The advantages and disadvantages of Outsourcing

The need for outsourcing is growing worldwide. Why do companies choose to outsource? There are many reasons behind the decision to improve an existing solution in the company or the creation of specific software for business, but the main reason is that it improves the efficiency of the cost-time ratio. 

Outsourcing is a revolutionary concept, that began to develop actively since the 1990s, especially internationally, in countries such as Western Europe and the United States, but less widespread in Moldova, now constituting a trillion industry of dollars. Due to the dynamic business processes and global trends, outsourcing is becoming more and more popular in achieving the successful strategies of various companies. Currently, 65% of outsourcing services are provided in IT, then in HR, economics, foreign languages, real estate and less in PR and Marketing.
Outsourcing IT services is an effective solution for a number of operational business and technological challenges, with many advantages and risks.

The benefits of outsourcing.
Following a synthesis of the informative material regarding outsourcing, in the private and public sector, we can determine a series of benefits that a company or an institution can obtain, and the most important ones can be called the following:

  1. Cost reduction. A study by consulting firm Price Waterhouse Cooper concluded that the vast majority of companies have outsourced, in particular, as a short-term cost-cutting tool.
  2. Increased efficiency and competitiveness. For many companies, the only reason they turn to outsource is that different types of activities require a lot of time and attention from the company's management. Most of the time, solving the problems generated by these activities is blocked somewhere in a so-called "decision grid block", at the management level. This generates financial losses that can affect the future of the company.
  3. Access to various technological resources, innovation and intellectual property. By using the services of specialized suppliers, companies have implicit access to their investments in technology, methodology and its people. Among the capabilities of these suppliers is the experience gained in that field, by working with various customers with similar needs. 
  4. Reducing continuous investment in internal infrastructure. The advantage of streamlining the allocation of resources contributes to improving a company's ability to direct its available resources, both financial and non-financial, to areas that deserve more attention and priority at a given time.
  5. Flexibility. The advantage of flexibility has a more operational and tactical connotation. Economist Bragg emphasizes the role of outsourcing as a shock absorber against market fluctuations. Thus, by outsourcing, a company can turn its fixed costs into variable costs, which makes it less vulnerable to unforeseen market changes.
  6. Risk sharing. Outsourcing companies are soon becoming more flexible, dynamic and willing to change to cope with the new transformations imposed by today's economy.

Potential costs and risks of outsourcing.

When selecting the provider for outsourced services, the main concerns of decision-makers are:

  1. Contractual relationship. In the outsourcing process, one of the most important elements of regulating the relations between the two parties participating in the process is the contract. The risk in this situation consists of the information asymmetry between the contractors.
  2. Reducing jobs. The inevitable decline in the existence of the workforce within a company is one of the most significant and primary disadvantageous consequences of outsourcing. The reduction of jobs is considered to be part of the category of negative social effects.
  3. Overestimation of the quality of the product or service. Outsourcing service can also consist in worsening its quality or the final product. The interest in minimizing costs by the supplier may, in fact, prevail over the interest in improving quality, especially in situations where the quality level is difficult to measure or is not specified, to the detriment of the outsourcing company or institution.

Global companies continue to take advantage of this resource optimization by delegating the most complex functions, such as IT services, to narrowly specialized companies. Many companies also recognize that outsourcing secondary functions, automating and incorporating cutting-edge technologies, help them become more agile, efficient, increase productivity, gain a competitive advantage, which will lead to significant growth and penetration of new markets. 

Currently, outsourcing is no longer associated only with reduced labour costs. It has become a core business strategy, according to which the most important resources are focused on carrying out operations related to the core business of the entity and outsourcing ancillary processes.


The advantages and disadvantages of Outsourcing