Advantages And Disadvantages Of Outsourcing

Advantages And Disadvantages Of Outsourcing

Business process outsourcing (BPO) has attracted a lot of negative attention over the years, and a lot of that comes from the fact that major corporations have completely offshored significant parts of their operations.

From a public and political viewpoint, that seems to be taking away jobs only to take advantage of lower labor costs in poor countries.

But it’s important to understand that there is a significant difference between outsourcing and offshoring. And while they both reduce costs for a business, outsourcing certain tasks is not the same as exporting thousands of jobs .

The principles between outsourcing and the offshoring process are similar, but as a business owner you need to understand how and why they are different.

Defining The Two Categories

Offshore outsourcing is where a company seeks the services of another company, an external agency, to help manage a specific project or business processes.

These external outsourcing services are known as a “Third Party Service Provider” because the work they do is related to the arrangement between the “The Second Party” or end-user and “The First Party” or the business.

There is no physical transfer of assets in outsourcing business process; it is only services or assignments that are transferred to an agent or another party that is located in another country or region.

On the other hand, offshoring business operations will involve a company or business setting up physical infrastructure in another country or region to handle an entire business division.

For both outsourcing and offshoring services, the main goal is to save money by taking advantage of existing comparative cost advantages, especially in regions and countries with lower labour costs.

Comparing Business Process Outsourcing And Offshoring

Advantages Of Outsourcing

1. Competitive Operational Costs

You spend less on hiring an external agency or a third-party outsourcing service compared to setting up your own operation. This is the case for a number of reasons.

An external agency is a different company, and they are going to handle their own cost of operations that don;t directly affect you.

The agency has the experience needed to find the right person to support your core functions. Having your own in-house department means you have to hire permanent employees and invest in business infrastructure upgrades.

If you choose to hire a VA directly, you will be forced to invest in research, training, and development. These costs add up, and you can easily spend more money and time than planned.

And that’s where third party companies in the outsourcing industry can help to streamline your operations without having to worry about hidden costs and time-consuming management tasks.

2. Boosted Productivity

You can improve productivity when you outsource some processes because your company will focus on core aspects that are dollar productive.

Every business out there wants to cut down on its costs to increase profits. The savings from hiring outsourcing companies can be directed to revenue-generating programs. You can use them to improve business infrastructure or even on promotional and marketing programs without increasing overhead costs.

You are also going to free up more time for your employees, which allows them to focus more on work that will grow the business..

3. Increased Flexibility

Outsourcing can help increase flexibility because it takes advantage of time zone differences. An external agency can help manage your business for 16 hours by just adjusting work shifts.

This means you can offer extended opening hours for certain business functions, which will positively impact your client and vendor relationships.

But the benefits of outsourcing extend to your own work schedule flexibility. By having a VA take care of administrative tasks like organising your calendar and email inbox before you get to work, your day will start with productive work and not trying to figure out what your priorities are.

Disadvantages Of Outsourcing

There are some advantages to outsourcing, and you have to keep them in mind to plan accordingly.

1. Cultural And Social Differences

The company will need a period of adjustments to accommodate certain social and cultural practices of the outsourcing vendor.

If you want to work with an outsourcing agency from India or the Philippines, you need to understand their beliefs, including the deeply rooted spiritual ones. Certain national and religious dates might clash with your project schedule so make sure you plan well ahead.

Our outsourcing company will help you with this process, to make sure that you gain full advantage of knowledge process outsourcing.

2. Communication Problems

Communication problems go hand-in-hand with social and cultural differences. This can come up due to differences in perspectives and not understanding the terminology.

Companies in Australia and North America are known for their straightforwardness. While people from the Philippines tend to be a little more introverted. They keep a lot to themselves and don’t say much.

The company culture in Australia and North America may be seen as a sign of aloofness, uncaring, and uncertainty. Understanding those differences can help avoid clashing over completely unnecessary miscommunications.

3. Security Issues

Many popular offshore outsourcing destinations have introduced a Data Protection Act, but data integrity and security breaches remain a serious issue in all industries.

Even if you have done everything right with networking protocols, tight information technology, and safety measures, the absence of close collaboration means there will always be security concerns.

This is very important for things like personal information about clients, vendors, and financial data. You need to invest in security protocols to help avoid serious data breaches that can easily turn into a huge financial burden.

Advantages Of Offshoring

1. Economies Of Scale

A company setting up a factory or office abroad is taking advantage of comparative cost differences on labour and new economies of scale.

The cost of items like rent, internet connectivity, and power might be lower than the cost in the home country. Most companies’ goals and expectations doing this are to make cost savings of up to 70% on a given business function.

This is typically a large undertaking with years of planning involved, and something that will quickly pay off due to the upfront investment. But with the right financial plan, the long-term savings can be significant.

2. Close Collaboration

The company has greater control through closer physical collaboration when offshoring.

Shared space collaboration will benefit you because you can oversee work conduct and not have to worry about delays and filters associated with technology.

There are software programs that let you collaborate with offshore outsourcing partners as if they were next door. But these systems can compromise the benefits of real-time analytics because of latency issues due to time zones and manual business processes for data entry.

3. Favourable Government Policies

Governments worldwide usually grant special exemptions and incentives for companies investing in their countries.

This includes access to cheap credit and tax exemptions, which will improve the bottom line of those businesses. This can significantly lower the upfront investment costs, making it one of the most significant planning items for businesses.

Disadvantages Of Offshoring

1. Increases Unemployment

One of the biggest cons of offshoring is that it will increase unemployment in the local economy.

Companies like Nike and Caterpillar have faced a lot of criticism because they have taken jobs away from Americans and given them to other nationalities.

The companies say that offshoring helps them improve their profits and lower costs, which leads to increased revenue. They claim that the increased profit will be used in improving the programs and facilities of the core business operations at home.

That’s difficult to prove when so many jobs are lost.

2. Cultural And Social Differences

The client will be immersed in the social and cultural practices of the country. This might affect communication and productivity as the new project gets off the ground.

Time zone differences can work for outsourcing, but the same might not work for offshoring companies. This is because production can easily delay when there is a change in manpower availability. This can easily add costs to certain job and business processes.

3. Security Issues

When you send large volumes of sensitive data across the world, there is the risk of security breaches. Transfer issues will always be there, even when it is in a shared space collaboration.

If the offshore expansion is part of the company, they still have to worry about sending data between two locations where it can be intercepted.

Start Your Outsourcing Journey Today

The decision between outsourcing and offshoring will depend on operational complexity and your company’s size, resources, and scope of work you want to transfer.

You will see a lot of savings in costs, and depending on how the operation is managed, you might experience greater productivity through either offshoring or outsourcing. What you can bank on is both outsourcing and offshoring being popular for business development in years to come.

The benefits of outsourcing solutions will help your business whether you need to free up time in back-office tasks, project admin work, or human resources.

If you want to find out how easy it is to get started with business process outsourcing, contact our team at Real Estate Virtual Assistant today. We have teams of VAs ready to take on your work, which saves you time and effort for recruitment and training.

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