Generally, the idea of outsourcing is not new as it has been applied in many organizations all over the world. However, just like all business strategies, it has its advantages and limitations which the managers in charge of the firm must be aware of its existence.
When we examine the details of outsourcing as a way of reducing costs, we will be able to draw relevant conclusions on whether or not it is a good idea to outsource resources. This is used to determine whether the risks involved are worthwhile or not. We will also be able to determine the levels of success when outsourcing is applied and know why the results may differ from one company to another.
Outsourcing refers to a situation where a particular organization or firm goes beyond the resources available to the firm and searches for additional help from other sources that are not in the firm’s permanent reach. The person who is being outsourced is referred to as an outsourcing vendor. He is only sought when the need arises.
It is becoming commonly used among firms all over the world. With the continuous innovations and the globalization that is making the world appear small and eventually become one global village, it has now become very easy to access each and everything one wants just at the click of a button. The distance is being reduced over time as technology advances. Hence, whenever a company wants to outsource any form of resource, it is always readily available (Hira & Hira, 2005, p. 67).
Outsourcing leads to a reduction in production costs which eventually lead to profit increment. After all, the objective of each and every firm is profit maximization subjected to technological and market constraints. This is because getting an already experienced person to carry out a particular task in an organization is much cheaper than getting someone else who has hardly any idea of what they are supposed to do. This is because the person will need to be well informed, trained, and eventually interviewed to ensure that they are well aware of what it is they are supposed to be doing and exactly how they are meant to do it. This would therefore result in time wastage and losses in terms of finance used to train the particular employee. Hence, firms result in outsourcing (Greaver, 1999, p. 134).
During outsourcing, the permanent employees in the firm that outsourced the resource are capable of learning from the experienced personnel. This ensures that the next time the task is encountered, the firm may not necessarily need to outsource from outside the firm since the skill is already available within the organization. Hence, the overall cost will be very low since there is no extra cost as the employee will only want his usual salary (Tho, 2005, p. 156).
Outsourcing to countries that have high levels of cost-effectiveness is very appealing. A country like India gives the same quality products at a much lower cost and hence becomes very beneficial. Countries that are great beneficiaries of outsourcing include the USA, United Kingdom, and Australia. Through outsourcing, they have been able to have tremendous economic growth and eventually there have been increased employment opportunities and better wages for the workers in these countries hence an improvement in their welfare (Blokdijk, 2008, p. 103).
Very many companies are using outsourcing as a strategy to reduce costs. However, the degree of success resultant from outsourcing is entirely and completely different. Big companies like Microsoft, IBM, Oracle, and Dell Computer Support are known to outsource from India, China, and Russia simply because of good infrastructure, cheap workforce, and cost-effectiveness. Since the production cost is lower in these countries, very many companies are resulting to outsourcing in them. The countries that provide outsourcing services are producing quality work (Bragg, 2007, p. 72).
The level of success is noticeably different and this is as a result of the risks involved when a company decides to outsource. Unless these risks are well assessed and a counter plan is put in place in advance, there will definitely be a difference in achievement of the results. A company that outsources personnel and as a result has to lay down some current permanent employees has to come up with a plan to make sure that they retain those employees in the long run (Schank, 2005, p. 96).
Failure to do so means that it will have incurred a bigger loss by the time of the completion of the outsourced task as this would mean recruiting more workers to carry out the core business activities resulting in a huge failure. Thus, a company that plans ahead to ensure that the two issues can run concurrently is more successful as compared to the one that does not and ends up losing its employees. Another possible solution would be to ensure that the permanent employees that have had to be laid down are compensated fully to ensure that they will resume work when the task is done (Wijers & Verhoef, 2009, p. 49).
A company that has the intention to outsource must also be ready in case of any unexpected expenditure that may arise in the course of the task being carried out or even after it is already done. This may include the possibility of mistakes that would end up costing the company a lot of money. Therefore, the person in charge of the outsourcing must be keen on the contents of the contract signed between the company and the outsourcing vendor. A company that takes the above precaution is more likely to be more successful compared to the one that does not (Raiborn, Butler & Massand, 2009, p. 95).
Companies also prefer to outsource from large companies that are already successful and whose probability to leak information from their companies is much lower as they are already less ambitious. If these companies were to outsource from companies that are small and hardly successful the probability of losing to their competitors is very high. Companies that rely on outsourcing services must therefore ensure that the cost of outsourcing is not more the net benefits, they must ensure that they are successful (Barrett & Baldry, 2003, p. 78).
When a company decides to seek the services of an outsourcing vendor it must put into consideration the legal matters involved and to make sure that these matters are well taken care of. The person in charge must ensure that everything is done in accordance with the law. If such matters are not taken care of there could result in lawsuits that will cost the company a lot resulting in extra costs. Lawsuits could also result in the tarnishing of the company’s name and of confidence of the customers in the firm and hence reduction in their total revenue. A company that deals with legal matters in advance is likely to be more successful as compared to one that does not. Thus, this also explains the different degrees of success for companies that use outsourcing as a strategy to reduce costs in the financial services sector (Bragg, 2001, p. 36).
Every businessman’s satisfaction is seeing his business drive to prosperity. He therefore must take every precaution to ensure that he achieves his sole goal and still hold a good name in the business. When it comes to outsourcing resources the businessman must make sure that the following issues are well taken care of and so as to have high degrees of success;
- There must a plan for the permanent workers who have to be laid off so as to give space to the outsourcing vendors.
- The contents of the contract signed by the outsourcing vendor must be clear; no ambiguity.
- The company must probe earlier to ensure that the outsourcing vendor they are hiring has the skill and expertise that they are looking for.
- The company must be ready for any unexpected costs arising and uncertainties therein.
- They must have a system that can adequately deal with matters such as strikes from workers whose needs are not being met.
In conclusion, as time goes by, outsourcing is becoming a frequently used strategy to try and reduce costs in the financial services sector. Firms must however realize that it is not as easy as it seems and that they must be able to gather all useful information so as to be successful. Everything in business is tricky and the businessmen just need to be smart so as to survive (McIvor., 2005, p. 95). Many companies involve outsourcing vendors but their degrees of success differ because some are smarter than others. All risks involved must be considered and the net benefit should be greater than the risks when the entire task is completed. The solutions must also be looked at carefully to ensure good business. With all these issues taken care of the degrees of successful outsourcing in companies will be very high.
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