Outsourcing is a process through which a company or an organization may ask other firms to handle some of its functions. These functions usually consist of marketing, human resource, finance, selling, retailing, etc. Since there are other firms in the market which specialize in these fields, it becomes easier for the company to let them handle the outsourced operations. A firm when outsources these responsibilities is cutting the cost of these departments within the company. The costs may include the cost of hiring new employees, operation costs, wages, and the extra benefits that are offered to employees.
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In today’s business environment, many companies have outsourced their operations as it makes them more flexible to the changing environment. Also, organizations are making use of cheaper resources available in different parts of the world, especially since it is not difficult to communicate across the globe. But outsourcing is not as simple as it sounds. There are many risks involved when a company makes this decision.
One of the most common problems and a common risk for the company is the need to ensure that the other company has the same principles and will be able to match with the organization. There are many times when this is not considered. Once the contract has been made and the company starts using the services it incurs problems. Both the companies do not agree on some aspects which lead to arguments and disagreements. This distorts the functioning of the company. It may result in inefficiency.
Another risk involved with outsourcing is that the company becomes dependent on the agency or the specialist company to provide them with the services. This is not such a good thing for the company because if then the agency can take advantage of the situation by charging higher prices. They may also take unnecessary advantage of the company and when they do not provide the service on time or in an efficient manner then it is the company that suffers and incurs losses.
The risks that a company faces when outsourcing is not limited to one field, they are widespread and they affect all the departments within the organization. The information technology department is a support function; anything that takes place here influences the whole organization as technology is widespread within the organization.
Some companies outsource their Information technology functions, this is very risky because all the information that is being sent over the intranet and the internet of the company can be hacked into and sold to competitors by the service provider. This puts the company in a very delicate position. Also, any changes or up-gradation in the IT processes can not be made without the cooperation of the service provider. This takes time and makes the process lengthy. On the other hand, if the IT department was within the organization, any changes could be made easily and information would be more secure because the employees would be a part of the company and would want to work for its benefit. (Wright, C. 2004)
Apart from the outsourcing of information technology functions, the company may outsource its retailing function or have a supplier for human resources. These are precarious relationships and need to be dealt with care.
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The legal consequences are another risk that the company faces. A relationship that is formed with the outsourcing agency is an intimate one since there is a lot of sharing of information. This relationship is not fiduciary, that is there is no obligation of the service provider to give special consideration to the client the way a lawyer or a doctor does. This makes it difficult for the company to fully trust the service provider.
There is a legal aspect when maintaining and creating relationships with third-party vendors. This legal aspect leads to a problem that can pose a risk for the company when conducting business transactions. When a transaction is carried out or a relationship is initiated a contract needs to be created and maintained. This takes time as all the things need to be cleared and the contract needs to be signed by both parties. The risk here is that during the time it takes for the contract to be made the market position for that commodity or service might change. The company has the right to back out or change the contract but it leaves a bad impression on the vendor and may give the company a bad reputation.
When a company enters into an agreement with a third-party vendor it is giving up control of that function. This means that how the vendor will perform the function is not up to the company anymore. It is up to the vendor. The company may not be comfortable with the way the operations are in or it may require more information from the vendor and since the operations are not thorough the vendor may not be able to provide this information.
The quality of service that is provided to the organization may vary. Once the vendor takes on other customers, he may get busy and have too much work. Thus, he may not be able to provide the same quality of service.
Service providers are usually small in size; this can increase the operating costs of their business. This can reflect on the business as the vendor may be charging the company a higher price for the service as compared to the company handling the function on its own.
In an international market, the risks of outsourcing are comparatively higher, mainly because the company may not have much information about the market and the way business is done in that market. Nowadays, many companies are making use of international outsourcing because of the benefit they get from cheaper costs but there is no guarantee that the work will be performed efficiently. Apart from this, there are legal barriers as each and every country has its own set of rules and regulations pertaining to the operations of companies.
Also, the business may not know a lot about the international market and the type of service that is provided by them. Such a service is useless to the organization if it is operating in the local market. International outsourcing will only be helpful to those companies which have a global presence or are planning to expand their operations.
There are some prerequisites and legal requirements which need to be fulfilled when a company outsources its functions. These may prove to be a hindrance in the future and may increase the time it takes to complete a job.
All communication that takes place between the vendor and the company needs to be documented to keep track of what is going on. This needs to be done so that this communication can later be presented as evidence if need be.
Communication problems can be a risk because there can be times when the company forgets to tell the vendor about changes in policy. This can result in the vendor still using the old policy; the data set will then not match with that of the company. Also, the company and the vendor may not change policies at the same time which may result in disruption of information and the reports that are being presented.
Apart from these risks that I have discussed there are many other risks that a company can face when outsourcing. These risks are also specific to the company and the sector in which the company is operating. The idea is to minimize these risks by carrying out the necessary research and preparing the company to face these risks when and if they are incurred.
Schniederjans, M. et al. Outsourcing and insourcing in an international context, M.E. Sharpe, (2005).
Get Blob, Chapter 4 – Risks of Outsourcing. Web.
Giera, J. & Schooley C. “The Benefits and Risks of Outsourcing Learning” Forrester. Web.
ISACA, Wright, C. Top Three Potential Risks with Outsourcing Information Systems. Web.
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Tompkins Associates, Tompkins, J. Top 40 Risks in Outsourcing. Web.