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.

However, projects that end with no ongoing need of the staff would best be outsourced

Management: If the management needs to strictly control the process, they should not outsource.

An example of an outsourcing activity which may not have been a good idea was customer support for computer equipment sales by Dell a while ago.

Dell could not control the interaction with their customers and there were numerous complaints about communication skills, product knowledge and general attitude of the outsourced technician. Outsourcing has many advantages but at the same time it has some disadvantages that cannot be ignored.

Specific tasks

Cheap labour: The organisation is able to access cheap and efficient labour through outsourcing.

This is brought about by reduced training costs.

Outsourcing helps the organisation save money, but this depends on the specific tasks being outsourced.

Reduced costs: Outsourcing helps companies cut operating costs by almost half.

It also helps the organisation provide high quality products at a cheaper rate.

The savings can be enormous depending on the nature of business operations.

Access to technology: The outsourced firm can afford the latest technology since it could be part of their core business.

With outsourcing you don’t need to become an expert in a particular area because you can depend on the outsourced company.

Increased production: The outsourced company can provide service 24 hours a day, with workers around the globe operating in the best shifts available.

This way the company will focus on its core business and outsource “non-competitive” factors to business partners.

Even though there are many reasons to consider outsourcing, there are also some negative aspects that need to be considered.

Employee reactions: No one likes to think his or her job may be in jeopardy.

Once your employees see that jobs are being outsourced, they may think their jobs are next.

This can cause some employees to leave the company in search of one that isn’t outsourcing tasks.

It can also cause general uneasiness, which can lead to lower morale and less productivity.

Loss of control: Once you let someone else handle part of your business, you begin to lose control.

Customers may not be handled the way you prefer and management may make decisions you don’t approve of.

If total control is important to you or your business, reconsider outsourcing.

Customers: You may lose some of your customers once you start outsourcing.

Some customers may feel disconnected knowing you no longer perform this function yourself.

Issues of trust arise and the outsourced company may not adapt to the firms changing needs.

Mr Mwalya is an Accountant at Tribe Hotel, Gigiri.