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?