Depending on your company’s strategy, advantages and disadvantages of outsourcing can differ form company to company. General advantages and disadvantages of outsourcing are discussed below.

Possible Advantages of outsourcing are (among others):

• Financial advantages
• Human resource advantages
• Operational advantages
• Strategic advantages

Possible Disadvantages of outsourcing are (among others):

• Cost of outsourcing are higher than the current costs
• Lost of knowledge and / or competences
• Great dependence of the supplier
• Confidentiality of information or idea

Possible Advantages of outsourcing

Financial advantages

Cost reductions are a continuous process in order to stay compatible within the market place. As soon as you have a good insight in the processes you encounter or

1. Superfluous costs within processes and/or activities
2. Costs related to decentralised activities within the business units.

These superfluous or indirect costs are not always related to the core activities of the organisation but merely to non-core activities. Outsourcing of activities of these processes that have high indirect costs will generate cost reductions. Therefore it is essential to control the unnecessary costs within your organisation and maintain your compatibility in the market. Centralisation of these activities in a shared service centre, for instance, enables to reduce costs.

Human resource advantages

Because of outsourcing, not only financial advantages can be obtained, but also reduction in human resources. Just to think about the reduction of absence through illness, activities and costs related to recruiting, training and motivating of staff is reduced. Thus outsourcing has not only cost benefits, but also human resources benefits.

Operational advantages

If outsourcing is directed to outsource mainly non-core activities, the transparency within the company is enhanced since it focuses more on the core competences. The management will gain better insight in the activities and is able to apply its control instruments more effectively and efficiently. This will result in a better quality, predictability and risk management. Furthermore, the company can establish more standardized processes. Thus, outsourcing can enhance the effectiveness of operation management.

Strategic advantage

Outsourcing enables the redistribution of resources to its core areas within the organisation that have directly impact on the profitability. Outsourcing enables organisations to become more flexible and being able to adapt easily to market changes without to many risks.

Possible disadvantages

Cost of outsourcing are higher than the current costs

Based on analyses or business cases it might turn out that outsourcing of activities and processes only increases the costs instead of decreasing the costs. This could be a reason not to outsource. However there are also strategic considerations to outsource such as increasing quality or access to technological capabilities that are not available internally. Outsourcing is not always be driven by cost reductions.

Lost of knowledge and / or competences

A company’s unique selling point can be based on firm specific knowledge and certain competences enhancing competitive advantages and return on investments. If you outsource these firm specific competences to an external provider, your competitiveness can be at stake. This can be a reason not to outsource. It is a strategic choice to outsource certain firm specific knowledge and competences. An example is Nike, which moved from a full production-orientated organisation to a marketing organisation. All their product knowledge and other competences is transferred to external parties.

Great dependence of the supplier

There is a possibility that suppliers can get a lot of influence in your organisation when you decide to outsource. For example when the supplier is entitled to advice you in your organisation strategy and transition in which the return on investment is at stake. This can be a reason not to outsource. It can even be a strategic choice for such a situation to outsource as for example in transformational outsourcing.

Confidentiality of information or idea

Outsourcing certain specific information, confidential information or ideas is risky and requires a well-thought-out strategic decision. To outsource confidential information, or firm specific information to a relatively unknown supplier would be risky, since it can be copied easily. What is the risk that the supplier takes advantages from it? The decision to outsource confidential information or not partial depends on the confidentiality of the potential provider.