Question

What are the risks and benefits of outsourcing? How can outsourcing strengthen a company's business model and increase its profitability ?

Answer 1

What are the risks and benefits of outsourcing?

Benefits:

1. Lower costs are benefits associated with outsourcing. Manufacturing or development inside the organization may sometimes prove to be very costly especially when the firm lacks technical expertise or human expertise.

2. Outsourcing allows firms to focus on their core business processes and outsource other processes. It allows firms to strongly build their own competencies while allowing other processes to be undertaken by other firms.

3. Outsourcing allows sharing of risks. In case of projects with huge investments, a firm will have to bear the losses in case of failure. However, when outsourced, both the firms will share the losses thus preventing firms from going bankrupt.

Risks:

1. Outsourcing the business processes always come risk of leakages in confidential data. Firms will have to share the confidential data with their partner which is a risky proposition.

2. Outsourcing may sometimes lead to delivery of project that is of sub-standard. This happens especially if the firms do not keep a close watch on outsourced processes.

3. Outsourcing generally involves lot of hidden costs. Firms have to incur costs on daily basis which are not documented.

How can outsourcing strengthen a company's business model and increase its profitability?

Outsourcing allows firms to focus and build their core competencies. Outsourcing takes care of activities that the firm does not have expertise. It provides the firms with ample time to build their competencies. In the long run, these competencies are converted into competitive advantage which ultimately increases the profitability.