Market Snapshot


Outsourcing is the process of having certain services that could be, or have been, provided internally performed on a continuing basis by companies or individuals outside your organization. It's long been common in manufacturing for companies to depend on external suppliers to provide them with components made to their specifications. Most business decisions favoring outsourcing are made for economic reasons, according to a recent article from the National Federation of Independent Businesses (NFIB). It notes that if a product or service can be obtained externally for less cost than providing it internally, outsourcing may be a preferred alternative as long as the external source meets the company's quality requirements.

Sometimes the economic decisions favoring outsourcing are driven by volume restrictions. Consider, for example, a service requiring specialized expertise but potentially consuming only a few hours per week. There may be nowhere near enough volume to justify recruiting specially qualified staff, so outsourcing may be the more practical-and ultimately less costly-alternative. Numerous potential outsourcing decisions may hinge upon the presence or absence of particular skills or capabilities in the manner just described. To cite another frequently encountered example, many organizations outsource the administration of their workers' compensation programs because the complexity of the system is most effectively addressed by individuals who specialize in workers' comp issues.

The pluses of outsourcing include:

  • Outsourcing is used to tap the knowledge and resources of specialists. It can conserve the time of regular employees so they can focus on needs more relevant to the company's purposes; that is, it redirects resources to more productive and strategically more important work.
  • Outsourcing can sometimes reduce administrative costs.
  • Outsourcing can be instrumental in preserving confidentiality. For example, the administration of an employee assistance program (EAP) is usually outsourced so that no company employees are privy to personal information about other employees.
  • It can compensate for overload or help eliminate backlogs.
  • Outsourcing can, at times, facilitate budget reductions.

Any number of people may offer multiple reasons why outsourcing's use in facilitating budget reductions is anything but a plus. In most companies, the majority of employees equate outsourcing with budget cuts and thus with staff reductions. That is, outsourcing's greatest minus is that it's perceived by many as primarily intended to reduce labor costs and thus eliminate employees.

It's no secret to anyone working in American business today that many jobs have been lost as a result of shifting activity to largely foreign areas where labor costs are lower than in this country. Under increasing competitive pressure, companies quickly learned that they could save money by going to outside suppliers for everything from raw materials to finished products to customer service. Indeed, entire industries have essentially outsourced themselves. Consider, for example, textiles: At one time, the New England states comprised a center of textile manufacturing, but as competition intensified and costs continued to rise, many of the textile manufacturers fled to the Southern states from where they later jumped again, mostly to foreign countries.

There are many instances in which outsourcing is undeniably good for business while, at the same time, damaging to employee relations. Thus, the decision to outsource could mean reduced cost and increased efficiency at the price of layoffs and employee unrest. Surely there are times when it is wiser to forego modest improvement rather than alienate the workforce. It is just as likely, however, given the economics of business today, that extensive outsourcing may be needed to ensure survival.

As the decision to outsource shouldn't be taken lightly, so too should the selection of an outsource supplier be approached very seriously. In selecting a vendor, you should consider:

  • The potential vendor's experience and reputation. If possible, check with some of the vendor's other clients.
  • Whether the vendor is equipped to provide computer systems and technology needed to ensure efficient access to all applicable data and reports.
  • Whether the vendor has invested in the necessary internal resources needed to support any employee who might be assigned on-site.
  • The extent to which the vendor takes responsibility for ongoing training of its staff.
  • Whether the vendor has sufficient understanding of your company's organization and culture.

It's probably not possible to explain away all employees' fears and misgivings about outsourcing. Nevertheless, the NFIB notes that thorough and conscientious communication of the necessity for outsourcing can go a long way toward ensuring employee acceptance of the practice.

Source: McConnell, Charles, R. (May 4, 2007). "The Pluses and Minuses of Outsourcing." The National Federation of Independent Businesses. Retrieved May 31, 2007.