When Not to Outsource: An Analysis
Offshore outsourcing Strategy

When Not to Outsource: An Analysis

By Mainak Biswas August 19, 2013 - 817 views

Outsourcing may seem like an easy option when you have a lot of work on your hands and very few people in your team, but the itch to outsource work spontaneously must be controlled as it may pose a potential threat to your company. Myriads of benefits of outsourcing have already been established, but little do we know about the demerits and seldom do we bother to know about “when not to outsource”.

Should you be worried about something?

Notwithstanding the major benefits of this business option there are situations which call for controlling the need to outsource. Acquiring the expertise to identify such situations may take an entire lifetime, but with a comprehensive view on the basics you could develop a knack to identify such situations. Irrespective of the reduced labor costs and increased flexibility outsourcing is not always a viable option and delegating work to an in-house team even at a higher labor cost may deem necessary.

Companies who are extremely particular about their cultural standing and their business strategies might not appreciate outsourcing at all, as it involves transferring the job to a third party which may have a different culture and a different management style. The woes of outsourcing are well known by all, but there are companies that still fall prey to common traps. To avoid repeating the common mistakes in outsourcing, it is crucial to acquire in-depth knowledge on outsourcing and carefully study cases where outsourcing proved to be a fiasco, which, let’s face it, no one does and ends up going down the hill. To make things easier for you here is a list of scenarios where outsourcing may seem like a viable option but one should steer clear of it to avoid trouble in the long run.

1. When Outsourcing increases expenditure

The prime reason for outsourcing is cost reduction and if that is being compromised then you might want to reconsider your options. This business option is believed to reduce costs as it does not entail overheads like social security and health care of the employees, more often than not the third party also offers a competitive quote which adds to cost reduction. With so many parameters working to its advantage it usually seems like a viable option as compared to delegating work to an in-house team and is bound to reduce costs, but if that is not happening then you might want to consider your options. There may be situations where the cost of outsourcing is much higher than operating an in-house department, which might lead to a financial loss. To avert a financial implication arising from a similar situation you could delegate the work to an in-house team.

2. Outsourcing may not be applicable for every project

Just because outsourcing reaped maximum profits in a project does not necessarily mean that it would fare the same way in other projects. Pay close attention to the requirements of the client and the project, there are situations where the client insists on getting the job done from an in-house team rather than a third party. This is clearly because of trust related issues, the client finds it difficult to bank on the quality of the service provided by a third party and prefers to bank upon the company’s reputation. In a fix like this you might want to cater to your client’s requirements rather than outsourcing operations to generate greater profits.

3. Not wise to outsource during management restructuring

Any decisions pertaining to outsourcing require undivided attention which is not possible if the top honchos of a company are involved in figuring out their new roles. Restructuring internal operations, eliminating hierarchies and divesting unprofitable functions require a lot of attention and are usually not done over night, after the structuring is completed it takes quite some time for employees to figure out their new roles that come along with new designations. If a company plans to enter into a contract during such unstable times the probability of error and misjudgment increase by leaps and bounds. Any kind of outsourcing needs sufficient focus and ample of time to reap the desired benefits.

4. Outsourcing to a company that frequently changes its senior management may not be a good idea

The basic idea behind outsourcing is to transfer the control of business operations of one company to another to the costs and the responsibility associated with it. If the management of the third party goes through constant restructuring, the benefits of outsourcing may not be so pronounced. An unstable management may result in constant reallocation of roles which in turn may cause a lot of confusion in dealing with the employees of the third party. You may end up inviting more trouble in an attempt to brush off responsibility associated with the outsourced business process.  It is essential for the third party to have a stable senior management to facilitate your company in heaving a sigh of relief.

5. Think twice before outsourcing to countries with political unrest

The economy of a country heavily depends on the political stability, an unstable economy can adversely affect any company and cause it to topple down from the zenith of success, and this could happen to your third party outsourcing vendor too. Consider the case of Egypt, which was touted as “the next big thing” in 2010 by the industry watchers in the outsourcing domain, came crumbling down when the anti-government protests pushed its government to shut down all the communication services overnight.

This caused huge resentment amongst the citizens and agitated them further, almost forcing the nation to be ousted from the list of dream destination for outsourcing. Many cases of outsourcing involve in allocating personnel from your company to the third party’s country and during political unrest you may also jeopardize the lives of your valued employees. Foreseeing political unrest in a country may need a lot of experience and conviction, but it certainly pays off and can save you from incurring grievous loses.

6. Countries with a laid back attitude should be avoided while outsourcing

When you outsource you would expect to get your work done by industry experts and delivery on time, which is not quite possible if you outsource to a place where people have a laid back attitude towards work. A thorough knowledge on the geopolitical factors is essential while chalking out a plan for outsourcing, for an instance, you would not want to outsource high-end IT sector work to a region which is predominantly famous as a tourist destination. Geopolitical factors play major role in determining a demographics’ attitude towards work, to get a clear understanding it would not hurt to depute few employees of your company to understand the international political behavior of the place where you plan to outsource.

7. Avoid outsourcing during recession

The adverse effects of economic recession are well known, it can tear down any corporate giant, when it strikes all extra costs must be avoided and savings must be started for the impending rainy days. As we know outsourcing may also result in situations where the cost can overshoot the predetermined budget, making it an unsafe bet.

During recession, incurring hidden costs and overheads is the last thing you would want to deal with. In cash crunch even the loss of a dime hurts and when it is unexpected it strikes you as a thunderbolt. During recession, it is prudent to designate the work to an in-house team where the expected costs can be predetermined and there are very less chances of any fluctuations in the budget decided.

8. Steer clear of socialist countries

Though socialist countries in their traditional sense do not exist anymore, there are several governments that levy high rates of taxes. It is in your interest to choose a country that does not have a lot of taxes and is business friendly. A country that is capitalist in nature is best suited for outsourcing.

9. Outsourcing should be avoided when the gap between the higher management and the production-floor employees is  vast.

Implementation of decisions is eased if the higher management directly oversees the production process, this can also be used to maintain the quality of service.  A long corporate hierarchy is not conducive in controlling the performance of the production floor employees, it may also lead to the formation of a recalcitrant and unruly employee union.

What and When You Should Not Outsource

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