Disadvantages of outsourcing
Outsourcing is the act of contracting your part of work for a lower price to another vendor. This is usually done to cut on costs and improve revenues. Most companies outsource their work to third-world economies where labor is cheap and resources are abundant. It is often done by the bigger companies by transferring their workload to free-lancers and demanding a higher price for the project because of their developed image. However the word outsourcing can have different meaning for different people. If an area lost jobs because the company outsourced its project to some low-paid economy then these people will have a bad view for outsourcing. And the people who received jobs because of this act will always consider outsourcing a positive term.
For a company outsourcing is a way risky step to take. In a way because there is always a possibility of losing managerial control over the outsourced department or project. Despite of the signed contract the managerial actions and decisions will still be performed by an outsider and it is a huge risk. The contract is always prepared by the other company so you are at disadvantage here as well. Any additional work that may come up during the project and is not mentioned in the contract will cost you additional charges. It will not be your own department who works for the company but will be an outsourcing company who are interested in their money. Not only that, but the biggest issue is business confidentiality. As you will have to give the private information to the new company or freelancer you have hired. This information can be very secretive and may be misused by the other end. It gets difficult when you are dealing with the other party for the first time. To be on the safe side it is advisable to include as much details in the contract as you can in case anything goes wrong you have your securities written and signed. The worst part in dealing with such companies is that they are not concerned with your corporate image; their only motivation is the profit they will earn. For this very reason they will try their best to increase the profit as much as they can by cutting down on expenses. This means they might hire cheap resources or use low quality material in manufacturing your product or finishing your task.
Outsourcing may save a company some cash but the risk is far higher. It may result in complete loss of goodwill and ruin the company image forever.
Outsourcing is a business strategy that moves some of an organization’s functions, processes, activities and decision responsibility from within an organization to outside providers.
This is done through negotiating contract agreements with a vendor who takes on the responsibility for the production process, people management, quality, customer service and key asset management of the function.
The process can greatly reduce fixed overhead costs of an organization.
Why do organizations outsource?
Outsourcing allows organizations to focus on their core business and can create a competitive advantage by reducing operational costs.
The beauty of outsourcing is you can outsource an entire function or only a part of it.
As an example, you can outsource the network management oversight of an IT system but keep the end-user support in-house.
This can provide an organization with a good balance of on-site support for employees.
Organizations use outsourcing as a strategic initiative to improve customer service, quality and reduce costs.
Outsourcing can be a permanent or temporary arrangement to bridge the gap in staffing, to learn better quality techniques or improvement of faulty product design.
When looking for outsource opportunities, an organization should look at potential areas and each component within that area to determine if part or all of that function should be outsourced.
Different industries outsource different aspects of their businesses, but some common operational functions that get outsourced are:
Advantages of Outsourcing
There can be significant cost savings when a business function is outsourced. Employee compensation costs, office space expenses and other costs associated with providing a work space or manufacturing setup are eliminated and free up resources for other purposes.
Focus on Core Business
Outsourcing allows organization to focus on their expertise and core business. When organizations go outside their expertise, they get into business functions and processes that they may not be as knowledgeable about and could potentially take away from their main focus.
An example of this is when a grocery store decides to add a florist to their operation. If too much focus is put on that part of the business they lose focus of the core business which is grocery.
Improved quality can be achieved by using vendors with more expertise and more specialized processes.
An example of this would be contracting out a cleaning service. An outside service would have the resources for hiring, proper training and facility inspections that may not be available if the function were kept in-house.
The advantage of having a vendor contract is they are bound to certain levels of service and quality.
An example of this is if your IT function is outsourced and the technician calls in sick, it is the vendor’s responsibility to find someone to replace them and meet your support needs.
Outsourcing gives an organization exposure to vendor specialized systems. Specialization provides more efficiency that allows for a quicker turnaround time and higher levels of quality.
Disadvantages of Outsourcing
Outsourcing can expose an organization to potential risks and legal exposure.
As an example, if a car is recalled for faulty parts and that part was outsourced, the car manufacturer carries the burden of correcting the potentially damaged reputation of the car maker.
While the vendor would need to make good on the faulty product by contract, the manufacturer still has the black eye from the incident and carries the burden of correcting the negative public perception.
Unless a contract specifically identifies a measurable process for quality service reporting, there could be a poor service quality experience. Some contracts are written to intentionally leave service levels out to save on costs.
If a customer call center is outsourced to a country that speaks a different language, there may be levels of dissatisfaction for customers dealing with the language barriers of someone with a strong accent.
There can be negative perceptions with outsourcing and the sympathy of lost jobs. This needs to be managed with sensitivity and grace.
An outsourced employee may not have the same understanding and passion for an organization as a regular employee. There is the potential that an outsourced employee will come in contact with customers and not be as knowledgeable of the organization, resulting in a negative customer experience.
Organized labor in the United States has very strong feelings about outsourcing to other countries that have a less standard of living and worse working conditions. This viewpoint can affect how the workforce responds to outsourcing and can affect their daily productivity.
Legal Compliance and Security
It is important that issues regarding legal compliance and security be addressed in formal documentation. Processes that are outsourced need to be managed to ensure there is diligence with legal compliance and system security.
An example of this is outsourcing the IT function and having an outsourced employees use their access to confidential customer data for their own gain.
Outsourcing commonly results in the need to reduce staffing levels. Unless it can be planned through attrition, layoffs are inevitable. This is difficult at best and if not managed appropriately, can have a negative impact on remaining employees.
Finally, when researching vendors for outsourcing be sure to think through your specific needs and get at least three Requests for Proposals (RFP) to ensure you are getting the best value for your dollar.
Does your organization outsource any of its functions?
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