The concept of outsourcing enables external vendors to carry out organizational activities on behalf of a particular company. An organization can decide to outsource all or part of its functional activities depending on its capacity. Outsourcing was traditionally meant for those companies that were struggling financially.
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In recent times, outsourcing has become a common service even for those companies that are doing well financially. Some of the commonly outsourced services include information technology, accounting, human resources and telecommunication services.
The performance of many firms has significantly improved due to outsourcing. The operating income of companies can increase as a result of outsourcing. Some company executives are of the view that outsourcing is a very powerful tool when it comes to reducing the cost of production.
Outsourcing helps organizations to focus on their core business and competencies and at the same time allocate the possible distractions to outside vendors.
Despite the economic advantages, outsourcing has got its limitations and does not always guarantee success. Outsourcing can sometimes fail due to some deadly sins that are committed by organization.
The first deadly sin that organizations commit is outsourcing for some services that should not in the first place be outsourced. There are some activities that are very important to a company’s business and should not be outsourced.
The company is bound to suffer a lot if the vendor goes bankrupt or fails to deliver the services according to specifications. Managers should have a better understanding on the kind of services to outsource rather than simply copying what competitors do.
Managers should carefully examine the prospective vendors to determine if they have the required qualifications and capacity to deliver quality services.
Selecting the wrong vendor is the second sin that organization commit when outsourcing. This is why it important to critically analyze vendors and check their capacity to deliver before outsourcing for their services.
Some selected vendors can end up not living up to expectation even after signing contracts with organizations. Outsourcing can only be successful if the management selects a vendor with the capacity to deliver.
It is also necessary for organizations to look for the quality of services being offered by vendors rather than being excited by vendors with the lowest bids. Service providers must meet certain basic qualifications before they are selected.
Some of the necessary soft qualifications include flexibility, having a good cultural shift, trustworthiness and the desire to facilitate continuous improvement. The hard qualifications include the ability to provide the best solution at a lower cost.
It is also important to note that cutting costs is not the only reason why firms outsource. Organizations should only rely on first hand information about a particular vendor in order to make the right decision when it comes to outsourcing.
The third deadly sin that firms commit when it comes to outsourcing is writing poor contracts. Rushing to sign a contact with a vendor without careful consideration can lead to problems in the future.
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The outsourcing contract should be precise and should also include a clause that allows a firm to measure the performance of a vendor in an objective manner. The outsourcing contract should allow a firm to switch vendors if the expectations are not met.
A balance of power between organizations and vendors can only be achieved through a well crafted contract. A good outsourcing contract should be precise, complete, incentive based, balanced and flexible.
Overlooking personnel issues is the fourth deadly sin that firms commit in the outsourcing process. It is important for managers to ensure that their employees understand the reason for outsourcing.
An organization can lose some of its valuable employees who may view outsourcing as an underestimation of their skills.
Outsourcing may also lead to industrial strikes because the employees feel that their jobs are at stake due to outsourcing. It is important for management to strike a balance between outsourcing and the job security of its employees.
The fifth deadly sin that firms commit in the outsourcing process is the tendency to loose control over the outsourced activity. The client should be able to have a complete control over the outsourced activity by actively managing the vendor.
Organizations should select some managers with some technical skills and the ability to manage vendors. Firms may be forced to hire new employees with a special mission of managing vendors.
The sixth sin that firms commit when it comes to outsourcing is overlooking the hidden costs of outsourcing. The viability of outsourcing can be threatened by some of the hidden costs that some firms tend to ignore. Some of the hidden costs include contracting and vendor management costs.
The rationale for outsourcing can only be challenged when the firm pays attention to some of the hidden costs associated with outsourcing.
The seventh sin that firms commit when outsourcing is the failure to plan for a clear exit strategy. It is important for managers to anticipate the possibility that an outsourcing contract can come to an end at any time. Reversibility clauses should be included in an outsourcing contract as one of the best exit strategies.