Top Outsourcing Disadvantages

When Outsourcing is a Disadvantage. Holloway

As you evaluate your outsourcing choices, keep in mind that there are advantages to outsourcing and disadvantages of outsourcing. Look at each one of the outsourcing disadvantages listed below and decide what impact that item would have on your business and its operation. If the outsourcing disadvantages outweigh the advantages of outsourcing, then you should avoid outsourcing those operations. Keep in mind that some functions or departments lend themselves much easier to being outsourced. Hence, what could be a disadvantage in one department may be an advantage for another.

Loss of Managerial Control and Possible Quality Issues

Whether you sign a contract to have another company perform the function of an entire department or single task, you are turning the management and control of that function over to another company.

Your outsourcing company will not be driven by the same standards and mission that drives your company. They will be driven to make a profit from the services that they are providing to you and other businesses like yours. The outsourcing company will be motivated by profit, versus specific metrics that you would have in place if the function stayed in-house. Since the contract will fix the price, the only way for the contracted company to increase profit will be to decrease expenses. Decreasing the expenses that an outsourcing company has may be trading off quality. In addition, you will lose the ability to rapidly respond to changes in the business environment because there will now be an extra layer of people and processes to work through.

Hidden Costs

You will sign a contract with the outsourcing company that will cover the details of the service that they will provide. Anything not covered in the contract will be the basis for additional charges. Also, there will be legal fees to be paid in order to retain a lawyer to review the contracts and make any required changes. Keep in mind that when working with an outsourcing company that they are the experts in this area. If they are good at what they do, they have many contracts and therefore much more experience in this area of contracting than you. It is their experience with this type of contracting, and your lack of experience, that makes it easy for you to miss hidden costs.

Threat to Security and Confidentiality

Intellectual property and confidential data must be protected when non-company employees are being used in an outsourced capacity. If you have payroll, medical records or any other confidential information that will be transmitted or used by the outsourcing company, there is a risk that the confidentiality may be compromised. If the outsourced function involves sharing proprietary company data or knowledge such as product drawings or formulas, there need to be proactive safeguards in place to protect this information. Play it safe an insist that the outsourcing company sign a protective clause in the contract or as a separate non-disclosure agreement. Ensure that the contract language is strong enough to discourage purposeful misuse of essential company data.

A Tie to the Financial Well-Being of the Outsourcing Company

Since you will be turning over part of the operations of your business to another company, you will now be tied to the financial well-being of that company. Due diligence and a review of the company’s financial statements is usually a good predictor of the health of the company. One of the worst things that can happen as a result of outsourcing is that the other company may underperform financially and therefore they default on their contractual obligations. The absolute worst scenario is that the outsourcing company files for bankruptcy and seeks protection from its creditors.

Impact on Employee Morale

The company’s employees could react (and retaliate) to outsourcing one or two key functions/departments in the company. To these employees, the act of outsourcing could signal that their job is also at risk and will eventually be eliminated by being given away to the outsourcing company. The management team needs to take care in how the message about outsourcing is delivered to the company employees. There is no such thing as over-communication when major changes such as outsourcing departments or company functions are concerned.