Risks and benefits of outsourcing

Are you already outsourcing or only mulling over the idea of it? From accustomed accounting, HR & payroll to product development, sales and marketing there are multiple benefits of taking this approach. And risks at the same time. 

What are the most common advantages and limitations of outsourcing? 

+ Time & cost savings as compared to hiring an in-house employee

With outsourcing you don’t have to engage into exhaustive search for a candidate, negotiations and onboarding. As well you will not have to go through the hassle of labor agreement termination. This may be a very important point if your business can face significant fluctuations in the amount of orders. 

+ Access to a larger talent-base 

When hiring an employee, you have to choose from the local talent pool and quite often you have to compromise. This may not be a strict limitation for companies in metropolitan or big city areas, but it can become significant for companies located in more rural areas. 

+ Savings on infrastructure  

Your service partner creates and maintains the infrastructure needed for service delivery, so you don’t have to take care of it and invest into upgrades and improvement. You simply use the service as needed.

+ Increased efficiency and savings on employee development and education 

Professional requirements change quickly in almost all employment areas. Accountants, software developers, marketers, supply chain managers, construction workers and so on have to invest time into staying aware of the changes and upgrading their professional skills. For an employer arranging professional education requires investment: paying for professional courses and freeing employee time to attend them. With an outsourced partner you always have access to the top professional talent.    

+ Focus on core competences 

Outsourcing of routine operations frees up employee time for their core business tasks. Your business development manager invests time into founding new partnerships and creating new business models instead of acting as customer support answering calls or uploading accounting documents into the system. 

- Loss of control 

When you outsource a business process to an external provider you definitely lessen the level of control over it. If the process is incorrectly managed by the provider you face various risks, from customer complaints about product quality or delivery times to fines and penalties for incorrect reporting submission.

- Miscommunication  

Multiple factors can lead to miscommunication or inefficient communication:

• Greatly varying time zones. For example, if an Estonian company engages a software development team from Indonesia you will have only a couple of hours during a day for communication within normal business hours.

• Language barriers. With distant outsourced teams usually both of you have to speak a foreign language. This can slow down the communication as you have to get used to different accents. However with time this barrier becomes less important. 

- Unforeseen additional costs 

If you don’t have full understanding of all the components of the business process or task you are outsourcing and have not listed them in the service agreement, you may have to pay extra for some tasks required to have the job done / project completed or will have to do these tasks yourself. A simple example, if you hired an accounting company for doing your Estonian accounting and reporting and haven’t discussed that you also need to transform the reporting into US standards.   

- Privacy and security risks 

 Outsourcing of a business process is usually associated with exposure of business assets to a 3rd party. You fully or partially provide access to your intellectual property, copyrights, trade secrets, client base, etc. These risks should be definitely addressed in the outsourcing agreement or additionally in a non-disclosure agreement. 

- Product / service quality 

As just every business your outsourcing partner aims to deliver your task as quickly as possible. This may affect the quality of product or service. Usually a set of intermediate control points and defined quality criteria help to address the risk of unsatisfying quality level.     

Conclusion

Outsourcing cannot be the ultimate answer to all business questions and just like every tool it has both advantages and limitations. While most of the risks and cons can be addressed with detailed agreements and arrangements, it’s still worth assessing your own readiness and ability to manage an external provider for a weighted decision if you go for outsourcing or stick with in-house.