Business outsourcing refers to giving certain responsibilities in a company or business to a contractor. These services maybe cleaning, advertising, book-keeping or marketing and the contractor may be stationed locally or overseas. A company may also decide to move certain departments such as production to other countries, which is known as offshoring. The causes of outsourcing are cost reduction, increased flexibility and increased efficiency.
There are various types of costs in an institution, they include wages, overheads and inputs and the need to reduce these costs is one of the key drivers of outsourcing. It reduces labor cost because the outsourced workers do not require the company to pay them benefits such as health and retirement benefits. There are also stringent labor laws that have requirements such as minimum wage that has to be paid to every employee. Outsourcing reduces these costs for companies as they do not have many employees on their payroll.
Manufacturing companies require inputs such as water, electricity and gas for the production of their goods. They therefore seek to reduce the cost of these inputs as it has an effect on the pricing of the finished product and therefore their profits. These companies move their production units to countries that have cheaper inputs or where gas is occurs naturally so as to reduce their cost of production. Raw materials are also put into consideration when outsourcing as companies aim to find the highest quality raw materials at the cheapest cost.
Acquiring new equipment to carry out important tasks is mostly a very expensive affair. Machinery also comes with the added cost of inputs such as electricity and the cost of training staff on how to use it plus maintenance fees. Outsourcing allows companies to acquire the services provided by this equipment at a much cheaper cost and without the associated hassles. This practice has been very effective in cost cutting because according to Dossani and Kenney “General Electric, one of the pioneers of outsourcing service operations to India, has achieved an annual savings of $340 million per year from its Indian operations, now seven years old.”(2004)
The other cause of outsourcing is the need for increased flexibility. Outsourcing helps in achieving it as it allows companies to be able to adapt to changing needs with ease and cheaply. If a company that has outsourced its production needs to make a new product, all they need to do is to inform their contractor about the new product and the how they want it made. They do not have to go through the tedious, expensive and time consuming process of acquiring new equipment and training staff on how to use it, all they need to do is make an order. This improves flexibility in the variety of goods produces and has a positive impact on the speed with which a company is able to adapt to various changes in the industry.
There are countries that have stringent labor and environmental laws which hinder the activities of some companies and businesses. Outsourcing services to countries with more friendly laws increases the flexibility of the companies and enables them to carry out their activities more easily.
There are times in the financial year when there is little work and a company maybe behaving employees who are idle and cannot fire them since they will be needed in the peak season. Outsourcing gives businesses flexibility as they hire only the employees they need at a particular moment and can increase or decrease their number according to their needs.
Outsourcing gives a business a chance to increase its efficiency through access to skilled man power that the company cannot afford to employ permanently but has the capacity to contract from time to time. Small businesses may be unable to employ an in house accountant but can contract the services of one who comes in once a month. A technology company may require technological know-how that is not found in the home country and it therefore shifts its production to a country with a lot of technological skills so as to improve the quality of the products manufactured. This increases the efficiency of the business as it is able to provide high quality services and products while managing its affairs well.
Outsourcing also frees staff from doing tasks that are not very important such as cleaning or computer maintenance. It instead allows them to focus on core areas that are important to the business such as customer care or quality production. This increases the efficiency of a business because the available resources such as manpower are put into good use which is increasing the competitive edge of the company.
For some companies outsourcing increases efficiency by bringing them closer to their target markets, companies with large overseas markets decide to outsource their production so as to be closer to their customers and have the ability to serve them better as they will be closer and the time delays and costs associated with shipping will also be reduced.
Dossani, Raffiq &Kenney, Martin. (2004) Outsourcing Debate. Yale Global Online
Ikenson, Dan. (2012) Outsourcing for Dummies (Including the Willfully Ignorant) Forbes. Retrieved From:
Merrill, Matthews. (2012) Companies 'Outsource' Because That's Where The Sales Are. Forbes.
Hamlett, Kenneth. (n.d) Reasons for Outsourcing in a Manufacturing Industry. Chron.