Outsourcing: Pros and Cons
Dennis AuBuchon
November 10, 2008
The subject of outsourcing is controversial and a critical one for our economy. This topic seems to stay in the public focus as companies try to reduce costs and improve profits. There is nothing wrong with this concept but when companies choose this option, it must for the right reasons. The subject of outsourcing and the decision to use this concept is different for each company. The justification and support is as different as there are products and services. It is necessary to evaluate several details or conditions before deciding to outsource operations/functions. This article will attempt to explain the concept of outsourcing. This will include some analysis of when it makes sense and when it does not. There is some commonality in some details and this is what this article will focus on. While I cannot discuss every aspect that may involve a company´s decision to outsource it is important to address conditions, which can affect the success of outsourcing decisions. Outsourcing is not for everyone and companies sometimes lose something in the process when they incorporate this concept.
To begin discussion of this important topic we first must understand the concept. What has been in the news of late is the outsourcing of jobs to foreign countries or the outright movement of companies to foreign lands. The main purpose of outsourcing is in effect to reduce costs and increase profit. This is not a bad thing. Companies must make money to survive in the world economy as it is today. There are many examples of outsourcing, which seem to lack the attention of the media that companies use every day. The following paragraphs will provide examples of outsourcing. While it is up to each company and their management to make the decision for outsourcing, there is an impact to the employees and the consumer when outsourcing is used.
Companies involved with performing outsourced operations will often quote a good price in the beginning to get the business. These companies while they may be good ones want your business and will do what they need to do to get your business. Companies may need to hire more individuals to accommodate the increased workload and this is normal. However, if the quantity of employees needed is more than the quantity now performing the work, it should raise questions. Companies performing outsourced functions must cover their cost. Their prices will incorporate this cost and a profit margin. They must make a profit just like anyone else. If they incur cost that cost will be seen in the price of their services either now or in the future.
Outsourcing is not a concept solely associated with foreign countries. Outsourcing occurs every day in the United States. Many companies routinely use this concept to conduct their business and provide a product or service to the public. The difference in many cases is that the jobs stay in America. Major companies in the United States routinely use sources outside their company. The purpose for this is they do not have the resources, talent or expertise to accomplish all the tasks for parts, which comprise their products.
The first example where companies routinely use outside sources is in the production of airplanes. The process of manufacturing airplanes is a complicated one, which involves thousands of parts with varying manufacturing requirements. With the volume of parts and requirements, a typical manufacturer does not have the resources, knowledge or expertise to manufacture all the parts required to complete the manufacture of an airplane. This is why the concept of outsourcing is necessary in this example and others like it. If you have ever flown in an airplane and I am sure many of the readers of this article have, consider the many parts that you can see inside and the many parts you cannot see. These are examples why airplane manufacturers must use suppliers or outsources to produce an airplane. Think of what it would cost in terms of a company being completely self-sufficient in the production of their products. While it may make sense in some cases to be self-sufficient there are a number of outside sources who are better qualified to produce a quality product, which will last longer. Making the determination if outsourcing is the right decision can be a difficult one. Many things need to be considered which will be covered later in this article.
Another example is an aircraft engine, which supplies the power to fly a plane from one destination to another. It has thousands of parts and requires sometimes hundreds of suppliers or sources outside the prime contractor. They often have complex requirements such as stress, chemical composition, material, heat-treating, and various process and inspection requirements. These requirements often require specialized training and certification to perform them and this costs money. Safety is also a critical aspect. Stress fractures have been reported in some engines and/or airplanes in news stories.
Like the example of the airplane and the engine previously discussed in the preceding paragraphs, complex products may require outsourcing to complete their manufacture. There are many companies that are specialized in various processes or techniques, which provide a service and fill a need for many companies, which they cannot do themselves. It takes a number of vendors, which in effect are outsourced jobs that help in the completion of a product for sale to either the public or state and federal governments. Aircraft engines and planes are a prime example of products, which use the concept of outsourcing to meet their manufacturing needs and make a profit.
Companies who move jobs to foreign lands have reasons and these need to be evaluated in an effort to keep these decisions from being made. While I feel outsourcing jobs to foreign lands may be necessary in some cases, it is not always the right decision. Granted costs are involved but there are usually ways to work with employees to keep their jobs and still make a profit. Companies make a variety of products for which they do not have all the resources or talent in house to complete them for their final product. This is where the concept of outsourcing comes into play.
Another fact associated with outsourcing is that outsourcing can be good for a company but not in all cases. Many times companies are looking for ways to cut costs so hard that they lose site of the fact that corporate knowledge is lost. Many times individuals performing work functions have learned much over time. Knowing the basic requirements does not necessarily mean that the process is understood. One example involves detailed requirements, which are necessary for information to be accurate, complete and reliable. In some environments information can be critical in receiving payment for products or services. If functions or aspects are missing when an outside source is used it will not only cost more to fix problems than doing them right the first time. An indirect disadvantage of outsourcing involves the financial flow to pay for the products or services rendered by an organization. Outsources will not necessarily have the same degree of importance for issues as an organization would have with their direct control.
Having direct control over critical aspects of a company is important in many ways. One key point to remember is that if problems arise the company is ultimately responsible not the companies to which they have outsourced. While they may be held accountable through agreements a company will have to bear the burden for any violations of laws and regulations associated with a product or service. Many companies today want to decentralize operations rather than centralize them. Laws and regulations are sometimes applicable for what a company does. Some involve records for tax purposes while others may be such things as environmental regulations. Regulations are in place for many products and services of organizations and there needs to be adequate control to assure they are not violated. Direct control is usually the best approach rather than delegating this responsibility to another organization, which is not part of the company or organization.
Another example of laws and regulations involve maintaining records of a company, especially the financial aspects. To have another organization control the documentation opens the door for potential violations of laws. Sometimes in the structure of an organization, certain data is recorded into the records but information is either inaccurate or incomplete which affects the efficient flow of payments for products and services. An example of this would be the address information and organizations, which would make payments for bills associated with products or services. Inaccurate data creates extra work for others and in the case of outsourcing, it can affect the flow of payments. This can affect available funds to have an organization run smoothly and efficiently. When there is money involved a company will pay more attention to making sure they receive it rather than another organization might. An outsourced organization is being paid to perform a service and the importance of delayed funds does not have the same degree of importance as it would if the function had remained within the company.
This article and the content within it does not mean that I am against outsourcing, because I am not. Certain criteria must be established to provide a basis for outsourcing operations or functions. There are always going to be critical areas of a company for which an organization should maintain control especially if it involves the receipt of funds to pay for the product or service. A key ingredient in being paid for a product or service involves that the right information is documented for payment to be made by the responsible party. Errors in documentation affect the payment process. This restricts the flow of funds to pay salaries and sustain their products and/or services. Accuracy should be the number one ingredient of any documentation system.
The examples I have discussed in this article identify conditions when outsourcing is beneficial and when it is not. If it is a proven fact that specific processes are working or there are efforts to improve any errors in a system, changing the location where the function is being accomplished will affect the accuracy. Improvements can always be made but improvements in processes must address all the needs and assure the necessary details, which have been learned over time are not ignored in any effort to cut costs.
There are many qualified organizations, that perform outsourcing responsibilities but companies must remember one critical aspect. A company cannot delegate responsibility for an operation connected to their product or service. They are ultimately responsible. I have seen many instances of outsourcing activities but the financial activities of an organization are typically not outsourced. Another key ingredient in making a decision to outsource is to consider if a company has performed the functions being considered or if they must adjust their system to accommodate the new responsibilities. When companies must modify their structure it should raise questions as to the capability to adequately perform any specific function or operation.
Another aspect is where functions may be relocated within an organization rather than maintaining a central focal point. Many times new individuals are given responsibilities for which certain aspects may not have been performed adequately in the past. This can involve not having adequate time to take on new responsibilities. While training can be given it takes time for individuals to absorb new responsibilities. They must also have the corporate knowledge to understand all the data that is relevant. Sometimes people who are assigned new responsibilities do not understand why certain data is needed. Transferring functions to new locations may be a good thing in some instances but corporate knowledge is learned over time and if a function is critical to an organization an organization must understand how it will affect the efficient operation and flow of financial payment.
The last point to make is that it is fine to consider outsourcing functions or operations. However, it must be remembered that corporate knowledge is involved in any function or operation. Corporate knowledge is learned over time and it will take a new organization or location to learn that corporate knowledge. Outsourcing may be a viable aspect for many organizations but if corporate knowledge is involved, and it is in many cases, it must be learned over time for any new location or organization. Finalizing a decision to outsource must consider the impact on the lack of corporate knowledge that may be involved in making changes on how the work will be accomplished. For organizations, which involve complex products or services it may make sense to outsource several aspects of a product and will work as long as there is a degree of control.
To begin discussion of this important topic we first must understand the concept. What has been in the news of late is the outsourcing of jobs to foreign countries or the outright movement of companies to foreign lands. The main purpose of outsourcing is in effect to reduce costs and increase profit. This is not a bad thing. Companies must make money to survive in the world economy as it is today. There are many examples of outsourcing, which seem to lack the attention of the media that companies use every day. The following paragraphs will provide examples of outsourcing. While it is up to each company and their management to make the decision for outsourcing, there is an impact to the employees and the consumer when outsourcing is used.
Companies involved with performing outsourced operations will often quote a good price in the beginning to get the business. These companies while they may be good ones want your business and will do what they need to do to get your business. Companies may need to hire more individuals to accommodate the increased workload and this is normal. However, if the quantity of employees needed is more than the quantity now performing the work, it should raise questions. Companies performing outsourced functions must cover their cost. Their prices will incorporate this cost and a profit margin. They must make a profit just like anyone else. If they incur cost that cost will be seen in the price of their services either now or in the future.
Outsourcing is not a concept solely associated with foreign countries. Outsourcing occurs every day in the United States. Many companies routinely use this concept to conduct their business and provide a product or service to the public. The difference in many cases is that the jobs stay in America. Major companies in the United States routinely use sources outside their company. The purpose for this is they do not have the resources, talent or expertise to accomplish all the tasks for parts, which comprise their products.
The first example where companies routinely use outside sources is in the production of airplanes. The process of manufacturing airplanes is a complicated one, which involves thousands of parts with varying manufacturing requirements. With the volume of parts and requirements, a typical manufacturer does not have the resources, knowledge or expertise to manufacture all the parts required to complete the manufacture of an airplane. This is why the concept of outsourcing is necessary in this example and others like it. If you have ever flown in an airplane and I am sure many of the readers of this article have, consider the many parts that you can see inside and the many parts you cannot see. These are examples why airplane manufacturers must use suppliers or outsources to produce an airplane. Think of what it would cost in terms of a company being completely self-sufficient in the production of their products. While it may make sense in some cases to be self-sufficient there are a number of outside sources who are better qualified to produce a quality product, which will last longer. Making the determination if outsourcing is the right decision can be a difficult one. Many things need to be considered which will be covered later in this article.
Another example is an aircraft engine, which supplies the power to fly a plane from one destination to another. It has thousands of parts and requires sometimes hundreds of suppliers or sources outside the prime contractor. They often have complex requirements such as stress, chemical composition, material, heat-treating, and various process and inspection requirements. These requirements often require specialized training and certification to perform them and this costs money. Safety is also a critical aspect. Stress fractures have been reported in some engines and/or airplanes in news stories.
Like the example of the airplane and the engine previously discussed in the preceding paragraphs, complex products may require outsourcing to complete their manufacture. There are many companies that are specialized in various processes or techniques, which provide a service and fill a need for many companies, which they cannot do themselves. It takes a number of vendors, which in effect are outsourced jobs that help in the completion of a product for sale to either the public or state and federal governments. Aircraft engines and planes are a prime example of products, which use the concept of outsourcing to meet their manufacturing needs and make a profit.
Companies who move jobs to foreign lands have reasons and these need to be evaluated in an effort to keep these decisions from being made. While I feel outsourcing jobs to foreign lands may be necessary in some cases, it is not always the right decision. Granted costs are involved but there are usually ways to work with employees to keep their jobs and still make a profit. Companies make a variety of products for which they do not have all the resources or talent in house to complete them for their final product. This is where the concept of outsourcing comes into play.
Another fact associated with outsourcing is that outsourcing can be good for a company but not in all cases. Many times companies are looking for ways to cut costs so hard that they lose site of the fact that corporate knowledge is lost. Many times individuals performing work functions have learned much over time. Knowing the basic requirements does not necessarily mean that the process is understood. One example involves detailed requirements, which are necessary for information to be accurate, complete and reliable. In some environments information can be critical in receiving payment for products or services. If functions or aspects are missing when an outside source is used it will not only cost more to fix problems than doing them right the first time. An indirect disadvantage of outsourcing involves the financial flow to pay for the products or services rendered by an organization. Outsources will not necessarily have the same degree of importance for issues as an organization would have with their direct control.
Having direct control over critical aspects of a company is important in many ways. One key point to remember is that if problems arise the company is ultimately responsible not the companies to which they have outsourced. While they may be held accountable through agreements a company will have to bear the burden for any violations of laws and regulations associated with a product or service. Many companies today want to decentralize operations rather than centralize them. Laws and regulations are sometimes applicable for what a company does. Some involve records for tax purposes while others may be such things as environmental regulations. Regulations are in place for many products and services of organizations and there needs to be adequate control to assure they are not violated. Direct control is usually the best approach rather than delegating this responsibility to another organization, which is not part of the company or organization.
Another example of laws and regulations involve maintaining records of a company, especially the financial aspects. To have another organization control the documentation opens the door for potential violations of laws. Sometimes in the structure of an organization, certain data is recorded into the records but information is either inaccurate or incomplete which affects the efficient flow of payments for products and services. An example of this would be the address information and organizations, which would make payments for bills associated with products or services. Inaccurate data creates extra work for others and in the case of outsourcing, it can affect the flow of payments. This can affect available funds to have an organization run smoothly and efficiently. When there is money involved a company will pay more attention to making sure they receive it rather than another organization might. An outsourced organization is being paid to perform a service and the importance of delayed funds does not have the same degree of importance as it would if the function had remained within the company.
This article and the content within it does not mean that I am against outsourcing, because I am not. Certain criteria must be established to provide a basis for outsourcing operations or functions. There are always going to be critical areas of a company for which an organization should maintain control especially if it involves the receipt of funds to pay for the product or service. A key ingredient in being paid for a product or service involves that the right information is documented for payment to be made by the responsible party. Errors in documentation affect the payment process. This restricts the flow of funds to pay salaries and sustain their products and/or services. Accuracy should be the number one ingredient of any documentation system.
The examples I have discussed in this article identify conditions when outsourcing is beneficial and when it is not. If it is a proven fact that specific processes are working or there are efforts to improve any errors in a system, changing the location where the function is being accomplished will affect the accuracy. Improvements can always be made but improvements in processes must address all the needs and assure the necessary details, which have been learned over time are not ignored in any effort to cut costs.
There are many qualified organizations, that perform outsourcing responsibilities but companies must remember one critical aspect. A company cannot delegate responsibility for an operation connected to their product or service. They are ultimately responsible. I have seen many instances of outsourcing activities but the financial activities of an organization are typically not outsourced. Another key ingredient in making a decision to outsource is to consider if a company has performed the functions being considered or if they must adjust their system to accommodate the new responsibilities. When companies must modify their structure it should raise questions as to the capability to adequately perform any specific function or operation.
Another aspect is where functions may be relocated within an organization rather than maintaining a central focal point. Many times new individuals are given responsibilities for which certain aspects may not have been performed adequately in the past. This can involve not having adequate time to take on new responsibilities. While training can be given it takes time for individuals to absorb new responsibilities. They must also have the corporate knowledge to understand all the data that is relevant. Sometimes people who are assigned new responsibilities do not understand why certain data is needed. Transferring functions to new locations may be a good thing in some instances but corporate knowledge is learned over time and if a function is critical to an organization an organization must understand how it will affect the efficient operation and flow of financial payment.
The last point to make is that it is fine to consider outsourcing functions or operations. However, it must be remembered that corporate knowledge is involved in any function or operation. Corporate knowledge is learned over time and it will take a new organization or location to learn that corporate knowledge. Outsourcing may be a viable aspect for many organizations but if corporate knowledge is involved, and it is in many cases, it must be learned over time for any new location or organization. Finalizing a decision to outsource must consider the impact on the lack of corporate knowledge that may be involved in making changes on how the work will be accomplished. For organizations, which involve complex products or services it may make sense to outsource several aspects of a product and will work as long as there is a degree of control.
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