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Outsourcing, or the practice of contracting a business function to someone else, has come to define today’s age of globalisation. It has generated quite a heated debate, with some countries claiming that outsourcing across borders snatches away jobs from the domestic workforce. However the fact remains that it has brought about quite a revolution in providing quality products and services across the world. Outsourcing can be in various streams – IT, legal, content development, recruitment, logistics, manufacturing and technical/customer support – to name a few. Here we examine some of the advantages of outsourcing.
Advantage of Outsourcing: Cost reduction
Contracting some aspects of a company’s production or service mechanism helps it to cut down on unnecessary costs. For example, a doctor’s clinic regularly has to deal with patients with medical insurance which involves a considerable legal angle. Spending money to assign and train people specifically for the purpose of efficient handling of billing and insurance would involve considerable costs for the clinic. Thus it would be profitable for it to outsource the billing aspect to a company which specialises in handling insurance claims. This would save the clinic a lot of time and money. Various other examples spring up, like a processed foods manufacturer outsourcing the packaging and distribution of his goods. This would save him the unnecessary task of employing people or training them to carry out these activities. Another instance that helps in reducing costs is when a company in a highly developed country outsources a certain task to a firm based in a developing country.
Let us take the example of General Electric in the USA outsourcing its customer complaint management to an Indian BPO. Now GE would pay its employees in USD which at the current exchange rate roughly translates to fifty times the amount in Indian Rupees. Hence GE would be able to employ fifty people in India at the same cost at which it employs one in the USA (considering equal purchasing power parity between USD and Rupee). Hence the whole exercise of handling customer complaints is now much cheaper for GE. This is one of the main reasons that the American labour force has been wary of outsourcing. Cheaper labour in developing countries poses a threat to their existence.
Advantage of Outsourcing: Cost Restructuring
Outsourcing enables companies and production units to cut down on initial setup costs or fixed costs. Operating leverage, or the measure of fixed cost versus variable cost, is reduced considerably through this process as the company can choose to avoid unnecessary and costly set-ups required for the operation and simply use alternate established facilities through outsourcing. When Louis Vuitton, a French fashion house, outsources the sewing and fabric manufacture of its couture dresses to Chinese companies, it is avoiding the expenses it would have to incur while establishing a sewing house in France itself. Thus through such cost restructuring activities, outsourcing provides some attractive gains.
Advantage of Outsourcing: Tax Benefits
Sometimes manufacturing and service providing agencies outsource their functions on contract to companies in other countries. The tax norms and regulations in these countries, especially developing countries, are usually lenient in order to encourage production and growth. Thus, foreign firms which outsource to these companies can enjoy the benefits of lower taxation on production and manufacturing activities. Corporate tax in these countries is considerably lower in comparison to the developed nations, making it a profitable venture for foreign companies to either establish themselves in these countries or outsource work to them.
Advantage of Outsourcing: Access to Funding
The laws and policies governing developing nations involve provision of grants and low interest funding to the production and manufacture sector. Thus obtaining funds through government grants or venture capitalists for the purpose of furthering businesses is relatively easy here. This provides another attractive reason for companies in the developed world to outsource production activities to third world countries.
Advantage of Outsourcing: Focus on Core Competencies
Outsourcing certain functions to other agencies allows the company to focus on its core business. For instance, McDonalds contracting the manufacture of toys and goodies to toy manufacturing plants in China and Korea, helps it in maintaining a stronghold on its primary product, i.e., burgers. If McDonalds started concentrating on production of toys and goodies, it would have to compromise in some way, in terms of manpower or quality, on efficiently producing and serving burgers. Hence, outsourcing allows businesses to focus their resources on developing the core business while also making a provision for its auxiliary services.
Advantage of Outsourcing: High Productivity and Efficiency
This advantage comes as a sort of corollary to the above mentioned point. If an organisation focuses on its core competencies by outsourcing its auxiliary activities, it makes more time and resources available for the main business, thus improving efficiency and quality of the product/service. As a company expands, other functions like back office operations, payroll management etc become more time consuming and tedious to handle. Thus, outsourcing these activities to other firms that specialise in the provision of such services helps streamline the process and avoid logistical costs.
Advantage of Outsourcing: Access to Expertise and Skill
Access to talent, operational expertise and skill set of the outsourcer gives a company the opportunity to avail top quality services and incorporate it into their product or service. For example, the government outsources the construction of highways and flyovers to contractors who specialise in construction activities. These construction agencies have the required skill set and manpower to undertake this task in an efficient manner. Thus the government accomplishes this task within a short time frame and with a better end product due to outsourcing. Also in certain cases, access to intellectual property and scientific knowledge provides additional benefits to the outsourcing firm.
Advantage of Outsourcing: Efficient Risk Management
Partnering with an outsourcer who is able to mitigate the risks associated with a particular business function helps the outsourcing company reduce its own risks. If a company outsources its human resource management to another company, then the latter (outsourcer) is liable for any discrepancies in the service provided and all its associated risks. Personnel management, recruitment, performance evaluation, employee complaints, leave sanctions and all other aspects of the HR department are handled by the outsourcer and risks such as absenteeism, problems in recruitment, planning failures, are also managed by them. This relieves the outsourcing company of having to bear these risks and allows it focus in its core regions of competency.
Advantage of Outsourcing: Accommodating peak loads
Outsourcing allows companies to manage the increased work load and demand requirements during peak season time through outsourcing some of the production work to other agencies. Since no extra operational or hiring cost is incurred while doing this, it helps in saving on expenditure which would otherwise have to be adjusted between peak periods. However this is mostly beneficial when peak loads are less frequents and shorter in duration.
These are some of the advantages of outsourcing. Initially restricted to national borders, it is now being done on a global scale. Consequently it has come to mark one of the corner points in the globalisation revolution. Greater outsourcing and contracting makes the world better connected and more inter-dependant than ever before. It helps in providing better products and services globally. Not to mention the huge impact it has on the lives of the millions employed through this medium. Though it is becoming an increasingly political issue, empirical evidence suggests that in the end outsourcing does pay off.