Question

Answer the following.
What are the advantages and disadvantages of outsourcing?

Answer 1

Outsourcing refers to the process of contracting out less important (i.e., non-core) business activities to other agencies, while focusing on the more important areas. The advantages of outsourcing are:
The following are the benefits or advantages of outsourcing.
i. Focus on core activities: Outsourcing allows a business enterprise to focus on the activities that are more important to it. This helps it to come up with more sophisticated and superior products, which builds goodwill for it in the market.
ii. Specialisation: The external agencies to which tasks are contracted out are highly specialised in their areas of activity and have expertise in performing the assigned tasks. This contributes to the overall efficiency and excellence of the company which is outsourcing work.
iii. Cost efficient: The larger the company, the higher are its constraints in minimising the cost of its back-office operations.
In view of this, outsourcing enables companies, especially large-scale organisations, to perform these operations at reasonable costs (compared with the costs that they would have incurred by performing the operations themselves). Thus, outsourcing is regarded as cost efficient.
Disadvantage of Outsourcing
The following are the limitations or disadvantages of outsourcing.
i. Confidentiality: Outsourcing involves sharing vital information and technological knowledge with the firms to which tasks are outsourced. As a result, there is always a risk that these firms might share vital information with the business rivals of the companies which have outsourced tasks to them. This lack of confidentiality can pose a serious threat to companies which rely on outsourcing.
ii. Quality concerns: Once the contract is given and the rates are fixed, it may happen that the firm to which tasks have been outsourced starts using cheap and inferior inputs in order to reduce their own costs and increase their profits. This adversely affects the quality of products and services of the companies outsourcing tasks.
iii. Resentment in home country: Global enterprises outsource their activities to firms located in countries where labour costs are much less. However, if the home countries of these enterprises are facing unemployment, then this may lead to resentment and disturbances.