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Strategic Outsourcing: benefits and risks

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The word outsourcing describes the assignment of processes, tasks or projects to external service providers. Firms choose the road of outsourcing to make processes more efficient, to save time or to take advantage of the strengths of the specialists of other companies. It fails, in most cases, to obtain a possible savings of the order of 10% or 15%. The smaller companies choose outsourcing of this type especially to reduce costs and to quickly organize certain business functions. Large companies, however, normally, they choose to improve their efficiency. The term “outsourcing” or “use of external resources” (outside resource using) and is not a modern invention but dates back to the eighteenth century: the outsourcing of work tasks was indeed a quick result of the principles of division of labor postulated by Adam Smith, and was intended primarily as a means to increase efficiency. In the beginning, outsourcing was limited to manufacturing: a typical example were the car manufacturers, who bought many components from external manufacturers then assemble the finished product in their establishments. In recent years, the concept of outsourcing has spread to all sectors of the economy: the technical services were the first to be contracted externally, but today it is possible to resort to external suppliers for virtually any type of service.

There are three different types of outsourcing:

  1. Business Process Outsourcing: this refers to the outsourcing of entire business processes. Classic example: outsourcing the entire IT infrastructure of a company to external service providers.
  2. Outsourcing of intellectual processes (Knowledge Process Outsourcing, KPO) also concerns the outsourcing of business processes, but in this case it comes to tasks requiring specialized knowledge of the internal processes of a company, and therefore are more complex because it is more difficult to coordinate. Example: to rely on external consultants to develop new marketing strategies.
  3. Out-tasking: refers to the transfer of individual tasks. For many companies it is the first step towards outsourcing, and is often used by companies that can not afford to hire staff to specific tasks. This makes it particularly interesting for small and medium-sized enterprises and start-ups.

What are however the benefits and risks of outsourcing?

The advantages are:

  • Focus on the “core business” since it reduces the number of tasks handled by her directly; avoiding the need to invest in secondary activities which moreover, to reach levels of absolute competitiveness, would require substantial investment, though not justifiable from results adjusted pro rata.
  • Reduce costs, because the company relies on a specialized partner whose main business activity that the company outsources.
  • To transform fixed costs into variable costs, since the cost of personnel and equipment (depreciation) involved shall be borne by outside.
  • Have greater flexibility, ie a greater capacity to cope with sudden changes in volume in sales, as the operator, thanks to its own specific organization, is able to compensate the peaks of a customer with others to seasonality contrary.
  • Improve the level of service through the use of specialized operators.
  • Enhance the staff, as no longer engaged in routine work, can focus more on the aspects of its focal activities, improving the professionalism reasonably.
  • Improve the quality of services and products provided, as the provider tends to enter in the “basket” of suppliers to whom it is addressed, only those companies that generate high quality standards: for this reason it is important to refer to a vendor consolidated experience and professionalism.

The main risks are:

  • the motivation of the staff, following the gradual demobilization of the internal structure;
  • the possibility of opportunistic behavior by the supplier of services, because of the situation of strong dependence of the company from the latter;
  • the difficulty of controlling the level of service offered to customers, due to the need for an adequate system of performance measurement and supplier of an interface within the company have the necessary skills;
  • the loss of the specific know-how, in the event that a member of staff to be absorbed by the service provider or in any case be transferred to another area of ​​the company;
  • the loss of direct contact with the end customer.
Header imagin credits: smallbiztrends.com

Un commento su “Strategic Outsourcing: benefits and risks”

  1. Strategic outsourcing is a good option for providing you tailor-made solution. but the major risk associated with outsourcing is a reliable partnership. Sometimes it becomes very difficult to identify the reliability of your outsourcing partner who can provide a cost-effective and an efficient supply chain management solution.


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