Outsourcing in Large Companies – Pitfalls

A highly divisive example of outsourcing is the shipping overseas of call-centre operations. This has been used by some banks and retailers who use cheaper labour abroad to deliver their services. In many cases it has proved to be an emotive subject, with a major pitfall being the handling overseas of personal information, particularly financial data. Another unpopular aspect of this is the perceived loss of the organisation’s cultural identity. One of the main arguments against outsourcing is the loss of domestic jobs to overseas workers. This is also called “offshore outsourcing” or “offshoring.” There is a risk that the repercussions of offshoring may far outweigh the short-term positive outcomes.

Other problems may include greater administrative costs for the organisation, the reduced morale of the workforce, decreased employee performance and ethical trade-offs. In fact, outsourcing can cripple a business if not handled in the correct way. The company may find itself with inadequate staffing and no corporate memory, having lost core skills that would be difficult and expensive to re-establish. To reduce the risks, stringent checks should be made in the form of a risk assessment. This will evaluate the suitability of the outsourcing company to the contract firm; it will take into account the cost (including any hidden costs) and any long-term disadvantages (one of those being the loss of knowledge gained through the outsourced activity.)

Key factors in the success of outsourcing are the way in which contractors are managed and the type of activities being outsourced. Consideration should be given to how the contract labour may fit in culturally with the organisation. It is important to remember that the outsourced workforce does not work for the parent organisation and may not have its best interests at heart; and if something were to go wrong, the buck would stop with the business that had outsourced the work rather than with the contracted workforce. Outsourcing works best when used for non-core skills. Core skills, as a general rule, should be kept in-house; if these skills are lost then the business would grind to a halt. However, the outsourcing of non-core functions can often be completed quickly, efficiently, and cost-effectively by an outside specialist. Although the main reason for outsourcing is down to financial benefit, other factors may come into play such as avoiding wage-related employment costs like the pension, or leave and vacation pay. Organisations should not be lulled into a false sense of security though, and legally liability may still fall with the outsourcing company rather than the contracted one.

A discussion of when should organisations should outsource services traditionally produced in house? Is outsourcing another management fad, or is it efficient and effective?  These questions are tackled by Simon Domberger in his book: The Contracting Organization: A Strategic Guide to Outsourcing. Based on over a decade of research and consulting experience, its conclusions have many practical implications. See this book on Amazon here.

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