To Outsource or Not to Outsource…

…there are many potential risks to outsourcing which can substantially outweigh the benefits…

As the world flattens (sorry, Thomas Friedman reference) the popularity of outsourcing increases. But there are many potential risks and hidden expenses which can substantially outweigh the benefits, so it is crucial for management to consider these risks when considering moving key IT functions to an outside provider.

In the manufacturing sector, the trend has been to outsource labor-intensive functions of the supply chain to China. In the service industry, the trend has been to outsource non-essential functions to India.

In difficult times, our initial reaction is to rein in spending through workforce reductions or layoffs, or move certain business processes to a lower-cost provider. Over the last decade, outsourcing commoditized IT skills has become fairly common - but the ROI from these practices remains elusive.

Reduced Quality

The loss of control over day-to-day operational functions can produce less-than-desirable effects in how the work product measures up to organizational standards. This requires additional resources to review quality and resolve issues before the product is issued or shipped.

Public Opinion

The second negative effect is more ethereal, but can still have a drastic impact on profits.

Actual services may meet all guidelines and requirements, but clients may still perceive a lower level of quality simply because they know the service is being performed overseas. Previous experience with language barriers can generate negative sentiment towards your company. These barriers are falling, but overseas outsourcing can still pose an issue for many customers who either want to interact with American workers, or who perceive outsourcing as indicative of financial instability.

Protection of Law

Despite the tightest wording in confidentiality and service level agreements, it may be difficult to enforce breaches of contract in a foreign court. Once third-parties are exposed to confidential client information, intellectual property or patented information, you have no guarantee the information will not be stolen.

Ultimately, the decision to outsource requires an evaluation of internal skills, and an honest assessment of your firm’s tolerance for risk. Even when management decides that outsourcing provides value, it still must consider hidden costs related to mitigation of risks that could narrow the savings gap.