4 major advantages of outsourcing:saving money,sharing risks,accommodating peak loads,and developing internal staff.
--> Advantage #1:Outsourcing can save you money.
Economies of scale save money when unit costs go down as volumes increase.External service providers can achieve economies of scale unavailable to individual firms when they combine the volumes of multiple companies.
Economies of scale are not limited to physical processes.Other precious assets -- including money,relationships,and people -- may be shared.
To be specific,there are three conditions that must be met before outsourcing saves money:
1.Economies of scale must exist.That is,there must be some economic advantage to larger size or greater numbers before outsourcing can pay off; for example,unit costs must drop as volumes increase
2.The economies must be accessible across corporate boundaries.That is,savings only occur if outsourcers can combine the volumes of multiple clients.
3.The savings must be sufficient to outweigh the additional cost of paying other shareholders a profit.
--> Advantage #2:Outsourcing can help you share risk.
Another type of synergy that can cross corporate boundaries is the sharing of risk.In financial circles,this is called the "portfolio effect."
In business investments,the same is generally true.Outsourcing may permit multiple companies to share risk.
--> Advantage #3:Outsourcing can help accommodate peak loads.
Outsourcing can be used to minimize fluctuations in headcount that could result from peaks and valleys in demand.
To protect staff from fluctuations in demand,every entrepreneur should staff to the valleys and outsource the peaks.
The added expense per hour of contractors must be balanced against the expense of hiring enough staff to handle the peaks and then wasting time between peak periods.If peak loads are frequent and the valleys are short in duration,hiring may be more economic than outsourcing.If peaks are occasional,contractors will save money in spite of their higher costs per hour.
--> Advantage #4:Outsourcing can help develop your internal staff.
Well-managed outsourcing can enhance the development of employees.Two strategies can accomplish this:
1.Contractors can be used to off-load less interesting "commodity" or end-of-life work,or to handle peak loads.This leaves staff free to pursue new,developmental opportunities.On the other hand,contractors should never be used to perform new,growth-oriented activities while internal staff is left with obsolescent work.
2.Consultants and vendors can be used to bring in new ideas and to train internal staff.
Disadvantages:
1.By outsourcing a business process,we tend to loose the managerial control.
2.Another disadvantage is that outsourcing can also prove to be a threat to the security and confidentiality of issues of a company.
3.Other disadvantages of outsourcing may include unfavorable contract lengths,loss of competitive edge,problems in contract renewal,and contractual misunderstandings.
