Financial Times

Possible benefits and dangers of outsourcing
By Nilooka Dissanayake
Simply put, outsourcing is getting someone outside your organisation to handle one or more of your business functions. It is a hot topic among small businesses and large ones alike.

It is an option for US and European companies who are considering off shore outsourcing as a way to attain competitive advantage and among others around the world who are trying to serve those companies. Whether you are big or small, a one man show or a multinational, operating in US or Sri Lanka, outsourcing is becoming a fact of life for you.

In an article last week we looked at how outsourcing creates business opportunities for small businesses and start ups. Today, let us consider the other side of the coin - how to look at outsourcing from the outsourcing company's point of view.
Yes, as with everything else, there are benefits and dangers in outsourcing. Let us consider the benefits first. Here are some of the more obvious ones that should tempt you:

Outsourcing allows you to reduce and control operating costs. This is so because you are allowing a specialist to take over. It goes without saying then that outsourcing opens up potential for access to external expertise that may not always be an option otherwise.

For example, you do not need to keep an inhouse hardware engineer; you can outsource your equipment management to an outside company who will send in experts only when needed. That way, your work gets done and your costs are relatively less.

By freeing up the time and attention of your employees from not-so-important issues, outsourcing improves the focus on company's real mission. No one can be everything to everyone; this is more so for companies. This is why many large groups that grow in size and numbers in regard to employees, subsidiary and associate companies as well as diversity in operational areas are now consolidating.

They are getting back to activities that made them winners; what they are good at.
This consolidation process and the resulting outsourcing frees up management time and other resources. These can be put to better use in the core activities.
Just because there are many tempting reasons should you just go and outsource everything? No. Let us now consider the dangers that lie hidden from view.
Experts in outsourcing recommend that you consider outsourcing from a strategic angle.

If you are simply thinking of it for short term cost reductions, think twice.

*Will outsourcing improve the way you operate, increase your performance in the long run and make your organization robust?

*Will outsourcing contribute towards building strategic and sustainable advantage?

*Is outsourcing likely to make your organization stand on a better footing than without it? If you answer yes to one or more of the above, then you are getting more than short term cost reductions.

Outsourcing can do more harm than good if you end up losing core relationships and competencies. In one company, a manufacturer learnt a bitter lesson when it outsourced the distribution of its products to a third party. As a result, over time, the manufacturer lost touch with the distributors. It lost its 'feel' of the market. When more agile competitors entered the market, you can imagine the result. The lesson: Do not outsource core areas.

The many other dangers become obvious when you consider the implications of being careless in selecting a partner. Advice here is to look before you leap. In selecting potential outsourcing partners look at the selection criteria carefully.
If you have any comments you can reach us at ft@sundaytimes.wnl.lk or 075-552524

The writer is the Managing Editor of Athwela Vyaparika Sangarawa (Athwela Business Journal), the only Sinhala management monthly targeting the small and medium enterprises and its English version, Small Business International magazine.

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