As your business expands, it’s natural for various administrative functions to become increasingly time-consuming and resource-intensive. These activities can divert significant attention and resources from core business activities despite their importance.
Outsourcing has emerged as a popular solution to this challenge, offering the promise of cost savings, efficiency gains, and a greater focus on the business’s core competencies.
However, outsourcing may not always be the silver bullet it is made out to be. While it can bring advantages, it also carries risks and downsides that should not be overlooked.
In this article, we will explore the disadvantages of outsourcing essential functions and discuss why a more nuanced approach may be necessary to optimise the balance between outsourcing and in-house operations.
Outsourcing can be an attractive option for senior management seeking to streamline operations and accelerate business growth. By entrusting non-core functions to external providers, they can devote more time and mental energy to core strategic initiatives.
tAdditionally, outsourcing can offer access to specialised expertise and cutting-edge technology that may not be available in-house. This can help companies realise cost savings and operational efficiencies while reducing the risks of managing complex functions internally.
In this context, outsourcing can be a powerful tool for driving business success, but it has its potential downsides. It’s essential to carefully evaluate the pros and cons of outsourcing before making any decisions and to establish clear objectives and metrics for measuring success.
Which types of functions are commonly outsourced?
While any business function can be outsourced to some extent, certain functions are more suitable for outsourcing than others in practice.
Functions close to your core business offering are typically not outsourced, as you are likely better at performing them than anyone else. Enhancing your in-house capabilities can propel your business forward.
For instance, if you design cutting-edge microchips, you wouldn’t want to outsource the design function as it is the foundation of your business’s reputation.
On the other hand, non-core functions are more amenable to outsourcing. For example outsourcing HR which requires specialist knowledge and expertise, is common.
Public relations, which involve a network of contacts and low-level administrative tasks such as managing email mailing lists or printing and distributing leaflets, are also good candidates for outsourcing.
Moreover, tasks that are time-consuming but not perceived as adding value, such as customer services or returns handling, are often outsourced to enable businesses to focus on their core competencies.
Therefore, by carefully identifying functions suitable for outsourcing, businesses can benefit from cost savings, operational efficiencies and access to specialised expertise while staying focused on their core competencies.
What are the downsides of outsourcing?
Outsourcing can create a loss of control
Outsourcing non-core functions may be seen as non-impactful to the core business, but over time, a loss of control in these areas can lead to a disconnect between the business and its stakeholders.
At best, this can lead to poor or inefficient decision-making, but at worst, it can lead to serious financial and reputational damage to an organisation.
To counteract this potential loss of control, you must stay in regular contact with your outsourcers and have appropriate contractual frameworks in place to govern the relationships. It cannot simply be a case of setting them up and letting them run.
Outsourcing can be expensive
It may initially seem cost-effective to reduce your need for in-house staff to carry out these roles. However, you may find that the need for these outsourcing businesses to make a profit eats into your margin and that as your business grows, an in-house solution may provide a more economical solution.
Outsourcing can involve a higher risk
Having external organisations handle confidential information and commercially sensitive data brings risks, which must be managed carefully. It’s easier to place protections and controls in-house than externally, so this must be considered at the very start.
In particular, data protection issues need to be covered within your contracts, and appropriate assurances and indemnities are sought.
Under-developing your workforce
There is the potential for under-developing your own workforce and, in turn, limiting your business’s potential growth and scalability. Utilising in-house solutions, as opposed to outsourced solutions, means that you naturally develop and improve your organisational capability across those functions.
This cross-business upskilling pays dividends over time and can be a springboard for success.
It’s critical to carefully evaluate the benefits and drawbacks of outsourcing and determine which functions are suitable for outsourcing. This approach can help businesses remain focused on their core competencies while leveraging the expertise and cost savings that outsourcing can provide.
Additionally, it’s crucial to have proper legal support and guidance when entering into outsourcing contracts, as well as having the correct insurance coverage in place to protect the business and its interests.
If you are seeking legal advice and support in navigating outsourcing contracts or any other commercial, corporate, or employment legal matters, LawBite’s experienced contract lawyers are available to provide the expertise and guidance needed to achieve their business goals.