Outsourcing refers to a situation where an entity contracts an outside organisation to perform part of a manufacturing process or another function normally undertaken within the entity.

  • Outsourcing may refer to an entity’s decision to make a particular component in house or to buy that component externally.
  • Typically, however, outsourcing refers to longer term arrangements. Common examples of outsourced areas in organisations include payroll, human resources, maintenance, IT and distribution processes.


Benefits of Outsourcing

  • ability to tap into high-level skills and expertise of an outside firm
  • reduced costs
  • reduced lead time
  • increased flexibility
  • improved focus on core activities
  • streamlined operations
  • improved quality
  • reduced risk of exposure due to technological change.


Drawbacks of Outsourcing

  • difficulty of reversing the outsourcing decision due to the need to
    • recruit skilled employees
    • retrain internal staff
    • develop infrastructure
  • purchase necessary equipment
  • increased dependence on suppliers
  • time and cost involved in managing the process
  • damage to staff morale
  • vulnerability to future price increases
  • potential quality and delivery issues
  • loss of knowledge.


Considerations when outsourcing

  • How will your organisation manage the arrangement between the two organisations?
  • How will performance be measured? What key performance measures are appropriate to the agreement?
  • How often will reviews be held, and what form will these take?
  • How will disputes be resolved?
  • What will happen at the end of the agreement?