In-House or Outsource?

One of the most crucial strategic business decisions is whether or not to outsource. Getting this right may mean a lasting competitive edge. If you make a mistake, the error may be quite difficult or impossible to reverse.

A good outsourcing move brings long-term advantage because competitors cannot easily copy your actions without suffering labor problems. Even if it is considered legal; laying off regular workers to embark on outsourcing will certainly provoke a hostile reaction.

If you do decide to outsource, keep yourself updated on current labor laws. It is important that you know what you are allowed to because some types of outsourcing may be prohibited, e.g., labor-only contracting. This happens when you pay a person or company to bring in workers without a substantial investment.

There are many aspects to consider when making an outsource decision. Below are just some of the major factors that affect this issue:

In-house:

Quality may be better. It is generally expected that you will get more reliable output from your own people as they have experience specific to the task.

Loyalty is higher. If a large part of your profitability is dependent on confidential information, it would be more difficult to secure this if the person with access to the information is not your employee. It is also more likely that the knowledge they acquired while doing their assigned tasks may be used to assist a competitor.

In-house workers are more knowledgeable on the peculiarities of your company. This covers a wide area: from knowing the quirks of the installed machinery and work methods, to familiarity with the company’s internal culture.

Work comes out cheaper if done in-house. An example of this is if your company has a large demand for artwork. It will probably be a lot more economical to hire a graphic artist instead of regularly paying for an outside provider.

Outsource:

You can focus on your core activities. If management is not constantly distracted by side issues from less critical departments, more time and resources can be allocated to work that brings the most value to the company. For example, a start-up publishing company with limited resources would be better off outsourcing their printing to another company.

Quality may be better. Although earlier I said that quality may be better if you hire in-house talent, this is only true if the skill level is the same. There may be capabilities that are not present in you company, and it may not be feasible to hire a permanent employee for this requirement. If this is the case, management must be openminded enough to outsource when needed.

Lower overhead. You will be paying for the service only when it is needed. This often results in huge savings. And in industries that are highly competitive, you may have no choice but to outsource in order to survive.

You gain flexibility. The need for a particular service may not be consistent. During peak season, you may need plenty of additional manpower but this need can disappear on low months.

Costs will be lower. At the very least, short-term costs are usually dramatically lower. It is the business model of the outsource provider to offer a significantly reduced price, or else it will be hard to justify their service.

You may save on capital. Outsourcing may eliminate the need to set up facilities, purchase expensive equipment and other expenses.

Less labor problems. Since the workers are not your employees, you can easily request that a person be changed if you are not satisfied with his performance; or you can simply replace the vendor. This is not purely one-sided because workers who are not satisfied with you can sometimes be transferred to other clients.

On the whole, there is indeed a strong case for outsourcing non-core functions if we judge by financial standards alone. However, this is not the only issue at stake in this neverending debate. Many workers’ groups (not only here but around the world) condemn this practice, claiming that it destroys job security and reduces wages and benefits.

On the other hand there are workers, too, that benefit; especially those in the business process outsourcing sector or call centers. Instead of being forced to work abroad, many people get to stay here and make a living.

Because it seems inevitable that there will be losers and gainers in this trend, management must carefully weigh the long term benefits and disadvantages before deciding to outsource. After all, the workers should be management’s partners and leaving them demoralized would be counterproductive in the long run.

*Originally published by the Manila Bulletin. Written by Ruben Anlacan, Jr. (President, BusinessCoach, Inc.) All rights reserved. May not be reproduced or copied without express written permission of the copyright holders.

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