Outsourcing

Outsourcing describes a company’s decision to purchase a product or acquire the service from
an outside supplier rather than producing it in-house. Through this option, an organization can
concentrate resources on its core business competencies while capitalizing on the expertise of
other firms that are more efficient, effective, or knowledgeable at specialized tasks that are
peripheral to those core business competencies. Today, many firms outsource significant parts of their support services such as: information technology, customer service, and human resource functions.

The terminology “make versus buy” is often used in reference to outsourcing. Make versus buy
analysis examines the relevant costs of keeping activities in-house versus outsourcing to external suppliers. Some firms have extended the idea of outsourcing to contract manufacturing, in which another company actually manufactures a portion of the first firm’s products. Contract manufacturing can provide a win-win relationship if one firm has excess capacity or expertise and another company lacks capacity or knowledge.

Benefits and limitations of outsourcing

There are many strategic reasons an organization may choose to outsource work. For smaller
business, outsourcing may provide access to resources and expertise for capabilities they may not have internally. For larger businesses, outsourcing can improve specific functions and may
provide the following benefits:

1. Allows management and employees to focus on core competencies and strategic revenuegenerating activities.
2. Can improve efficiency and effectiveness by gaining outside expertise or scale.
3. Can provide access to current technologies at reasonable cost without the risk of obsolescence.
4. Can reduce expenses by gaining capabilities without incurring overhead costs (for example, staffing, benefits, space).
5. May improve the quality and/or timeliness of products or services.

Despite many attractive advantages, outsourcing is not the answer for all activities or functions and should consider the following key cautions:

• May cost more to go outside for specific expertise.
• Can result in a loss of in-house expertise and capabilities.
• Can reduce process control.
• May reduce control over quality.
• May lead to less flexibility (depending on the external supplier)
• May result in less-personalized service.
• Creates privacy and confidentiality issues.
• Can result in “giving knowledge away” and lead to competitors obtaining expertise, scale,
  customers, etc.
• Potential for employee morale and loyalty issues.