• Simplification. This arises from reducing the number of activities performed within the business.
• Efficiency and cost savings. Access to cheaper labour, regulatory differences and skilled labour in offshore locations all lead to cost savings for business.
• Increased process capability. This comes from access to improved technologies and highly skilled labour. Improved process capability means products are produced and delivered to the market with improved levels of service.
• Increased accountability. This is achieved through the use of service level agreements (SLAs), which contractually bind the vendor to predetermined targets on KPIs
• Access to skills/resources lacking within the business. A business outsourcing to a nation such as India or Vietnam, may well find that there is access to highly skilled and disciplined labour at low cost. This gives a double saving as there is then no need to spend money on training and developing labour resources.
• Capacity to focus on core business or key competencies. The use of outsourcing enables a business to focus on that which it cannot outsource: its vision, purpose, sustainable advantage through innovation, and so on.
• Improvements to in-house performance. A business using outsourcing and therefore focusing on core competencies can improve in-house performance as it can really focus on making internal changes that reduce cost and improve profitability.
These advantages are very significant and businesses that undertake outsourcing do not readily reverse the decision. However, there are also issues arising with the use of outsourcing, which businesses must address or overcome if they are to realise the benefits of outsourcing as a strategy.
• Payback periods and cost. This refers to how long it takes to repay the cost of organising outsourcing and make the required organisational changes. Over time businesses will experience cost savings; however, it could take 2-3 years. If a business reduces internal inefficiencies, businesses may become more efficient and productive without using outsourcing.
• Communication and language. This is an issue between the business and the outsourcing vendor, and is a key issue in managing the relationship. When negotiating to outsource, the business might focus too much on the decision to outsource rather than consider the ongoing relationship with the vendor (which typically lasts three to five years). This can lead to confusion over expectations. Moreover, as outsourcing often occurs across two or more regions, there can be cultural differences, language differences and differences in the way business issues and problems are managed. This can lead to a misalignment between the business and the outsourcing vendor. There may also be misunderstandings about what the agreed service levels are and what KPI measures are acceptable.
• Loss of control of standards and information security. When a business opts to outsource, it can feel a loss of control over standards and also over how information is used. Recent issues have occurred where a Chinese manufacturer of toys for the Mattel brand (a leading United States of America toy brand) did not adhere to the design specifications outlined in the SLA and used too much lead in toys. Similarly, Australian banks have found privacy within outsourced operations in India may not be as secure as it is was when the functions were performed in-house.
• Hierarchies. A business using outsourcing may be aiming to eliminate costs associated with hierarchies, yet managing complex outsourcing agreements can create its own hierarchies, thereby maintaining business inefficiency.
• Organisational change and redesign. Outsourcing may be accompanied by a high level of business change and organisational redesign. There may be downsizing, causing the loss of domestic employment. An option can exist for job migration for employees who may be losing work to gain employment in the outsourcing. However, even if desired, work permits/work visas may prevent this from being an option.
• Loss of corporate memory and vulnerability. A significant disadvantage arises from the reliance on the outsourcing provider. Key knowledge of processes and solutions may be lost with the transfer of business processes to outside parties. To counter this, some businesses such as the banks create ‘shadow teams’ to retain corporate knowledge and, if required, processing capability. Business may also require that the outsourcing vendor have strategies in place in case there is a regional crisis (such as an earthquake) that severely disrupts communication and leads to information losses.
• Information technology. As the use of outsourcing grows so too does the need for supporting information technology (IT). There is a cost and time associated with the use and adaptation of IT to the specific requirements of the business and the outsourcing vendor. The cost and time can significantly reduce any financial advantages accruing in the short term with the use of outsourcing.