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Outsourcing: a Complex Series of Tradeoffs

Outsourcing: a Complex Series of Tradeoffs

Outsourcing is not a new concept as basically it’s a “subcontracting of tasks” which were prevalent & even prevalent today, & we know that the Rationale for subcontracting is to save cost & time so that the party subcontracting the task may specialize itself in its core competencies without wasting time & intellect in the task that may be subcontracted.
When we talk about outsourcing we say that An organization entering into a contract with another organization to operate and manage one or more of its business processes. We call it as outsourcing of process. Outsourcing originated and became popular as a cost-saving strategy during a recessionary environment. Usually the processes that are outsourced are the support processes and not of extremely high strategic importance, but necessary for doing business. In a nutshell outsourcing deals with the people and processes in and around business.

No doubt about the success of outsourcing which is visible in present context & even a favourable regime for a country like India where human capital is abundant. But Organizations have now begun to recognize the real costs and inherent risks of outsourcing. Instead of simplifying operations, outsourcing often introduces complexity, increased cost, and friction into the value chain, requiring more senior management attention and deeper management skills than anticipated. It is generally said that “Outsourcing is an extraordinarily complex process, and the anticipated benefits often fail to materialize.” outsource¬†

The outsourcing requires a complex series of tradeoffs: cost savings versus growth, speed versus quality of service delivery, and maintaining organizational cohesion versus knowledge and innovation. Service providers and organizations have inherently conflicting objectives, putting the organization’s objective for innovation, cost savings, and quality at risk. Moreover, the service provider’s structural advantages do not always translate into cheaper, better, or faster services. The world’s largest companies should be able to replicate the service provider’s structural advantages in-house and rely on the service provider only under specific circumstances, such as fixing deep-seated structural problems or maintaining infrastructure operations.

An unfavorable mix of rising costs and increased demand will drive up the cost of outsourcing for organizations and vendors. Weaknesses in operational management will result in more deal failures, prompting organizations to bring more operations back in-house. In the long run, organizations that continue to outsource will experience a loss of bargaining power to vendors as the supply side consolidates. Those that apply strong skills in deal structuring and risk management and strong management skills to oversee deals from inception to execution will be best positioned to reap the benefits of outsourcing.

 

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