Outsourcing refers to that practice using which a company reduces its operational cost by transferring the company’s repetitive and less important work to outside agencies or outsiders. It can be better understood with the help of an example, suppose company receives a work order of manufacturing 100 units and in – house production cost is $10 per unit. However, same work can be completed by some outsider at $8 per unit then a company will outsource this work and save $200 on 100 units. In order to understand it better let’s look at some of the advantages and disadvantages of outsourcing –
Advantages of Outsourcing
- The first and foremost advantage of outsourcing is that it results in better profit margins for the company because when work is outsourced it results in lower cost per unit or per employee and ultimately it reflects in the bottom line of the company in the form of higher profits.
- It also results in saving of valuable work hours of employees of the company which can be directed towards more productive and efficient work because work which is outsourced is of repetitive nature and not that important and if same work was done by employees of the company then employees will not be able to contribute towards betterment of the company as their majority of times is spent on doing work.
- Since work is outsourced to those vendors who specialize in that particular work and it therefore they are able to do the work in lesser time than normal and hence it results in improvement in efficiency of the company as company is able to complete work in lesser time and lower cost.
Disadvantages of Outsourcing
- The biggest shortcoming of outsourcing is that it results in sharing of confidential information about company to outside agency or company who are doing outsourcing work and there is always a risk that this information may be used to harm company in future by individuals working in these companies.
- Since outsourcing work is done in order to save money, companies doing outsourcing do not pay attention in hiring process and they tend to employ individuals in bunches without properly looking at their qualification and experience which in turn leads to company’s work being done by unqualified people for the job leading to reduction in quality of outsourced work.
- Outsourcing creates insecurity among employees of the company because employees start thinking that eventually they will lose their job because of outsourcing and hence there is a risk that company will lose loyalty and confidence of its own employees because of outsourcing.
As one can see from the above that outsourcing has benefits as well as limitations and it is up to the company whether it wants to reduce its operational cost by just look at advantages only and start outsourcing or it wants to have balanced approach and look at its limitations also.