Outsourcing: Advantages and disadvantages

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Outsourcing: a market with advantages, but one that requires attention!

 

In my first article, we talked about the “back office” and its importance to companies. I also mentioned “outsourcing”.

I also stated that you cannot talk about the back office without relating it to outsourcing, and vice versa.

This article, therefore, looks at outsourcing in more detail; types, advantages and disadvantages, and the latest numbers of this high-value market.

Definition of outsourcing

Outsourcing is the business practice of hiring a separate company (third party) to perform administrative services or manufacture products.

This practice is nothing more than outsourcing the execution of administrative services, project development, or product creation.

According to Wikipedia, the term outsourcing was first recorded in 1981, a blend of “outside resourcing.” Outsourcing was first noted as a business strategy by Kodak (who outsourced their printing services to an outside company) in 1989. It became a common economic practice among companies in the 1990s.

Outsourcing is generally linked to economic issues such as lowering a company’s operating costs. Criticism of the practice, however, generally focuses on the negative economic impact when jobs are outsourced offshore.

Defenders claim that the practice generates incentives for the creation of new businesses and allocates resources where they are most effective. As such, outsourcing ends up helping to maintain and improve free-market economies across all parts of the world.

Understanding outsourcing

As mentioned, outsourcing can significantly reduce a company’s operating costs.

Why? Simply put, in countries that are traditionally suppliers of outsourcing, the costs of labor, taxes, rents, and other charges are lower. Thus, for a company in Europe for example, the same administration or manufacturing projects can be done in another country more efficiently and with lower expenses.

Cost reductions are possible too because the company outsourcing projects will not have to invest in equipment and technologies that may have only limited or one-product use.

And along with cost savings, companies can use outsourcing as a strategy to improve their focus on the core of their business. Peripheral activities such as manufacturing or administration can be being carried out efficiently by a specialized company. Allowing a company to focus on its core strengths can increase product response time, which helps overall its competitiveness.

Types of Outsourcing

The most logical and objective way to classify outsourcing is by geographic location. According to this criterion, the following types exist:

Local Outsourcing: a company in the same country.

Nearshore Outsourcing: the company is in a neighboring country or on the same continent.

Offshore Outsourcing: the contracting company uses a company on another continent.

When choosing the type of outsourcing, some of the factors that need to be considered and researched include:

  • Cost efficiency
  • Cultural closeness
  • Creativity
  • Ease of access

Advantages and disadvantages

Advantages of outsourcing include:

  • Lower costs
  • Increased efficiency (or productivity)
  • Variable-capacity
  • Increased focus on strategy/core competencies
  • Access to talent or resources
  • Increased flexibility to achieve changes in business and commercial conditions.
  • Accelerated time to market
  • Lower ongoing investment within the internal infrastructure
  • Access to innovation, intellectual property, and leadership ideas
  • Possible cash inflow resulting from the transfer of assets to the new provider

There are disadvantages, however, such as:

  • Slower time for products to reach the market
  • Lack of business or knowledge domain
  • Cultural or language barriers
  • Time zone differences
  • Lack of oversight and control

Note that there are several types of outsourcing contracts. Each has specific characteristics that are adapted to certain types of activities. The company contracting these services must take careful note of these details before entering into the contract.

A global market

The Brazilian website Statista has been publishing statistics on the outsourcing market since 2000. According to data published in February this year, in 2019 the global outsourcing market was worth some USD$92.5 billion.

The annual revenue of the global outsourced services industry, however, has been unstable in recent years. In 2016 for example, revenues dropped to USD 76.9 billion, the lowest value seen in a decade.

The largest outsourcers come from the Americas, followed by Europe, the Middle East, and Africa. The smallest portion of this global revenue came from the Asia-Pacific region, which is traditionally a provider of outsourcing services.

Importantly though, for both the outsourcing company and the host country, there are cost opportunities and advantages for developing a diverse range of suppliers around the world.

Further reading:

The Back Office: What it does and where it is going by

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Guilherme Santos Saraiva Guilherme Santos Saraiva

Back Office Specialist with a BSc in law, I have over 10 years of experience in Administrative Management, 3 of them in a Financial Market company based in Geneva. What I love most about my job is researching, analyzing and making important and complex data accessible to people. I'm organized, have a good sense of prioritizing tasks, and appreciate honesty, loyalty, responsibility and harmony. I'm also a lover of music, books, old cars, nature (animals and plants) and good humor too.

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