What to consider before outsourcing functions

“If you deprive yourself of outsourcing and your competitors do not, you’re putting yourself out of business” Lee Kuan Yew.

Outsourcing is subcontracting a service, or services, that might have been performed in-house to a third-party.

It is not a recent phenomenon; it has been in existence as long as work specialisation has existed.

It is geared towards achieving a lower production cost, making better use of available resources, focusing energy on the core competencies and making more efficient use of resources.

The decision to outsource or keep activity ‘in-house’ depends on various things.

Whether the activity/process is core: If the activity or process is core process to the business, it should not be outsourced. For example, in car assembly, the assembly-line is core and cannot be outsourced, while computer training is not core and can be outsourced.

Need for skills: If the activity requires highly specialised skills which the organisation may not have, the activity or process can be outsourced.

For example if an organisation wants to write an employee handbook ensuring all policies are represented clearly and in legally correct terms, it’s better to outsource to an experienced HR consulting firm.

On the other-hand, if affirm has just installed a new database technology requiring specialised technicians, it’s better to hire the skilled individuals since they will be needed for an extended period to work on projects.

The duration: If the activity will last several years, it should not be outsourced.

The primary reason is price.

Outsourcing typically costs more for long periods because, the client pays some ‘fixed costs and profit’ as part of the cost to do the work.

Confidentiality: If highly sensitive and confidential information will be revealed during the execution of the project, do not outsource.

For example, if the project requires access to customer lists and future orders, it cannot be outsourced.

Staffing: If the staff will be needed after project completion for future projects, then the activity should not be outsourced.