Thursday 01 December 2022

Outsourcing Benefits and Disadvantages

Since the entry of the new millennium, outsourcing has been at the forefront of every successful business development plan. In the past 15 years, outsourcing has remained on a strong and stable growth path. From a US$45.6 Billion industry in 2000, outsourcing grew to a US$104.6 Billion in 2014.

Outsourcing Benefits and Disadvantages

Given the increasing globalization of business, further uncertainties in markets and instability in some regions in the world, outsourcing is expected to be in demand over the next few years. But its multitude of benefits has its drawbacks.

Here are the benefits and disadvantages of outsourcing:


  1. Streamline costs

The immediate benefit outsourcing gives businesses is the capacity to streamline costs. Outsourcing reduces costs by capitalizing on comparative advantages that exist in other regions.

First and foremost is the cost of labor. Companies look to outsource work to regions where there is a comparative cost advantage in labor. In countries such as the Philippines, the average wage rate of an outsourced agent is only $2.3/ hour.

According to Outsource Workers, developed countries such as the United States and Australia, the average wage rates are US$20 and AUD$18 respectively.

  1. Improve productivity

Outsourcing improves productivity in two (2) ways.

First, by outsourcing non- core functions to a third party service provider, the company can focus more on its core functions. Second, the cost savings generated by outsourcing can be re- purposed and used to support other revenue- generating programs.

  1. Greater flexibility

When you outsource to third party service providers in other regions of the world, you have to deal with time zone differentials.

The advantage of having time zone differentials is that you can have your business covered any time of the day. This is important if your business is highly- customer driven and support services should be available at all times.

Thus, you can have a sales team working with you during your office hours then have the customer support group manage inquiries and issues after office hours.

Also, by contracting outsourced services, you can terminate the agreement any time as provided by the contract. Usually there is a 60- day notice but it is much easier and more convenient to sever ties if it is not working out as expected.

  1. Economies of scale

Another big benefit of outsourcing is lowering incremental cost because of economies of scale.

This is because when you plan to expand your scale of operations, each additional person you hire will not significantly affect your variable costs. Of course salaries will increase but the increase in rent, Internet, communications and power will be insignificant. As a matter of fact, expanding your scale will improve capacity.

Let’s assume that you outsourced customer support to a center in the Philippines with a bandwidth of 20MB. For receiving data and to support calling features, each station must have minimum 85 kbps bandwidth. Currently, the service provider has allocated 100 seats for your operation which means at least 8.5MB is used every shift.

Every additional agent hired will bring you closer to 20 MB full capacity. There will be no incremental increase in cost for Internet.

  1. Access to technology

If there was a jump- off point in the growth of outsourcing, it would be at the height of the Silicon Valley arrangement with IT companies in India.

Not only were the Silicon Valley companies able to streamline costs by a significant amount, they were able to access world- class, high- level technology from India.

In the world of IT, India houses many of the world’s most brilliant minds and brightest talent. The US companies had the best of both worlds; affordable skill and the latest innovations.


  1. Security concerns

The most serious disadvantage with outsourcing concerns the security, protection and integrity of data. Even with strict networking guidelines, the availability of highly- encrypted file sharing systems and regular monitoring the possibility of a breach will always be there.

Over the years there have been a number of publicized incidents involving high- profile personalities. One of the more popular ones was the unauthorized distribution of the medical records of a controversial American celebrity.

Although the matter was resolved, it still brings to light the risks to sensitive documents and information.

  1. Communication issues

Problems in communication arise because of a difference in perception. And the varying perception has its roots in having social and cultural differences.

Put simply, people react differently to how information, instruction and opinions are constructed and relayed. As an example, North Americans particularly those from the East Coast are very direct and straight- forward while service providers in Asia tend to be more conscientious and deliberate in their approach.

In addition, both parties have to contend with pre- conceived notions and other biases that tend to obstruct effective communication.

The key to establishing a successful outsourcing arrangement is to first build a strong, solid business relationship with the service provider. It is all about trust and transparency.

A successful outsourcing engagement is not just a client- service provider arrangement. It is a strategic partnership between two parties with a common set of goals and shared interests.