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Pros and Cons of Outsourcing

When is the right time to outsource? When should you stay in house?

By Gabe Perna, Business Review Usa
Apr 07, 2010
Itís such a taboo subject and gets such a bad rap that itís almost not even worth defending. You might be better off defending socialism at a "Tea Party" rally. Okay perhaps thatís overdoing it. Itís not that bad.

However, one mention of the word outsourcing and you get a lot of people up in arms. Itís one of those words that has just accumulated a terrible reputation over the years, whether itís fair or unfair. When major politicians (Hello Mr. President) and influential business leaders such as Bill Gates speak out against outsourcing, you know itís destined to become a poisonous term.

But is it fair? It seems like there are plenty of misconceptions on the subject out there. For one, outsourcing is a bit different than offshoring. Outsourcing is putting the work in a hands of a third party vendor, it could be abroad or at home. Offshoring is sending the work overseas, it may stay in the same company or not.

One thing seems certain, there have to be reasons as to why some of the biggest companies such as IBM and American Express outsource constantly. What are the pros of the outsourcing? What are the cons? These are the questions we at Business Review USA try to answer with a good olí fashioned list of pros and cons.

Pros
Weíll start by defending outsourcing, which will probably be a little more challenging. The most obvious reason on the surface for outsourcing seems to be money and cutting costs. The fact that many large companies outsource for this reason primarily cannot be denied. According to the Outsourcing Index, 64 percent of large companies, defined as having more than 5,000 employees and $2.5 billion profit, outsource for the main reason of reducing and controlling operating costs.

Itís difficult to estimate how much exactly a firm can save through outsourcing, but make no mistake itís definitely substantial. Take for instance the case of San Carlos, California. This small, affluent Northern California community plans to outsource its fire and police services. The move will save the community an estimated $5.5 million. There are lot more San Carlos Californias out there, much bigger in size and saving a lot more.

Many large multinationals outsource overseas or offshore because of cheaper wages and less restrictive labor laws. Additionally, employers donít have pay federal or state tax wages on oversea employers. For these reasons, offshoring has become a popular cost cutting strategy. A recent study from IBM says multinationals that outsourced various IT projects overseas enjoyed an average of 11.8 percent higher growth in net earnings in 2009. By saving more from outsourcing, a company can invest into R&D, technical equipment and other things pertinent to its success.

Yet, money isnít the only pro to outsourcing. Many companies who outsource do it to focus on core businesses. By handing over the reins to a third party vendor youíre obtaining their main skills, something that you may not excel at. This is the reason why many small to midsize businesses outsource. In fact, many tech companies outsource for this reason alone. A survey from Computer Economics reveals application development, at 33 percent, was the most popular reason IT firms outsourced last year.

One last prominent pro for outsourcing is the increasing of productivity. If everything was kept in house, youíd only have people working for eight-ten hours a day. Outsourcing and off shoring means your business becomes an around the clock operation.

Cons
In the middle of the recession, outsourcing essentially became a curse word. This is because a common idea placement with outsourcing is that it sends jobs overseas. Since a company could outsource a job within the country, this idea is definitively false.

However, it does have some truths. Most multinationals outsource overseas for the reasons above. This does damage the US economy and countless jobs are lost each year to outsourcing. Itís a fact you canít avoid if you outsource overseas.

There is definitely a negative connotation with outsourcing. A survey from Angus Reid Global Monitor asked Americans their top concern as to what in the world could impact things domestically. 26 percent said outsourcing, which was actually the highest number.

This concern became heightened during the recession. Essentially, if you decide to outsource (especially overseas), be prepared answer to employees, clients and partners who might share the overall publicís negative perception of it.

There are other negative factors to outsourcing. In any case of outsourcing, by not having someone on site it becomes difficult to manage and guide them. Losing control of any function in your business can be potentially damaging. What can be equally as damaging is that by outsourcing, youíre revealing the inner workings of your business to a third party. This is where potential security issues come into play. Lastly, if youíre outsourcing overseas, there may be a problem with the language barrier.

This article was originally posted by businessreviewusa.com and is the property of White Digital Media Group