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The Pros and Cons of Outsourcing Business Functions

Outsourcing is becoming the method of choice when it comes to reducing business costs. Every business wants to lower their cost structure and grow business. The difficulty is being able to accomplish both without affecting service. Whether it’s outsourcing marketing and sales, accounting, using third party warehousing or simply outsourcing labor in manufacturing, there are some pros and cons that all businesses need to be cognizant of. It’s not simply handing over everything to an outside firm and hoping they delivery on promises. It requires the company be a proactive participant in working with whatever firm they choose to outsource to. So, what are the benefits and drawbacks of deciding to use outside sources?

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What are the Benefits of Outsourcing?

Among the immediate benefits of outsourcing are the reductions in day to day operating costs. Companies that use full time employees can benefit from moving these functions to outside firms. This immediately reduces the costs of both salaries and benefits. Considering the high cost of medical insurance for businesses, this is a tremendous cost savings and one that immediately goes to a company’s bottom line. In addition, companies often lack the expertise and abilities in a given department. Whether due to complacency, or simply inability, companies often find they lack the business knowledge and know how to excel in certain key functions. This can inhibit a company’s ability to grow business, reduce costs and close on opportunities.

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Outside experts bring fresh new approaches and ideas to existing problems. They know what works and how best to expedite solutions. They have the experience necessary to solve almost any problem and they make the problems their own responsibility. Of all the benefits for businesses perhaps the most important is the opportunity to work directly with specialists. These firms make it their number one priority to remove the management and problems associated with running a department. Consider them a business within your business. To summarize, here are the benefits companies enjoy through outsourcing.

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  • Cost reductions from outsourcing: Moving full time positions saves companies on salaries and benefits.
  • Improved problem resolution: Having a fresh set of eyes allows companies to improve their ability to resolve problems and provides incentives to improve efficiencies.
  • Increased market share: Using outsourced marketing firms increase market share, improves customer relationships and grows business.
  • Better financial management: Using outsourced accounting firms help to better manage a company’s credit rating and provide insight on how best to secure lower interest rates on business loans and credit lines.
  • Lower manufacturing costs: Using temporary labor allows companies to maximize gross profit relative to size of order or production run size.

What are the Drawbacks of Outsourcing?

It’s not all peaches and cream when it comes to outsourcing. There are several potential dangers associated with giving another company access to time sensitive information. Should companies provide outsourced firms with customer lists, payment history and critical sales information? What about proprietary information? What risks is the company taking by deciding to share this information with outside companies?

These are the important questions that need to be answered by business who decide to seek outside help. It’s not simply a question of trust but of protecting one’s business interests. One of the most common problems is that these firms represent multiple companies and competitors in the same market and industry. Several are notorious for using information from one customer to better service another. These situations happen often with outside firms.

Handing over control is perhaps the biggest issue. While companies may need some help in a given area, by outsourcing they are actually handing over their work processes to another company. The way a business conducts itself is essential to its reputation with its customers and its market. Going with an outside firm puts that reputation at risk. Sometimes the damage is so severe it can take the company months and even years to repair the reputation they worked so hard to create. Using outside help is a big decision and requires a lot of reflection. Here is a summary of the drawbacks of outsourcing.

  • Lack of control: Using outside experts means less control over the outcome of initiatives.
  • Information sharing: Sharing critical business information is a risk, regardless of the firm’s reputation.
  • Conflict of interest: Many firms represent multiple companies in the same market. They may use information about one customer’s pricing or business activities to help another customer.
  • Damage to business model: If an outside firm damages a company’s reputation with its customers and its market, that company will have to spend a large amount of time recouping lost business.

While there are some benefits to outsourcing, there are an equal number of drawbacks. Each requires an in-depth analysis and evaluation as to the benefits that can be accrued, and the damage that could result in relying upon another company. It’s not an easy decision to make. However, by being aware of both the pros and cons, companies can be better prepared and ensure their decision to pursue this option is a good one.

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