Outsourcing: Pros and Cons

Outsourcing is a process that has broken into our economic realities from the crisis, conventionally called the “2008 crisis”. In the basic definition, this is the name of the operating activity entirely adopted from the English word “outsourcing”, which implies a process of borrowing the necessary resources from outside the company on the basis of the relevant contractual obligations.

The strategic question of building up our own resource base or borrowing it from focal specialists sooner or later arises in every organization. It can be said that at the initial stages of development of a company, owners rarely think about the fact that when organizing the first business processes, many functions “buy” from outside, i.e. sort of a natural outsourcing of small and medium businesses.

As development progresses, many organizations begin to produce part of the previously purchased services independently for various internally grounded and agreed reasons:
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• so do our competitors
• certified provider has disappeared, let's do this work on our own
• we pay our partners too much, it's cheaper to get a specialist in the state and pay him a salary
• if we organize this service ourselves we will add value to our service / finished product
• we will not depend on the optionality of the supplier of this service
• we will control and assign tasks directly to our staff
• and other very good reasons

Assuming that the chosen market niche is promising, owning a significant level of growth in sales and profits at the growth stages of a company, many already medium-sized businesses acquire very important and necessary service functions without which, at first glance, a business cannot work efficiently and generate profit.

As the market niche is filled, the industry transitions to a saturation stage, the level of competition is perfect, prices are multipacked and discounts, companies' profit margins decrease, and operating fixed costs remain almost unchanged. The crisis of 2008, when the accumulated overproduction and decline in consumer activity led to a sharp deterioration in economic indicators in almost all industries, also became a significant driver of lower profit rates for commercial organizations.

At one of the next rounds of decline in the company's overall profit, business owners decide to change operating processes or optimization. One of the elements of optimization is “outsourcing”.

What are the goals of the company?

1. Actual translation of fixed operating costs into variables, i.e. “Outsourcing” is maximally tied to the sales volume;
2. Reducing the number of full-time employees, which is one of the measurable performance indicators of the company. Particularly relevant for joint-stock companies;
3. Improving the quality of final goods / services by attracting specialists / professionals in the operational chain who have better competencies than are developed within the company.

Objective 3 lays down the basic principle of “outsourcing” : “It is possible to transfer part of business processes / operations / functions / resources to management if the company that accepts them has more developed competencies in managing a selected segment than the company that transfers them ".

Another law : “You cannot outsource business processes / operations / functions / resources that constitute points of a company's competitive advantage or are the basis of its business.” For example, it will look strange if the printing plant transfers to the production outsourcing all printing works. Our printing plant becomes an advertising agency for attracting and placing printing orders.

Another example often encountered in the FMCG product market is the transfer of full distribution rights to a distribution company in a region or distribution logistics. Everyone who experienced this decision will immediately list its disadvantages:

• a sharp decline in the control of quantitative and qualitative indicators of distribution;
• poor controllability of sales staff;
• a sharp decrease in the control over the level of receivables and an increase in its maturity;
• loss of control over distribution channels in the region;
• the growth of dependence on the partner, the negotiating position weakening with time;
• increased costs for the motivation of the partner’s / distributor’s staff to fulfill sales plans;
• decrease / stagnation of the share of sales;
• etc.

It is wrong not to recall the basic technical tool for making a decision on outsourcing - the Outsourcing Matrix (see figure).



The decision on outsourcing is probably one of the most difficult in the practice of the manager. This is a solution that requires you to give a piece of a company grown over the years, easy to manage and familiar in the details of the company. A solution that requires abandoning part of well-trained and often loyal staff. A decision that requires willpower and managerial rigidity.

But, in this decision there is also a reverse side for the specialists, who were singled out into separate divisions and were taken out of the company's contours. In business practice, there are many examples of the creation of new businesses by released employees and the conclusion of contracts with former employers. But this is a completely different chapter, as well as a chapter on how the psychological climate and staff motivation are changing in anticipation of an outsourcing restructuring.