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Issue of September 2006 

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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 customer’s 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 confidentiality.

While this is an alarming scenario, it isn’t too far-fetched—one 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 company’s 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 company’s 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 risk—the 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 client’s side

From a client’s 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

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Indian Express - Business Publications Division

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