We cannot function in solitude. We are all a part of the society and are interdependent. As individuals, we usually seek help from the people around us. The reason behind this is that we cannot perform all tasks efficiently by ourselves. In the same way, the business also requires help. It cannot perform all activities, by itself. However, there are various activities, which are non-core to the business, but also very essential to the main business. These activities result in increased cost and employee requirement in the business. In order to overcome this hurdle, the concept of outsourcing took place but what is outsourcing?
What is outsourcing?
Outsourcing is getting something done from an external source rather than doing it within the organization. In simple words, it is the process which involves contracting out non-core activities to third parties. In this, a company hires or contracts out another company or an entity to handle processes, or carry out those activities, which were earlier performed within the company itself.
Reasons for outsourcing
1. It reduces the cost
Outsourcing of non-core activities reduces the operational cost of an organization. The organization can focus and concentrate its manpower on its strengths and source out the activities which are a hindrance to the main business activity.
2. Focus on the core
Every business has its own core area of operation. It strives to serve one definite purpose. However, it cannot stick on to that business alone, as there are several ancillary businesses that are also required. By outsourcing, a business can get rid of performing these ancillary functions and focus on its core function.
As a result of outsourcing, every business performs those activities which it is best at. The business units are not forced to carry out functions which are beyond its purview. This improves the quality of the product or service produced
4. Reduces the production time.
Outsourcing is a form of specialization. The best man is appointed for the job. This reduces the time involved in the production of products. As every business is specialized in what it does, the time required to produce a product is considerably reduced.
5. Foster innovation and employment.
As a result of outsourcing, every business can invest more time and capital in its core business. This leads to innovative ways, products, services, and ideas. Also, outsourcing leads to the creation of new industries and markets, thereby generating employment.
Key areas of outsourcing
- Information technology
- Human resource management
- Call centers.
Disadvantages of outsourcing
1. Loss of managerial control
As a result of outsourcing, the organization loses its stake over the outsourced activity.
2. Cultural mismatch
It is possible that that the parties involved in the process of outsourcing be culturally mismatched. This may result in a conflict between the two organizations and altered the quality of the product.
3. Increased dependency
As a result of outsourcing, one company completely relies on another company for a product or service. This results in increased dependency, which may prove to be fatal in the long run.
4. Increased cash outflow
Outsourcing is nothing but getting things done through others. This involves a huge outflow of cash. It is sometimes argued that outsourcing is an unnecessary business activity, as it outsources those activities which the business is capable of performing.
Examples of outsourcing
P&G outsourced a major part of its research and development activities, as a result, it’s innovation productivity increased by 60% and generated over $10billion in revenue from 400 new products.
Acer, the Taiwan based personal computer maker, chose to outsource everything it had a hard time with, like manufacturing. This led to faster-growing sales and gain in market share.
It is estimated that at least 94% of the companies outsource at least one activity or another. This itself shows that outsourcing, in the contemporary time, is inevitable. However, this activity requires a lot of circumspection and prudence.