Disadvantages of Outsourcing

Outsourcing in general can be defined as passing of service provision or production to another internal or external party. The chief reason of outsourcing is to reduce capital expenditure over a business process. Also management gets more time to concentrate over core competencies. This also reduces the dependency upon internal resources and increases the flexibility to meet the changing business and commercial conditions.

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Even though several other reasons can be listed up in favor of outsourcing, one must not overlook the disadvantages of it.

By outsourcing a business process, we tend to loose the managerial control. This happens because it is harder to manage the outsourcing service provider as compare to managing one's own employees. Also because we generally tend to skip (or miss to calculate) the
potential hidden costs of outsourcing which includes legal costs of putting together a contract between companies and time spent on coordinating the contracts, we feel that outsourcing reduces the overall expenditure of a business process, one of the major reasons why a company goes for outsourcing. This hidden and missed out costs of outsourcing is hard to predict causing overall costs to be underestimated.

Another disadvantage is that outsourcing can also prove to be a threat to the security and confidentiality of issues of a company. If your company is outsourcing business process such as payroll, confidential information such as salary will be known to the outsourcing service provider. Therefore one must be very careful in choosing which business process to outsource and which one not.

Outsourcing may also result into the possible loss of flexibility in reacting to changing business conditions, lack of internal and external customer focus and sharing cost savings. Loss of internally generated talent is yet another problem associated with the outsourcing as it may hamper the growth of an employee by depriving him from the experience he would have gained by handling the business issue himself then by passing it over to some other external party.

Thus before a company decides to outsource its business process, it must examine all the factors carefully. It may not happen that outsourcing becomes a reason for company to regret later.

Other posts in Outsourcing-1

July 22nd, 2007 | Category: Outsourcing-1 | View Comments
  • Vanessa
    Outsourcing projects offshore is very short-sighted and is damaging to a country's economy. A company (or manager/exec) may receive short-term gains (a bonus for saving the company money in the case of a manager), but ultimately it results in jobs that could remain on home soil being sent offshore. This in turn leads to higher unemployment (within a country where outsourcing abroad is the 'norm'), hence higher government spending (housing, unemployment benefits etc...). I strongly believe that in the UK, the government should intervene and prevent companies from outsourcing abroad unnecessarily. If a company operating within the UK feels that this is unacceptable and unworkable, then it's more than welcome to re-establish itself abroad.

  • adam
    outsourcing companies wouldnt still be in business if they did things like disclose ones salarys or got behind on new business practices. one suggestion i have is that you refrain from outsourcing to the 3 monsters, adp, paychex and Ceridian, They'll promise anything to get you in and fall short on services you thought you were going to get. In this service based economy, medium sized, well established, independent, local business should be what you search for. Dont get lazy in your search either.
  • There are many disadvantages to outsoucing, but of done properly, most can be controlled. For example, outsourcing document conversion and data entry work to other countries becomes difficult in case you loose customer documentation in post. It is better to have your own presence to oversee things, if possible.
  • John
    What do you think about this article:

    Friday, February 20, 2009
    Commentary
    Work visas stop offshoring of high-skill jobs
    Robert Kennedy

    Desperate economic times often lead to scapegoating and ultimately to bad public policy.

    U.S. Sens. Charles Grassley and Richard Durbin have been painting a picture of greedy U.S. firms recruiting low-wage foreigners to undercut struggling Americans workers and then using these foreign workers to grease the departure of tech jobs to lower-wage countries.

    In reality, nothing could be further from the truth.

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    The H-1B visa program helps U.S. firms stay competitive with foreign rivals and slows the migration of high-skill jobs offshore. Reducing or eliminating it would be a blow to U.S. competitiveness and would harm all American workers.

    The H-1B visa program allows U.S. firms with specific skill shortages to bring talented individuals from around the world to America to work on specific projects for short periods of time. The program applies only to "specialty occupations" (such as nursing, software engineering, faculty positions and scientific jobs). It is capped at 65,000 positions a year. This is less than one-twentieth of 1 percent (0.05 percent) of the 140 million positions in the work force.

    The program explicitly requires employers to pay 100 percent of prevailing wages, eliminating cost as a motivation. Further, the application process asks sponsoring firms to show that they have searched for and cannot identify American workers with the skill set to fill the position. While this last item is not a requirement for approval, leaving it out is a sure way to have an application denied.

    The reality facing large firms is that globalization has come to the services sector, meaning many activities can now be done anywhere in the world. This is inconvenient for workers and politicians. But denying reality won't change the competitive pressures bearing down on firms.

    Most companies prefer to perform high-value processes close to their headquarters for cultural reasons and because it eases coordination. Further, many processes require a range of specialized skills to complete. A successful drug discovery research lab at a pharmaceutical firm requires chemists, biologists, lab technicians and genomics engineers, among others.

    If a firm is missing one or two key skills, the entire process suffers. This is precisely the situation the H-1B visa program is designed to address. If no local worker can fill the position, the program allows firms to recruit a person with the missing skill, pay that person the prevailing local wage, and allow them join the existing operation in the United States. This makes all the other workers more productive and helps protect their jobs.

    The Grassley/Durbin approach would make U.S.-based operations less competitive and increase pressure to move entire processes offshore.

    This is why almost all economists who have examined the situation, as well as thoughtful politicians from across the political spectrum, advocate expanding the H-1B program. The market for talent has become global. The question facing firms and policymakers is: Do we want those talented people working in the United States, strengthening firms that are based here? Or do we want them working overseas, competing with American operations?

    Robert Kennedy is executive director of the William Davidson Institute and is the Tom Lantos professor of business administration at the University of Michigan's Ross School of Business. He recently published "The Services Shift: Seizing the Ultimate Offshore Opportunity."
  • xorgen
    Great point to Managers who thinks outsourcing is the solution for cost cut down. Many companies realized the issues and loss with outsourcing by now.
  • Dragan
    You probably had bad experience with really cheep companies. Quality does cost. I worked, in the field of architecture, on both sides and secret is in good management. How god you manage outsource power, makes all the difference.
  • Costs of outsourcing are heavy on the employees and transferred to the consumers.
  • matt
    cheers or saink, been lookin for some disadvantages for ages to help with my assignment :) CHEERS
  • yin
    great info. thanks alot =) Helped alot for my assignment ^^
  • xin
    straight to the points.
  • pamela
    so true, short straight to the point summary
  • mitch
    dude u are so right you rock.
  • core
    Cheerz mate - it's useful.
  • Bas
    This is the one and only :) more pages are ripped from this site... darn the internet.
  • k3ff
    i've seen the same content from 2 different sites..points are exactly the same..Wonder who copies who?
  • Alex
    Wonderful summary,i will like to read more materials from you.
  • Migx
    Short explanation but direct to the point thanks
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