Strategic Outsourcing 101: Understanding Its Types, Pros, And Cons
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Running a business is a challenging job, and leaders have to do a fine balancing act between focusing on core tasks and managing non-core activities. Many enterprises are turning to strategic outsourcing that allows them to delegate certain non-core tasks to specialized service providers, giving them the time to concentrate on doing what they do best. This model enhances efficiency, reduces expenses, and keeps the organization lean and competitive.
What began earlier as a means to reduce expenses today has evolved into a larger role. Companies began to see the advantages of outsourcing beyond just financial savings. With the rise of the internet and digital technology making the world smaller, companies can now tap into the global talent pool to get access to specialized skills. This accelerates innovation, improves the quality of their product, and results in a better overall performance.
What Are the Types of Strategic Outsourcing?
Depending on the service required and the type of contract between the two parties, there are a few forms of strategic outsourcing. Here are the more commonly occurring outsourcing models.
Production Outsourcing
As the name suggests, this outsourcing includes shifting the production or part of the production procedures to an external provider. This is usually found in the automobile, clothing, and electronics sectors. The biggest advantage for a business here is the lower production costs and greater manufacturing speeds.
IT Outsourcing
Today technology plays a big role in all businesses. However, not every enterprise has the capability or the technical know-how to efficiently manage its digital footprint. This is where IT outsourcing steps in. It usually includes infrastructure management, software program development, security, and technical support.
Business Process Outsourcing
In this form of strategic outsourcing, non-critical business tasks are assigned to an external service provider. These are usually the repetitive or pre-set activities, such as accounting and payment processing, or even customer support and human resources control. This helps maintain a lean team, reduce operational costs, and streamline business operations.
Expert Services Outsourcing
Businesses can also opt for outsourcing other tasks besides production, IT, and Business Processes. These often call for expert services, and can include criminal, accounting, shopping, and administrative support.
In addition to these expert services, strategic outsourcing also offers several key advantages.
Advantages of Outsourcing
As outlined earlier, strategic outsourcing comes with a few significant advantages. Let’s look at some of the benefits of strategic outsourcing.
- Cost Reduction: Outsourcing repetitive, pre-set tasks to a third party can bring down operating costs substantially. By delegating certain tasks and activities to countries with lower labor charges, an enterprise can reduce its labor costs. Besides labor expenses, outsourcing can also save on infrastructure, technology, and training costs that can quickly add up if the work is retained in-house. Moreover, with the employees freed up from mundane tasks, they can be utilized in other critical business areas.
- Improved Performance: Instead of struggling to train and perform certain tasks in-house, organizations can delegate them to service specialists, and meet their delivery targets faster and more efficiently. Furthermore, outsourcing gives an enterprise access to advanced skills and technology that may not be present in-house, generating an enhanced outcome.
- Resources Reallocation: When non-essential tasks are delegated to outside sources, a business can turn its focus on its core strengths, resulting in greater performance and productivity. Its existing in-house resources can develop and improve essential business areas, giving it a competitive advantage in the business landscape.
- Scale on Demand: Outsourcing gives a company the flexibility to scale and adapt to the demands and trends of the market. This further helps turn fixed costs into variable ones, giving the company greater control over the availability and delivery of services.
Disadvantages of Outsourcing
Even with its many benefits, strategic outsourcing, if not done correctly, does pose a few risks, such as:
- Information Leak: When outsourcing tasks, companies might need to give access to sensitive information, including technology, trade secrets, and customer facts, to third parties. This increases the possibility of a data breach, which could negatively impact an organization’s competitive edge.
- Reduced Quality: A third-party organization might not meet the exacting quality standards that a business is accustomed to. Furthermore, communication gaps, cultural differences, and lack of in-depth understanding can have a bearing on the quality of output.
- Lack of Control: Another risk with outsourcing is giving up control of certain aspects of business. A third-party operator conducts business independently, and that could lead to a deviation from the expected result.
- Over-dependence: Strategic outsourcing can also create dependence on the outsourced companies. If the service provider is unable to deliver, for any reason, the company is directly affected due to this loss in service. Finding a replacement or transitioning those tasks in-house can be challenging.
Also Read: What Is Offshore Outsourcing And Its Advantages?
In a Nutshell
Outsourcing isn’t a new concept. Businesses have always looked for ways to streamline processes, improve performance, maintain a leaner organization, and reduce operational costs. Strategic outsourcing provides all this, with the additional advantage of being able to access skills and abilities that they lack internally. Done correctly, strategic outsourcing is a powerful technique that enables organizations to focus on their core strengths and strategic activities to gain a competitive advantage.
Frequently Asked Questions
Q1. What is Strategic Outsourcing?
Another term for the gig economy, strategic outsourcing is the method of entrusting some processes and tasks in an organization to a specialized contractor to boost productivity and reduce costs. This could be a single task, a set of tasks, or an entire cycle of one or more tasks.
Q2. What Are the Advantages of Outsourcing?
All companies are expected to improve the quality of their goods while also reducing costs. Strategic outsourcing is a model that allows a business to offload some of its tasks to an outside vendor to achieve them efficiently. The four main benefits include:
- Cost reduction
- Improved performance
- Resources reallocation
- Scale on demand
Q3. What are the Disadvantages of Outsourcing?
Despite its advantages, outsourcing does present businesses with certain risks and challenges, especially if too many operations are outsourced. The disadvantages to watch out for include:
- Information leak
- Reduced quality
- Lack of control
- Over-dependence
