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Economies of scale Essay

Lower costs due to economies of scale Ability to concentrate on core functions Greater flexibility and ability to define the requisite service more readily Higher quality service due to focus of the supplier Faster setup of the function or service Greater ability to control delivery dates (eg: via penalty clauses) Increase commitment and energy in non core areas Improve credibility and image by associating with superior providers Gain market access and business opportunities through the supplier’s network. (Outsourcerzone. com 2003)

Outsourcing cons: 1) Outsourcing removes certain control of certain tasks from the organisation. This loss of control may have negative consequences. 2) The short-term savings provided by the outsourcing contract could be negated in the future, should the organisation decide to reintegrate the outsourced function. 3) The outsourcing vendor may not feel obligated to keep the outsourced function up to date and may use outdated technology, or may compromise quality in other ways in order to save money. 4) Outsourcing can create moral quandary in the organisation if the in-house begin to fear that job would be outsourced as well.

5) Any contingency not addressed in the original agreement must be renegotiated. Post-contract negotiations are likely to be troublesome and costly for

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the client. 6) Vendor stability cannot be guaranteed, especially in the case of more affordable smaller outsourcing companies. 7) Predicting the future of an organisation is at best difficult, and predicting the effects of a current outsourcing contract on the basis of unknown future changes is even more difficult. 8) Sometimes, hidden agendas can create a disadvantageous situation for the unwary client.

The organisation should exercise extreme caution when examining an outsourcing contract, paying special attention to possible ulterior motives on the part of the vendor (Rost 2006). Although outsourcing may seem the logical solution for cost-related problems, other measures to resolve problems can be taken before outsourcing becomes a necessity. For example, facing up to the issue of poor management in the data center (or any other department) and taking the appropriate action to strengthen management may be a much better solution in the long term than outsourcing.

Outsourcing should not be undertaken as automatic reaction to certain inadequacies in the organisation but only as a measured response to the perceived needs. Under a wide variety of conditions, however, outsourcing may prove to be the most efficient solution to an organisation’s specific needs. For instance, if the level of both technical and business knowledge is so low within a department of the organisation that little or no progress can be made without a dramatic increase in staff, the organisation may resort to outsourcing (Friedman 2006).

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