Supply Chain

Why Outsourcing Abroad Could be Your Biggest Mistake

One of the biggest drivers for most businesses is cost reduction. Increasingly, companies are outsourcing their support functions, call centres and back office functionalities to organisations abroad on the basis that it will drive considerable cost savings to their organisation.

This cost based approach could negatively impact your staff and customer relationships, your business operations and result in increased costs to your business. So why, then, do we think organisations who are adopting the “cheaper abroad” approach are at risk of making a big mistake?

1.      Wrongly focusing on price Instead of skills & efficiencies

We have said this before in some of our other articles on contract and supply management – you get what you pay for. Yes, labour may be more expensive locally. But while labour may be cheaper in a foreign country, what are the other costs that also need to be factored into this equation?

Language and cultural barriers can often create significant customer dissatisfaction issues with a flow-on impact on reputation.  Failure to perform the required tasks due to lack of skill or the creation of inadvertent inefficiencies (see below) may result in losses to your business.   

2.      Failing to see what’s under your nose

When companies outsource abroad, they often do so to reduce employment costs locally.  The initial costs of this decision could be significant if redundancy payments are required, if there are industrial relations disputes or any unfair dismissal claims. But what’s forgotten is the cost to the organisation that arises from a huge loss of corporate knowledge that goes with retrenchment of entire teams across a business.

Organisations and their people have a lot of knowledge and that knowledge often comes from years of experience and history. When entire teams are retrenched to achieve an operational costs objective, much of that organisational knowledge is lost at a great detriment to the organisation.

So while a company may save money on wage costs, they may have neglected to consider the impact a loss of operational knowledge will have on their business and how this will affect day-to-day or business as usual activities. It can take organisations years to recover from poor outsourcing decisions.

3.      Forgetting that the true measure is “Business Efficiency”

It’s important that organisations consider whether their outsourcing arrangements will impact on organisational efficiencies. If outsourcing creates multiple touchpoints across a business, then that adds to the inefficiency of the business and can create organisational complexity. These inefficiencies can damage an organisation’s brand and can create issues for an organisation’s core business.  

Frustrated internal staff and dissatisfied customers can be the cost of bad outsourcing decisions. So while the price of the services abroad may be significantly cheaper, the true cost must reflect the costs of any inefficiencies created by the outsourcing arrangement.

4.      Failing to comprehend the true impact of failed deliverables

No outsourcing model is ever fail safe. But often organisations neglect to consider how they will enforce contractual terms they’ve agreed on as part of the outsourcing arrangements.

How, for example, will service deliverables and key service levels really be managed if those deliverables and service levels are not met? What is the direct impact to an organisation’s business?

It’s quite often the case that the local business is left faltering while the issues with the external service provider are resolved.  This may directly impact the operation of the business and also lead to both staff and customer dissatisfaction. The result can be disengagement between the lines of business (departments) within an organisation.

It can also create a raft of legal issues relating to the enforcement of contracts in those jurisdictions, particularly in relation to conflict of laws.

Sometimes the hardest part for organisations is conceding that they’ve made a mistake with their outsourcing approach. But it’s never too late and services can always be transitioned back. The sooner an organisation concedes that the arrangement isn’t working, the easier it is for everyone to work together towards re-instating an internal structure.

© Copyright 2016, Elisian Pty Ltd.