Outsourcing: Strategic advantage or disadvantage?
Cracks in the outsourcing theory are starting to show, writes
Dr Wing Lam.
Dr Wing Lam
Many organisations are turning to outsourcing in the expectation
that it will enable considerable cost savings, ensure higher levels of quality
and help achieve better service levels. Examples of outsourcing strategies include
the outsourcing of IT functions and even the relocation of whole business units
to countries such as India (a strategy known as offshoring).
After all, if a company in another part of the world can do the same job equally
well at lower cost, why not? Indeed, many large organisations believe outsourcing
provides them with strategic advantages and have consequently restructured their
business in such a way that major chunks of the business operation are outsourced.
Emergence of cracks
While this all sounds good in theory, cracks in the theory are now beginning
to show. Many organisations wrongly view outsourcing as essentially a cost-reduction
strategy and neglect the significant business risks associated with it.
Take for example, a company that decides to outsource its call centre operations
to a firm in India. Many things could go wrong. For example, imagine if the
call centre agents do not speak nicely to the people calling in. Or if the call
centre agents take too long to resolve a customers query. Or if the call
centre agents lack local knowledge about the companies other products and services.
Or worse still, if the call centre agents break policies regarding customer
While this is an alarming scenario, it isnt too far-fetchedone
UK high street bank is right now considering whether or not to terminate the
operations of one of its Bangalore-based call centres because of problems. Sure,
the company can slap the call centre provider with warnings, penalties and other
legalities, but the point is that harm to customers and damage to the companys
reputation has already been done. The company can argue that all this is the
responsibility of the call centre provider, but at the end of the day it is
still the companys customers who get a raw deal. Further, finding another
call centre provider and investing all that time, effort and training would
mean high switching costs.
More than risk mitigation
What this means is that outsourcing is not about mitigating riskthe risk
is always there, immaterial of whether it is with the company or transferred
to the outsourcing provider. It is also clear that outsourcing over the longer
term can not be based on formal and exact specifications of work activities.
In a changing business climate, organisations need to respond accordingly to
maintain competitiveness rather than being hindered by decisions that may no
longer be appropriate. A call centre for example, may have to take on additional
service functions for new products that a company is offering, or may have to
increase customer-response times as industry benchmarks are raised. Hence, both
parties need to be willing to adapt.
The clients side
From a clients point of view, selecting the right outsourcing provider
is therefore a good starting point, but that is only a small part of the bigger
outsourcing picture. Critically, senior executives within an organisation should
view outsourcing as a relationship between the company and the outsourcing provider
which needs to be nurtured, and where both parties have responsibilities.
If the relationship has an imbalance, is too rigid, or is built upon expectations
which are inconsistent with either parties ability to deliver, then outsourcing
is likely to become a strategic disadvantage. Rather than an advantage, it will
have more of significant business ramifications.
The author is Director, MISM Programme, and
Associate Professor, Universitas 21 Global