin 10).

Basically, this means getting an external manpower to work on internal functions. This process is normally bound by an agreement in the form of a contract that outlines the terms and conditions of both sides. In most cases, the most outsourced services include catering, cleaning and security (Phipps and Jamie 63). However, in the recent past, other professions have been actively open to outsourcing. Some of this includes IT, human resource, financial services, auditing and transportation.

Variants of outsourcing

Outsourcing has a number of variants which include backsourcing, offshoring, and insourcing. Backsourcing is actually terminating the outsourcing agreement in cases where the outsourced manpower is perceived to be underperforming, engaging in illegal activities in the name of the host company or as a result of negligence on its mandate. Offshoring, on the other hand, means outsourcing from an offshore target mostly free trade zones in foreign countries. Insourcing involves getting contractors to help out in cases of understaffing in a particular department (Fan et al. 7).

The problem arising from insourcing is the challenge of the incoming team to fit into the already existing company’s team. This may take a while due to differences in organizational behaviour, making it a difficult decision to make regarding outsourcing. Although outsourcing present quite enticing economies of scale, it also likes any other business strategy has its own disadvantages.

Outsourcing and culture

Outsourcing and culture go in handy. As at the beginning of this paper, I defined outsourcing as bringing in external help. Help can be outsourced from anywhere, and the outsourced personnel might come in with their own cultural characteristic. Depending on the outsourcing procedures, it is of paramount importance to make sure cultural differences and characteristics are vividly understood. To work in a new environment with new colleagues is somehow disorienting, and the trauma involved can not be overemphasized.

For instance, if an American company is contracted to work in an Indian company. The personnel if not taken through preparation training, may not be able to withstand the culture shock, which may hinder their performance. In order to fully collaborate with people from different backgrounds and from different cultures, it is important to understand the people one will be interacting with.

World view on outsourcing

In most of the global companies, outsourcing presents hope for getting through tough economic situations and also for survival in the business arena. However, to some companies, outsourcing is not received in good terms. On the centrally, it is viewed and approached with mixed feelings globally, but the bottom line is the fact that it is a factor to consider if competence and survival are to be attained. No company can adequately perform and provide quality products without getting external help.

For a company to adequately manage to perform, then the production cost of its products would be very high. In order to avoid outsourcing, companies need to have enough personnel to offer professional services. This kind of approach is not cost-effective and would halt the survival and competence of the company. Although this approach poses critical risks to the organization, the lack of outsourcing makes profitability and survival of the company a challenge.

Risk and HR solutions

Outsourcing is a risky engagement and caution must be taken before engaging in such an undertaking. The first precautionary measure is to ensure that the responsibility scope is understood and adhered to. However, the range of responsibilities must be flexible and open for random changes in case a need for such changes arises. Like discussed above, in case outsourced personnel are working outside their mandate or under illegal terms, then the contract must leave room for such actions as a termination to seal the possibility of inconsistency. To avoid conflicts and dissatisfaction, service level agreements, ‘SLAs’ must be flexible enough to cater for both the host company as well as the outsourced manpower.

Successful outsourcing must put into feasibility test the level of vulnerability (McCray 36). Outsourcing blindly can cause irreversible damage to the company’s performance. Risks involved in outsourcing are hence not predictable; therefore; risk management is of the essence if a company will be able to withstand the dangers ahead. Organizational behaviour theory acknowledges that human beings are unpredictable, and in this case, then it is only wise to prepare for the worse and have strategies to protect the company from experiencing the effects of it.

Problems associated with outsourcing

Outsourcing has a number of benefits as I will discuss later in the paper, but first I would like to point out a few problems that seem to be the major shortcomings of this brilliant move in business. One of the major problems is the misunderstanding of the post-contract as well as decision rights (Miller 96). In most cases, the clients and the contracted service provider may have some differences in working together, which is a very unfortunate yet normal situation. Again this arises as a result of organizational culture. Each side wants to prove their way is better than the other.

The effects of such an event are dire. In the long run, the task intended will be stalled and business activities jeopardized. This causes disappointments to the client the service provider, the stakeholders, while the prospected business achievements may be slowed down or in the worse case, never be achieved (Herbert). This risk keeps many companies away from trying outsourcing with the fear of losing. Nonetheless, to avoid such instances and to ensure maximum benefits requires a perfect understanding of the contract and decision rights. This prevents such problems as mentioned above.

Another problem emanates from the clients or the host company. Service providers require support from the leadership of the client company as a first priority. In most cases, companies receiving outsourcing services show active or passive opposition to the sourcing plan. If this is the case, then clearly there will be no support from the leadership, and this may result to stalemate of the business. Another problem is when the client’s staff can not comprehend the new operating procedures with the new team that has been introduced. The service providers on the other hand pride in the fact that they can solve the problem hence they often ignore the host company’s input in the matter.

Of course this brings up confrontation and each team may be trying to outdo each other (Herbert). There is also the risk of culture disparities that can significantly affect the performance and completion of the task. Cultural differences can cause misunderstanding and hence jeopardize the task at hand. These are some of the concerns that companies fear about when the term outsourcing is mentioned. However, the problems associated with outsourcing are nothing compared to the benefits accrued from this approach. In business, the ideal procedure is not really that which does not pose risks but the one with significant advantages amidst the risks. Outsourcing I believe passes the test for an ideal business strategy.

Benefits of outsourcing

The benefits realized in outsourcing are numerous and by far outdo the risks involved. The first and the most important merit is the cost effectiveness. As I said earlier, having qualified personnel for each department in a company can be quite expensive. To go around this challenge, outsourcing provides a chance for a company to get these services at a cheaper rate from other firms which specialize in the same service that the company requires. To help understand the cost effectiveness, I will give a case scenario. The Toyota Company is a mechanical company. However, the company has a finance department and requires auditing on its financial records from time to time. While having their own auditors may be beneficial, the company will be incurring cost of keeping them as regular employees.

It is important to note that auditing is not a daily activity which means the auditing team will be getting paid even when they are not working since they are under the company’s payroll. This may be very expensive for the company to maintain. Outsourcing deals with such a problem in a very easy way. Auditing firms have been in the recent past offering their services to firms and reducing the round-the-year cost on employed auditors. With this plan, the Toyota Company can hire auditors only when it is necessary to do so hence reducing the cost incurred in employing their own personnel. This not only benefits the company in saving on cost but also gives an opportunity for the company to receive quality services. Outsourcing is a specific undertaking not a general assignment.

If a company requires auditing services they hire exactly that, if its in the human resource department they hire firms specialized in that line, if it is in the line of IT, they hire specialized firms on the IT profession and the same is true for security outsourcing. This helps the company to focus on the core business and matter of concern. The ultimate results are that professional quality services are rendered. It is through outsourcing that the benefit of accessing the best service in the market. Outsourcing gives the client an opportunity to hire world class service provider hence they benefit from getting world class services.

By having permanent employees in some of the departments such as IT and HR, which change and keep on improving day after day limits the company’s chances on getting the best and modern services in the market. Outsourcing training for instance is a good undertaking since it gives the client access to some of the bets training as well putting the company in the level playing ground with its competition that may have received the same training and are using the same tactics.

Training

Training in many companies is the last thing they may want to get involved in due to the expenses involved. However, this is worthwhile investment in the businesses today. Any company that wishes to grow must invest in training its employees to keep them updated with current market procedures and norms in order to remain relevant to the market. If a company just absorbs labor from graduating students and does not find a procedural training to assimilate the new employees into the business, they are on the losing end in terms of productivity. Most companies overlook the training part to avoid the expenses but in essence by so doing they get into more risk than engaging in the former (Miller 96).

Outsourcing training is cost effective and beneficial to both the client and the service provider. The company is assured that their employees are well equipped to handle the business and that they have highly trained personnel, a factor that is very instrumental for a company’s survival. As I mentioned earlier, outsourcing is one of the ways through which a company is assured of survival in the market.

Pros and Cons of outsourcing

Some the reasons in favor of outsourcing are that the outsourced project manager gives a fresh approach on the project. Some problems can not be solved internally by the regular employees. Some fresh ideas and mindsets are required to root out some issues and planning difficulties in a company. This freshness is what puts outsourcing on the lead when it comes to effective project planning. Consulting outsourced firms helps in ensuring professionalism and best practices in the functions of the company. It is always better to consult from outside firms who specialize with such projects in order to be competent enough to be in a position to compete with the international market in the current globalised world.

Having specialized personnel to asses the project gives the client access to credible information on the feasibility of the project from a professional research perspective. This averts possibilities of engaging in a faulty and inconsistent project giving the client an opportunity to deal and focus with the main competencies (Fan et al 12). A lasting effect is the fact that a company is equipped to deal with similar projects in the future having learned the skill (Fan et al 11). However, there are prices to pay. If a proper working relationship is not achieved, the repercussions are worse than not initiating an outsourcing procedure. A proper relationship ensures that the course of the project is kept alive as well as being understood by both parties. This involves having service level agreements way before the beginning of the project to avoid conflicts. Misunderstanding leads to losses if they occur and therefore it’s in the best interest of both parties to eliminate the possibility of such losses by initiating an understanding among them. Outsourcing involves great compromises. The client must provide key information to the service provider in order to facility effective services. Through this standard procedure, the client company might be forced to compromise classified information to an outsider which in itself is a risk.

Case study

The National University of Singapore is one of the largest universities in the country. The school is home to 23,000 undergraduate students as well as 9,000 graduates (McCray 38). The growing population in the school has become a challenge to its IT infrastructure while the schooling is straining to be effective and to maintain quality services. However this is getting out of control and the administration is forced to consider other alternatives. IBM global technology services intervened and created a team to deal with the challenge at the call center. The results were overwhelming.

The IBM Company managed to solve the routine call center problem giving the IT staff more time to handle other non-routine issues (McCray 38). The company also provided quality check services to the university’s IT infrastructure which was instrumental in helping the IT staff to understand the problems and solve them adequately. The advantage of having the IBM Company come on board is the fact that the school’s IT staff would have been overwhelmed by the increasing inquires from the large population of students as well as other users of their services.

Increased workload may have adverse effects to the schools IT department staff (McCray 39). Overworked staff will stage complains and this complains if not addressed effectively may affect the staff’s attitude towards the job hence the negative repercussions to this are unimaginable.

Conclusion

In my opinion I think outsourcing is one of the best ways to improve a company’s competence in the market. It has proved to work in a number of global companies and the rising number of consultancies is a clear indication that companies are putting keen interest in it. Although the disadvantages are not to be overlooked, outsourcing provides a better deal and way more advantages compared to the shortcomings. In the world’s global economic challenges, cost effective project are of essence and companies know this better than any body else.

Works Cited

Fan, Liang Liang, Srihari Ramachandran, Ying Hsiang Wu and Zhang Ning Yue. “Outsourcing in Businesses.” SAM Advanced Management Journal. 18.4 (2011): 9-10. Print.

Herbert, Lam. Advantages of Outsourcing Your Job. 2012. Web.

McCray, Shawn. The Top 10 Problems with Outsourcing Implementations. New York, NY: Technology Partners International, Inc., 2008. Print.

Miller, Dan. The Advantages of Outsourcing Training Find the most cost-effective, low-risk way to make your employees more innovative, effective and focused on the strategies that drive your business. Elkridge, USA: General Physics Corporation, 2003. Print.

Phipps, Ronald and Jamie Merisotis. Is outsourcing part of the solution to the higher education cost dilemma? A preliminary examination. Washington, DC: Institute for Higher Education Policy, Print.

Taplin, Ruth. Outsourcing, innovation and risk. Tokyo: Centre for Japanese and East Asian Studies, 2008. Print.

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