Short Essay On Outsourcing
Outsourcing -- the practice of using outside firms to handle work normally performed within a company -- is a familiar concept to many entrepreneurs. Small companies routinely outsource their payroll processing, accounting, distribution, and many other important functions -- often because they have no other choice. Many large companies turn to outsourcing to cut costs. In response, entire industries have evolved to serve companies' outsourcing needs.
But not many businesses thoroughly understand the benefits of outsourcing. It's true that outsourcing can save money, but that's not the only (or even the most important) reason to do it. As many firms discovered during the outsourcing "mania" of the early 1990s, outsourcing too much can be an even bigger mistake than not outsourcing any work at all. The flat economy caused many companies into huge layoffs and subsequently outsourced functions that were better kept in-house. Wise outsourcing, however, can provide a number of long-term benefits:
Control capital costs. Cost-cutting may not be the only reason to outsource, but it's certainly a major factor. Outsourcing converts fixed costs into variable costs, releases capital for investment elsewhere in your business, and allows you to avoid large expenditures in the early stages of your business. Outsourcing can also make your firm more attractive to investors, since you're able to pump more capital directly into revenue-producing activities.
Increase efficiency. Companies that do everything themselves have much higher research, development, marketing, and distribution expenses, all of which must be passed on to customers. An outside provider's cost structure and economy of scale can give your firm an important competitive advantage.
Reduce labor costs. Hiring and training staff for short-term or peripheral projects can be very expensive, and temporary employees don't always live up to your expectations. Outsourcing lets you focus your human resources where you need them most.
Start new projects quickly. A good outsourcing firm has the resources to start a project right away. Handling the same project in-house might involve taking weeks or months to hire the right people, train them, and provide the support they need. And if a project requires major capital investments (such as building a series of distribution centers), the startup process can be even more difficult.
Focus on your core business. Every business has limited resources, and every manager has limited time and attention. Outsourcing can help your business to shift its focus from peripheral activities toward work that serves the customer, and it can help managers set their priorities more clearly.
Level the playing field. Most small firms simply can't afford to match the in-house support services that larger companies maintain. Outsourcing can help small firms act "big" by giving them access to the same economies of scale, efficiency, and expertise that large companies enjoy.
Reduce risk. Every business investment carries a certain amount of risk. Markets, competition, government regulations, financial conditions, and technologies all change very quickly. Outsourcing providers assume and manage this risk for you, and they generally are much better at deciding how to avoid risk in their areas of expertise.
Checklist: Potential Pitfalls of Outsourcing
- Management: The outsourcing company must be prepared to manage projects across time differences and cultural barriers.
- Quality control: The outsourcing company needs a clear set of guidelines, expectations, and processes to manage the quality of products or services rendered.
- Taxes: Employing several outsourced for-profit enterprises can impact the taxes assessed on the outsourcing company.
- Liability: It can be difficult to determine the liability of different parties involved in complex outsourcing relationships.
Copyright 2008 AllBusiness.com Inc. All Rights Reserved.
What exactly is “outsourcing”? Outsourcing is the process by which companies hire third-party companies to get their work done. It helps in reducing the expenses and increasing the profit.
Although a company can provide a certain service for itself, it prefers to assign the job to someone else. This way saves time, energy and resources for the enterprise, which can now be a lot more productive and profitable.
Advantages: Outsourcing can cut the costs of any business impressively. By having part of the work done for them, companies can focus on improving their production.
In other words, outsourcing can also increase efficiency. Moreover, companies can save a lot of money that they can invest in other avenues of business, like technology.
Also read: Outsourcing: Meaning, Advantages and Disadvantages of Outsourcing
Disadvantages: However, hiring someone else to do the work, means signing contracts and legal restrictions that can be very time-consuming.
The cooperation between two different companies can be very slow.
The communication is not always ideal.In addition to wasting valuable time, outsourcing could leave a company exposed, since some confidential information could leak towards the third-party company.
So, security issues could also come up.
Conclusion: Outsourcing can be extremely helpful to many companies. It can lead up to less cost and more profit. However, this method can be tricky, since the companies might get involved in complicated security or legal situations.