Outsourcing: The Cost-Cutter

While many may believe that outsourcing is reserved for large companies, it is no longer the case. Outsourcing has several advantages, especially for small companies that do not benefit from economies of volume.

Outsourcing of employees brings more benefits than just cost cutting, increased production capacity and an increased focus on the business.
In these times of crisis and financial turmoil, many companies tend to view outsourcing as a viable option to reduce costs. While this statement is valid, there are many strategic reasons why outsourcing should be adopted by companies, some of which are:

1. Reduction of production costs

Small companies that do not benefit from economies associated with large production volumes may outsource production to large manufacturers. Larger manufacturers buy their raw material at a lower price and have efficient operations that produce large amounts for a lower unit cost.

2. Reduction of direct and indirect costs

Through outsourcing, it is feasible to reduce costs that are primarily associated with the operation and execution of functions such as labor, material handling processes, management information systems, customer service infrastructure etc.

3. Price reduction of transport and logistics

Companies that are distributed over a large geographical area with low population density need to outsource the delivery of their products. It is not easy tobuild a distribution infrastructure as effective as FedEx, UPS or Canada Post. It is wise for companies to rent space for temporary storage instead of building their own warehouse.

4. Lower investment

Outsourcing presents an opportunity to build the infrastructure through investment made by other companies, thereby reducing investment and freeing own resources to be applied to another part of the value chain.

5. Reduction of capital commitments

If you are unsure of the production volume required, or if you have a limited capital, you can reduce your capital commitments by subcontracting or outsourcing.

6. Change of fixed to variable costs

Outsourcing presents the advantage of avoiding idle resources in periods of low activity.

7. Incremental revenues

They are a result of operational efficiencies, greater range of services, responsiveness to increasing demand, better quality of service and the ability to access other markets.

A call centre is a typical example of implementation of cost reduction by outsourcing. A company may outsource functions such as customer support to a call centre company which specializes in customer support. A company might assess that it is cheaper to outsource its call centre to another company rather than building its own call centre that would require space, manpower and management.

To make a good decision, these benefits must be measured against the cost of outsourcing. Many times we tend to do a limited assessment by considering only the payment to be made to the company providing the service, however, it is of utmost importance to identify comprehensive costs as at times, there are also financial impacts associated with the management and operation.