Personal Finance

Always think of the cost implications before outsourcing

To outsource or not? That is the big question that many company executives are pondering over as profits dip and businesses strive to remain competitive.

As business processes grow and get more sophisticated, a number of companies are outsourcing some of their services like cleaning, recruitment, and mail delivery.

A larger number, however, still maintain their own human capital for all their needs.

Most of the businesses that outsource are often the blue-chip type and this has led to question whether the smaller outfits should follow suit in these hard economic times.

One of the reason behind outsourcing is to cut costs.

Having a permanent staff that comes with cost implications like salaries, medical fees, and days taken off is seen as relatively expensive compared to having a standing negotiated figure dedicated to outsourcing of a specific function.

For example, companies don’t have to incur expenses of buying materials and equipment like detergent, broom, hand wash soap, or toilet paper and these costs are left to the outsourcing firms.

Another reason for outsourcing is because it makes companies easier to manage.

This is due to the smaller staff a manager is directly responsible for, says Joyce Bartai, a management consultant at Adept Systems.

But the more familiar corporate buzz word is “focusing on core business functions.”

“Kenyan companies need to change their mind-set regarding outsourcing because it can allow them to streamline their operations and in most cases, cut costs and focus on core competencies,” says Mr Collen Tapfumaneyi of Custody and Registrar Services, a company that provides share registry services to listed companies.

Profitable firms
Outsourcing to focus on core functions is more beneficial to large, highly profitable business entities that have numerous business processes.

The wisdom is to hire staff for and concentrate on activities that bring in the money and pay another company a fixed figure for those other essential services.

However, cautious is the approach a business should have in deciding whether to outsource or not, because if not done properly, it might end up being more expensive than providing the service in-house.

“It may end up being more expensive than keeping your own staff.

One should, therefore, do a feasibility study and compare the different rates companies are charging for a particular service delivery,” says Ms Bharti.

Outsourcing comes with the need for close supervision. The client company’s administrators should check to ensure that the services and/or products are actually delivered to a satisfying level.

“The employees of the contracted company may abandon their duties or fail to do their job well and start blaming one another,” she says.

Downsizing tool
Outsourcing can be an efficient tool for downsizing or business process re-engineering (BPR). BPR refers to changing the way a business operates in a radical way in order to achieve high returns. It may even lead to a total change of a business model.

The decision to outsource therefore depends on the circumstances of a company, but if taken, should be applied after a careful balancing of the value it brings vis-à-vis the challenges it comes with.