Outsourcing Disadvantages and Advantages: The 2023 Guide

Frequently Asked Questions About Outsourcing Disadvantages and Advantages: The 2023 Guide

What is Outsourcing?

Outsourcing is contracting a third party to perform some of your business activities. The term was coined in the early 1980s and shortened from “outside resourcing.” Commonly outsourced functions include:

• Human resources (payroll, claims, benefits, etc.)
• Manufacturing
• Customer support/call centers
• Shipping
• Warehousing
• Data analysis/processing

With remote work rising, outsourcing is becoming simpler. Project management software, chat applications, and other remote tools are bringing workers worldwide closer. Outsourcing is more complex than it used to be and will likely continue in that direction.

Offshoring vs. Nearshoring

Offshoring is when work is outsourced to a distant country. On the other hand, Nearshoring is outsourcing to a country that shares or is in a nearby time zone to the company. While offshoring typically costs less, nearshoring for services like software development negates some disadvantages of outsourcing. For example, the nearshore outsourced employees work similar hours to their on-shore counterparts, with fewer language and cultural barriers.

What are the advantages of outsourcing?

Outsourcing is a popular tactic for a reason. Several advantages could boost your company to the next level. There is even a onsite offshore outsoucing hybrid model companies use that we discuss here. 

Cutting Expenses

This is the first thing that comes to mind when considering outsourcing. Cutting expenses was the original goal of outsourcing, and it continues to be a valuable tool. Your business will be able to save costs in a few areas (1).

“It might cost far less than the price of expanding, and it is both more efficient and less expensive than relocating.”

– Live About

Labor

Labor costs are lower because a third-party company handles their wages, benefits, and training. This also allows you to avoid adding more people to your primary location, which would raise overhead and possibly require additional hiring in human resources, training, and management. Hiring and onboarding are further costs that the third-party company will take on. The available talent pool will be significantly expanded, making positions less competitive and getting higher-quality candidates. 

Manufacturing

Creating a facility, getting tools, and purchasing materials for manufacturing can be a considerable cost. When manufacturing can be outsourced, your business can save on all that. Manufacturing companies are already set up to create products, and yours will be added to their list. You won’t have the added cost of building that process from the ground up.

Facilities

New buildings cost money, time, and further cash for maintenance and overhead. If you can outsource warehousing, storage, or shipping operations, you can utilize existing facilities and reduce costs.

Increasing Productivity and Efficiency

Outsourcing allows you to move peripheral functions from your primary location to companies specializing in those areas. Your core staff can focus on what they do best, and the third-party companies will be more efficient at their tasks. For example, many companies outsource their customer support. Their on-location staff is free to work on the leading products and services, and a company specializing in customer support will handle customer inquiries (2).

“When companies outsource their operations, it alleviates the need for internal employees to work in that department, meaning employees can spend more time working on other operations which increases company productivity.”

– Indeed

Expert Input

When choosing where to outsource, you have a selection of companies with diverse expertise. You’ll be able to source experts worldwide. If there’s an area your company is struggling in, you can rely on experts to handle it instead. It will relieve pressure from the employees who don’t specialize in that area, and the expert can improve it.

Competitive Edge

If you’re sourcing talent, experts, and manufacturing from around the world, you have a vastly larger pool than your local competitors. Keeping your company’s functions in one place limits you to local resources. Outsourcing opens the door to the rest of the world and all the possibilities that come with it.

What are the disadvantages of outsourcing?

While outsourcing can give your company a big boost, there are disadvantages you need to consider.

Negative Impact on Staff

Outsourcing can lower employee morale. If the reason for outsourcing isn’t apparent, employees may feel that they’re being replaced by cheaper help. Clear communication, opportunities for advancement, and continuing education can help your staff feel valued and optimistic. 

Data Protection and Confidentiality Risks

The more locations data lives in, the higher the risk. You’ll also have less control over screening potential employees, which could mean people working with your information that you wouldn’t have hired. Unscrupulous third parties could also leak or sell data to benefit themselves. Do your research, ensure you’re contracting with reputable companies, and set agreements over how data can be used. 

Lack of Consistency

While you have control over your local work and how employees function, you won’t have that over outsourced employees. This could mean quality, security, customer service, or productivity inconsistency. You can discuss this with the company you outsource to, but you won’t have the same opportunity to oversee their work (3).

“Unfortunately, you just cannot control the whole development progress or deal with troubleshooting on the go. And this would be perhaps the only situation when a complete in-house team pays off.”

– Forbes

Financial and Reputation Risks

Adding to the previous issue, working with a third party could harm your reputation if they act improperly. Since you don’t have any say over their operations, there’s nothing you can do if they misuse finances, provide poor customer support, or go out of business. You can stop working with them if something like that happens, but the damage may already be done. Again, do thorough research and look up reviews of companies you plan to work with.

Less Flexibility and Control

With your on-site employees, you can speak to them immediately and ask for changes. You won’t have that immediacy with an outsourced company, mainly offshore. It may take time to reach them. If they’re in a different time zone, you may have to try outside your regular office hours. That extra time to reach them means more time until they can implement changes.

Political and Cultural Problems

This is another issue that’s particularly apparent when offshoring. Nearshoring can be a solution. When outsourcing to far countries, the political environment and culture will be different than what your in-house employees are used to. This can cause communication issues, misunderstandings, and potential issues with customers. It’s hard to relate to a culture you’re unfamiliar with, and it creates challenges for both sides.

Is outsourcing right for your company?

There are many factors to consider when it comes to outsourcing. Putting much thought into it and research before committing to anything is essential. Here are some other considerations.

Core Functions of Your Company

Outsourcing is most effective when you separate the core functions of your business from the peripheral activities. Determine what those are and analyze your operations. Where can you improve efficiency? What areas need to be streamlined? What are you okay with outsourcing?

Calculate Costs

If your goal with outsourcing is to save money, calculate how much each department costs to run. Look at efficiency, overhead costs, and employee turnover. Compare that to the income they generate. Areas that bring in less money might be good candidates for outsourcing.

Research, Research, Research

This is arguably one of the most critical steps. Once you’ve determined what you’d like to outsource, start researching companies with which to do so. Look into offshoring vs. nearshoring (https://sonatafy.com/how-to-choose-between-nearshore-vs-offshore-outsourcing/) and decide if one would be more beneficial. Narrow down the countries you’re interested in, and then research companies that specialize in the area you’re outsourcing. Read about their services, prices, hiring practices, and security policies. You’ll want to understand their contracts and terms as well. Look up reviews and read as much about them as you can. Utilize your network to find companies or get opinions on them.

Know What You Need

Before working out a contract, understand your needs, what you want to be firm on, and where you can be flexible. Some things you might need to consider:

• Hours of availability, especially for customer or employee support
• Contact methods
• Volume expectations
• Quotas and how they’re reported
• Quality assurance
• Security protocols

Once you know where you stand, you can begin discussing contracts with attractive companies. Don’t settle for anything you don’t want to, and don’t be afraid to stand your ground on the things necessary to your business. Even if you don’t come away with a company to work with, you’ll have a good idea of how to streamline the department.

Consider Your Employees

Your employees are likely the heart of your business. Considering how morale and satisfaction might be impacted is in your best interest. Though outsourcing can save you money, it’s not worth losing the people who keep your business going. If possible, try to keep lines of communication open and allow them to be part of the discussion.

So, What Are the Pros and Cons of Outsourcing?

In general, the pros of outsourcing are cost savings and increased efficiency. The cons are less control over the output and potential morale problems with your employees. Many businesses utilize outsourcing, and we’ll see that trend continue as remote work becomes more seamless and the world’s borders feel closer. There’s no blanket answer for what is suitable for every company. Your business is unique, and it’s up to you to analyze the advantages and disadvantages of outsourcing.

References:

1. It might cost far less than the price of expanding, and it is both more efficient and less expensive than relocating. – Live About Quote
   https://www.liveabout.com/top-outsourcing-advantages-2533765
2. When companies outsource their operations, it alleviates the need for internal employees to work in that department, meaning employees can spend more time working on other operations which increases company productivity. – Indeed Quote
   https://www.indeed.com/career-advice/career-development/operational-outsourcing
3. Unfortunately, you just cannot control the whole development progress or deal with troubleshooting on the go. And this would be perhaps the only situation when a complete in-house team pays off. – Forbes Quote
   https://www.forbes.com/sites/forbesbusinesscouncil/2022/01/28/in-house-or-outsource-whats-better-for-a-large-enterprise/?sh=37e5ba8070f3