Advantages of outsourcing
Outsourcing is a practice of contracting with a third service provider for the management and execution of a certain amount of work, regarding specific time, cost and level of service; the practice is usually associated with IT services, however, today everything is being outsourced from different parts of the world, including payroll, HR management, information technology, research, development and engineering tasks.
The growth of global outsourcing has been associated with many benefits, such as:
- Skilled yet low-cost labor
- Reduce the time-to-market
- Development of telecommunications industry
- Investments in infrastructure and stabilized growth of economy in an outsourced country
- Concentration on a core business which contributes to significant competitive advantage
- Greater flexibility in terms of scale and scope of production in response to changing demand
- Third-party expertise, innovative solutions and global connections
The Economic Argument
We can justify outsourcing both by judging current market forces and social trends and by proposing an economic theory of comparative advantage by D. Ricardo, which states that:
- Trade occurs due to differences in (production) technology
- Trade is advantageous to both sides
- Even a technologically inferior country can benefit from free trade
- A developed country can compete against some low foreign wage countries
Thus, Polish and Indian workers are not as well paid as American workers; they can still compete in the market; and both parties can benefit from the exchange of services. Moreover, a country which can produce a product (for instance - IT services) at a lower opportunity cost than the other country, is believed to have a substantial advantage in the production of that product or service.
Outsourcing in India
India with its staggering 7.4% GDP growth, third largest education system producing 3.1 million graduates from various engineering and IT fields, and 4.75 million young, English-speaking professionals entering a workforce every year has been the most popular outsourcing country since the 90s. In this particular period of time IT companies followed previously outsourcing global airlines and starting to settle in India, which lead transitional companies to rapidly globalize at a very low cost, and, consequently, the Indian government began efforts to open up to the world by starting easing restrictions, liberalizing economy, involving state governments, and allowing privatization - particularly of a telecom industry - which has become a major contributor to the growth of Indian economy. Over the years of rapid growth and infrastructure development, BPO has become the second largest yet fastest growing segment in Indian IT/ITES industry, contributing to the compounded annual growth rate (CAGR) of the outsourcing industry of approximately 25%(main components: IT services, BPO, Engineering Services and Hardware).
Today, Indian companies offer wide variety of outsourced services, including biotech research, tax processing and telemarketing in top cities such as Bangalore, Chennai, Hyderabad, Delhi; being a profitable experience for many companies, the trend is expected to hold despite a current uncertainty of world economy.
Outsourcing in Poland
Due to a steady economic growth since 2008 crisis and post-communism trend for IT and engineering studies, Poland has risen as a strong competitor on a European market, scoring high in international rankings; its popularity has been growing mainly due to highly skilled workforce (3rd best developers according to HackerRank) and estimated 15k Polish IT graduates entering the market annually. Low costs of professionals with good English skills have been attracting many investors, including 7ninjas or Euvic, who has been encouraged by special economic zones and high EU standards of data security.
Examples of Advantages of outsourcing
- Cost savings: One of the major advantages of outsourcing is the potential to save costs. Companies can save money by outsourcing certain activities, such as customer service, payroll processing, or IT services, as they no longer need to hire and train in-house personnel. For example, a company that outsources its customer service to a third-party provider can reduce its overhead costs and use the savings to invest in other areas of the business.
- Access to specialized skills: Outsourcing allows companies to access specialized skills that they may not have in-house. This can be especially beneficial for small businesses that don't have the resources to hire their own in-house experts in a particular field. For example, a small business may outsource its web design to a third-party provider that specializes in website design. By doing so, the company can ensure that its website is designed and maintained by professionals who are experts in their field.
- Flexibility: Companies can benefit from the flexibility that outsourcing offers. They can quickly scale up or down their operations depending on the needs of the business, as well as adjust their contracts with the service provider as their needs change. This allows them to be agile and respond quickly to changes in the market. For example, a company may outsource its IT operations to a service provider that can quickly increase the number of servers or IT staff as needed.
- Improved focus: Outsourcing can allow companies to focus on core competencies and invest in the areas that they do best. By outsourcing non-core activities, companies can free up resources and time, enabling them to focus on activities that are more important to their business. For example, a company may outsource its payroll processing to a third-party provider, enabling its HR team to focus on more strategic initiatives.
Limitations of Advantages of outsourcing
Outsourcing offers many advantages, such as cost savings, access to specialist talents, better scalability, and improved productivity. However, there are some limitations to consider when outsourcing, such as:
- Loss of control: When outsourcing, organizations lose direct control over the outsourced functions, resulting in a lack of visibility and potential mismanagement of resources.
- Cultural differences: Cultural differences between outsourcing partners can lead to miscommunication and misunderstandings, which can cause delays in project completion and even project failure.
- Security risks: When data and processes are outsourced to a third-party provider, it may increase the risk of data breach and unauthorized access to confidential information.
- Quality assurance: Depending on the outsourcing partner, there may be a lack of quality control and assurance, leading to a decrease in the quality of the services or products.
- Contract termination: Termination of the contract may become a problem when a certain level of service is not fulfilled or when the project is completed.
- Issues with intellectual property: Intellectual property rights may be compromised when the data is handled by a third-party provider.
- Cost overruns: Outsourcing can lead to cost overruns due to hidden or unexpected costs, or due to the need for additional resources or expertise.
One of the key advantages of outsourcing is cost savings, as firms can access resources, technology, and talent from around the world at lower costs than they would in their home markets. Other advantages of outsourcing include:
- Access to specialized skills and knowledge: By outsourcing, businesses gain access to a pool of specialized talent and knowledge that can help them increase their efficiency and productivity.
- Improved focus: Outsourcing allows organizations to focus on their core competencies and devote resources to those areas that are most important for their success.
- Faster delivery: By outsourcing, businesses can take advantage of streamlined processes and improved delivery times, resulting in improved customer satisfaction.
- Increased flexibility: Outsourcing allows businesses to quickly scale their operations up or down as needed, allowing them to respond to changing market conditions.
In summary, outsourcing can provide many advantages, such as cost savings, access to specialized skills and knowledge, improved focus, faster delivery, and increased flexibility. By leveraging these advantages, businesses can become more competitive in the global marketplace.
|Advantages of outsourcing — recommended articles|
|Contingent staffing — Tactical outsourcing — Business process outsourcing — Big four — Economies of scale — International competitiveness — Labour market trends — Importance of international business — Employee leasing — Minimum viable product|
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Author: Ewa Jackowska, Jacob Elisson, Manpreet Kaur, Dakshay Kumar