- Economies of Scale.
Outsourcing organization carries out activities on full time basis and at possibly at much larger scale than their clients. They may have economies of scales and have specialist able to bargain discounts and work efficiently better than their client. Some extent of these benefits they may passed to their clients to gain business.
- Planning and Budgeting.
Cost can be known in advance reduces uncertainties in planning and budgeting. Future cash flow requirements can be better anticipated. - Realization of Surplus Assets.
Outsourcing can make some asset idle which can be used deployed elsewhere or can be sold to realize cash flow which contribute towards the improvement of liquidity position. - Elimination of Limiting Resources.
Outsourcing organization may have larger capacity which can be used in line with other activities of the business. - Reduced Overhead Costs.
Outsourcing organization may be ready to provide services based on variable charges hourly or per unit basis. - Experience and Expertise.
It is possible that outsourcing organization has specialist knowledge; skills and equipment enable them to provide better quality services. - Focus on Core Activities.
It will reduce managerial workload allowing them to focus on core competencies and delegate areas on which they lack competencies and resources to some competent outsourcing organization.Limitations of Outsourcing in Business Management.
- Loss of Control.
Outsourcing organization may be remote from business current location, frequent visits are not possible and communication through reporting are not sufficient to exercise control. Core activities should not be outsourced unless impracticable to do in-house. Any incompetency identified by market can be threatening to the reputation of the business.
- Lack of Independence.
Business may became dependent on outsourcing organization, because of loss of competency and resources in the business due to employees being redundant or deployed elsewhere and assets are sold which now require more investment to buy again. In case of breach, it will be difficult to setup activities immediately. Delays to setup activities again can damage reputation and cash flows. - Employee Morale.
Employee may lost their skills overtime and resentment can happen if outsourcing leads to forced redundancy. It can seriously impact productivity because their will be little motivation regarding promotion and growth. In extreme cases it may end up with strikes. - Cost May Exceed Benefits.
There may be cost associated with employee redundancy payments, early termination penalties of existing contracts and disposal cost of property, plant and equipments. Benefits determined from outsourcing are future expectations which may not come true. Like savings in step fixed costs of energy and supervisory costs due to reduced activity level. - Reaction of Stakeholders.
Stakeholders may react positively or negatively depends how they perceive the impact of outsourcing on their interest in the business. Some stakeholders may become happy while some may become sad.
These include shareholders who may sell their shares can affect the share price, financers who may demand repayment of the capital, customer who may take their business elsewhere and supplier who may change their business terms depending upon their perception of business future risk.
- Legislation.
Legislation may limit dealing in foreign countries to protect its currency value or dealing with rival countries. It may protect some stakeholder rights by enforcing legislation e.g. imposing high import duty to protect home industries or by imposing licensing requirements to business operating in particular industry requiring some activities or standards which are pre-requisite to get a license.
Related posts:
Process/Strategy Matrix for Outsourcing Decisions in Business Management.
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Benefits of Outsourcing in Business Management.
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