Outsourcing is a practice that companies use to externalize parts of their business to an outside partner or partners. By outsourcing, companies can gain cost advantages as well as increased sales opportunities, access to new expertise, lower annual costs, and more time to focus on core business strategy. It can also provide competitive advantages. It can be viewed as the practice of converting fixed costs to variable costs. By outsourcing certain manufacturing and production, a company can then focus on activities closer to its customers.
Benefits of Outsourcing Your Startups Processes
- An increase in competitive advantage through cost reductions.
- The motivation to focus on core activities.
- Access to knowledge and resources in the suppliers market.
Suppliers can produce cheaper goods and services through the economics of scales because they have much of their capital invested in machinery and other fixed assets. The company requires less investment in machinery and warehousing and can also employ fewer people.
Although outsourcing can provide significant benefits, there is always a threat to a competitive advantage when activities are outsourced. A survey of outsourcing costs expressed as a percentage of revenues revealed that as much as 50% of some company’s revenue is spent on outsourcing. This fact should be considered while decisions are taken.
Moreover, when documents and drawings must be translated, language, problems, and misaligned goals create high risks. Product quality may also suffer if the supplier chooses cheap labor. Travel and other transportation costs can also be significant when outsourcing. These problem areas should also be investigated before making a decision.
Risks
While more and more companies recognize the value of outsourcing some qualities, each company must consider how the entirety of its business is affected by an outsourcing decision. The problem is that many companies tend only to see the benefits of outsourcing and overlook the risks. They do not evaluate the extent of the risk based on an evaluation of the outsourced activity/process characteristics.
The main reason that outsourcing projects fail is that decision-makers have not identified the risks and taken steps to prevent or minimize them. Or they have chosen to outsource the wrong product/process have chosen the wrong suppliers, have overlooked the hidden costs, etc.
Motives
There are several reasons that company outsource their various activities. Companies may want to focus more on their core business or perhaps compensate for their lack of skills in a certain area. Moreover, companies want to reduce costs and acquire greater flexibility. Some companies want to avoid particular problems although they rarely advertise this reason for outsourcing.
