Outsourcing Boon or Bane?

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Outsourcing Boon or Bane?

October 04 2023

Outsourcing has both positive and negative effects. Let’s start by first with its definition. Outsourcing is the practice of hiring a party outside a company to create goods or perform services that traditionally were performed in-house. We will discuss its history and current company practices and at the end how would the future of Outsourcing look like. Outsourcing is subjected to controversies in many countries. We can broadly classify the bane as follows: first, it has caused the loss of domestic jobs, particularly in the manufacturing sector. Secondly, businesses can reduce labour costs significantly by outsourcing the tasks in which companies don’t have their core competency in. They can also avoid expenses associated with technology, overhead, and equipment. A manufacturer of cars might buy internal components for the machines from manufacturers which are efficient and cost-effective to save on production costs. A law firm can using a cloud-computing service provider. When used properly, outsourcing is an effective strategy to reduce expenses, and can even provide a business with a competitive advantage over rivals. Outsourcing leads to not only cost savings but companies can use an outsourcing strategy to channel their focus on core aspects of the business. Outsourcing non-core activities can improve efficiency and productivity because another entity performs these smaller tasks better than the firm itself. All this is a boon for the company as it leads to faster turnaround times and an increase in competitiveness within an industry. For example, Procter & Gamble used connect and develop to launch Pringles Prints – a line of potato crisps printed with entertaining pictures and words – in record time and at a fraction of the normal cost. P&G decide not to go for internal innovation on how to print images on crisps, P&G went with external innovation. It found a bakery in Italy, which had patented an ink-jet method for printing edible images on cakes and cookies. P&G adapted the method which lead to increased growth. While, the boon of outsourcing are as follows: first, as it rightly said by an economic expert David Ricardo’s theory of competitive advantage which says that countries should develop those products which they are most competent in manufacturing or deliver those services which they are best at portraying. For example, developing countries like India which the home for outsourcing the BPO facilities of many fortune 500 companies. Secondly, it creates an incentive for businesses and companies to allocate resources according to their utilisation rate, and that outsourcing maintains the free market economies on a global scale. Outsourcing Internationally Businesses choosing to outsource internationally often benefit from differences in labour and production costs. Price disparity in another country may motivate a business to relocate its operations to the cheaper country in order to stay competitive within an industry and increase the bottom line of the company. Seeing one, as everyone nowadays are in a habit of copying thinking of reaping the same benefits would outsource which in turn would lead to increased competion which is better for the world economy at large. This option also has its own drawbacks because of the outsourcing the differential pricing would become standardised. Outsourcing directly impacts globalization or should I say they are directly related. An increase in outsourcing leads to an increase in globalisation, but everyone wants to reap the best this leads to shrinkages in global economies and prices and they began to become standardised. Hiring directly may not be justified, budget-wise, so outsourcing becomes an effective cost-control solution. Drawbacks to Outsourcing Outsourcing also has several disadvantages. Signing contracts with other companies may take time and extra effort from a firm's legal team. Outsourcing also leads to the problem of sharing of confidential information. Yes, we have the Information Act but there is a good possibility of data breach and passing of key information to competitors. There is always the big problem of miscommunication between companies which leads to delay in project timelines. There are several steps to find their outsourcing companies: 1. Know where to Look 2. Leverage your Networks 3. Distribute and Screen Ideas We can conclude by saying that in a healthy, competitive corporate scenario outsourcing is a boon but due to malice and monopoly issues still prevalent in the society outsourcing can lead to inherent problems and disruption in the market trends.

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Author

Rahul Singh

Harvard Business School (SPNM), MBA: SP Jain Institute of Management & Research, Master of Information Technology, Virginia Tech.

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