Outsourcing: too risky… too dangerous… too expensive

September 6, 2009

Companies trying to optimize their cost structure, improve quality and focus on core business make the use of outsourcing. That is correct… – to some extend

Outsourcing, correctly implemented, brings advantages to its buyer (and obviously to the vendor, too). These are mainly the three ones:

• Cost advantages,
• Qualitative improvements,
• Focus on core business.

Regarding cost advantages, there are not just cost savings but the possibility to make them transparent and better eligible for planning. Cost advantages can be realized due to the following factors:

• Specialized knowledge vendor has saves time (and money),
• Use of economies of scale as the personnel and investment costs at vendor’s end are mostly dealt into more than one service buyer,
• Capital which was bound in the infrastructure and personnel outsourced can be used for other purposes or the financial position of the company can be improved.

Qualitative improvements imply the following ones:

• Use of external know-how,
• Following the newest trends – also possible for small and medium-size companies,
• “Intelligent” outsourcing and productive co-operation can generate innovations.

And finally, focus on core business brings the following advantages to the buyer:

• Share the work load enables the buyer to focus on these areas which are essential to him,
• Higher strategic flexibility regarding market changes,
• Reduction of business risk as a part of it has been outsourced to the vendor.

So far so good. But… Have you already heard about DaimlerChrysler, outsourcing to HP a few years ago? The value of the contract was about EUR 0.5 million and HP lost it in the pilot phase. HP could not fulfil the project scope. The project leader and the team were not present as they were expected to be. The client had changed their requirements many times which caused problems regarding keeping of deadlines. And finally, the employees of DaimlerChrysler were of the opinion, they can deliver the service at comparable cost. Or… Have you maybe heard about Porsche – the car producer which originally had outsourced its IT infrastructure to IBM and then decided to get it back as outsourcing did not bring better cost structure than the in-house-made solution?

Dilbert: Outsourcing

Yes, every medal has two sides: the positive and the negative one (we already know it from the classical economics teaching us about alternative cost, don’t we?). What about the negative aspects of outsourcing? – They exist as well. Not correct implemented outsourcing projects can bring the opposite effects to the above mentioned, which means:

• Cost disadvantages,
• Qualitative risks,
• Additional burden (in place of focusing on core business).

It is expected that outsourcing initiative brings cost advantages – but in fact it can bring cost disadvantages. These occur due to following reasons:

• The outsourcing potential has not been used efficiently and the cost planning was too optimistic,
• Transaction costs have not been considered,
• Not sufficient reduction of fixed costs,
• Third party costs can be higher than the own ones,
• Dependence on third party and its monopolistic role if no competition exists.

The following risks belong to the category qualitative risks:

• Loss of knowledge which can be essential for core business,
• Standardization at vendor’s end can cause loss in quality,
• Possible bankruptcy of the vendor can cause loss of knowledge which will be very difficult to compensate (therefore: check its financial position before signing the contract!).

And finally additional burden is very possible to occur due to the following factors:

• Security aspects which should be checked out as the vendor could possibly get sensitive data which should better be processed in-house,
• Resistance of employees to the outsourcing project due to their fear of losing jobs,
• Configuring of interfaces which requires in-house know-how.

Now you know both sides of the outsourcing medal. To be or not to be?… – To outsource or not to outsource? – That is your (rational) choice…

Magdalena Szarafin

P.S. More about how to reduce outsourcing-related risks:
Intelligent outsourcing: Money is not (that) important


4 Responses to “Outsourcing: too risky… too dangerous… too expensive”

  1. Robin on September 7th, 2009 12:43 am

    Outsourcing BPO services has become a part and parcel of global business companies.

  2. outsourcing risks on September 7th, 2009 3:53 am

    Anyway, today more and more businesses understand the benefits of working with outsourcing companies. Having a business relationship with an outsourcing vendor can be a smart move, but it is important to minimize the risks associated with this type of business partnership. With the right outsourcing arrangement, you can convert fixed IT costs to variable, gain access to scarce resources and increase service availability. All you need is to know how to manage outsourcing risks effectively. Some good tips can be found here: http://www.executivebrief.com/article/outsourcing-risk-reduction/.

  3. sujatha on September 7th, 2009 12:27 pm

    I am from India; I can do any kind of work in auto-cad.
    I am familiar with Utilizing Control Survey, Default and Title Reports; Read Field Work Order
    Having Five years Land Surveying Drafting experience & AutoCAD.
    If you can out source any work, I can do it under minimum price.pls. Send some samples.

    Thanks and regards,

    [email protected]

  4. Cygnet - BPO on September 19th, 2009 8:48 am

    Advantages of Outsourcing:

    Concentration on core business areas

    World-class technology at lower rates

    Skilled manpower at affordable prices

    Increased productivity

    Beat Competition

    Tax benefits

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