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What is Outsourcing? Pros and Cons

Should businesses send their work elsewhere?

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Congress recently passed a bill that would make companies traded on the New York Stock Exchange reveal the size of their workforces that are outside the US. This move was in response to the bank Wells Fargo laying off thousands of American workers and shifting certain operations offshore, meaning that it is sending certain aspects of the bank’s business to foreign markets. Why are companies outsourcing their work to other countries?

What is Outsourcing?

Outsourcing is a process of sending jobs, operations, and basic workplace tasks to be performed by a third-party workforce that could be in the same country or a different one. Essentially, a company hires another business or contractor to do some of its work. These functions can either be done onsite (at the company’s offices) or offsite (at the contractor’s location). Often, outsourcing involves hiring workers in another country to do certain tasks.

Also known as contracting out, there have been many negative connotations to outsourcing, a notion that has been used for gain by politicians on both sides of the aisle. But if the consensus is that outsourcing is a bad move, why would companies do it? Let’s take a look at the pros and cons of outsourcing.

Pros

The main reason for outsourcing is to save on labor costs. By hiring other companies to handle customer support calls, clerical tasks, or data analytics, businesses can save money. The biggest money-saver is if they hire firms in low-wage markets, such as India, Bangladesh, or the Philippines.

You may have read that employers are having a hard time filling positions, which is creating a productivity problem. As a result, employers may have no other choice but to outsource. This could also save the enterprise money and time since it does not need to train new employees or offer them an expensive benefits package.

In today’s hyper-connected global economy, employers have access to an enormous talent pool. They can work with people around the world, which may be more suitable for the company.

Businesses may have short-term projects. In this situation, it makes more economic sense to hire an outsourced team of workers because the business does not need to spend time, money, and other limited resources to train and maintain employees who will only be needed for a short period.

Finally, staff does not need to be taken away from more important assignments in order to complete basic tasks. By hiring an outsourcing firm that can perform the boring stuff, a company’s main team can focus on other work.

Cons

If you are outsourcing to a foreign market, then your reputation could take a hit. Wells Fargo tried to justify its decision by noting that employees abroad are needed to meet certain demands, like round-the-clock customer support. But that still did not prevent lawmakers from acting and penalizing the private sector for outsourcing across the ocean.

Outsourcing can trigger communication problems, especially if the third party is in another time zone.

Another major drawback to outsourcing is the possibility of low-quality work. This would be more common for companies that are tapping into a low-wage market, since workers there may not have the same education, experience, or skills as the company’s current crop of employees. Plus, a business that outsources will inevitably lose some control of its processes, which means it might also be impacted by poor quality.

Security is one major factor that is starting to discourage outsourcing. Sure, one company may have top-notch digital security, but what about the contractor? What if its security technology is inferior and lacks the same effective security protocols? As technology becomes central to many companies’ operations, security is increasingly an issue.

Should Companies Outsource?

Outsourcing has its advantages and disadvantages, and companies may have their own reasons to outsource their work, operations, and processes to a different firm. It is important to weigh the pros and cons and move on from there.

Andrew Moran

Economics Correspondent at LibertyNation.com and LNGenZ.com. Andrew has written extensively on economics, business, and political subjects for the last decade. He also writes about economics at Economic Collapse News and commodities at EarnForex.com. He is the author of “The War on Cash.” You can learn more at AndrewMoran.net.

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