Outsourcing: Risks and Opportunities for the Organization and the Economy

this article is available in :
Outsourcing: Risks and Opportunities for the Organization and the Economy

In response to the globalization of markets and the internationalization of competition, some companies are lead to outsource some of their activities in order to remain competitive. The successfulness of this approach is linked to certain conditions in which the human factor plays a major role.

By Liliane Held-Khawam, author of the book "Management by Coaching (MPC): Learning to Cope With Complexity in a Globalized Economy"

Outsourcing: an expanding phenomenon

With the globalization of markets, companies go through restructuring processes, so as to better focus on their "core business" and "core competencies", as they generally emphasize. Such restructuring processes are often guided by a desire to mitigate costs and reduce structures, so as to develop the company’s flexibility and, what is even more important, its competitiveness. This desire to reorganize companies is perfectly legitimate given that the environment presents an increased level of complexity. The globalization of markets indeed implies an internationalization of suppliers and customers, a merciless competition, increased requirements in terms of the quality/price ratio, etc. In addition to this, the life expectancy of products gets ever shorter. The company thus has to find a way of differentiating itself from its competitors. Its survival is at stake.

Outsourcing was born in this context of simplification of structures and activities, and it keeps expanding. Yet, what does outsourcing actually consist in?

The principle of  outsourcing consists in entrusting some other company with activities one does not wish to perform oneself anymore. Outsourcing has been existing for a long time under the form of subcontracting. Yet, the main novelty of the last years is linked to the fact that outsourcing does not solely apply to manufacturing (e.g. machining) or subsidiary activities (e.g. maintenance of the buildings, cafeteria,…) anymore, but also to more strategic functions such as IT’s, Human Resource management, marketing, etc. By "outsourcing", the company parts with certain activities, either by simply entrusting them to another company it consider to be more efficient, or by separating these activities and making them autonomous.

A strong socioeconomic impact

The decision to "outsource" seems to be, at first sight, of financial nature. In reality, it has a much further-reaching impact both internally (personnel, competence chain…) and externally (image, region, customers…). This incidence thus goes beyond the company it originates in and the present moment and will be projected into the socioeconomic future.

Success thus cannot simply be measured internally and in financial terms. This is all the more true if the company is large and may thus create a "fashion" other companies will follow.

There can indeed be diverse negative impacts within the company: breach of the social peace, degradation of the social atmosphere, inertia of the management, passivity of the employees, sense of insecurity, etc.

One or several outsourcing actions can also provoke a multiplier effect that can negatively impact the economic market (relocation of activities) and the labor market (impact on unemployment). This is why political and economic authorities should show an interest in this phenomenon in order to prepare and follow up the process, in particular in the area of training.

The potentially pernicious effects of outsourcing

As we have seen, outsourcing is no trivial punctual operation. It can conceal traps at different levels. The latter can be of internal (human, organizational…) or external (corporate image, labor market…) nature:

The risks of outsourcing for the company’s environment (its external life)

An outsourcing process can have a strong negative impact on a region. As a consequence, the operation will significantly damage the image of the parent company (the one that takes the decision to outsource). In little-developed economic regions, the closing or relocation of an industrial site can lead to disastrous consequences.

If certain groups have to outsource as a consequence of the globalization of markets, their policies can cause other companies to follow the "fashion". Though the latter may do exactly the same as the former, this decision will be arbitrary and unjustified. By gaining on importance, outsourcing can have a very strong negative impact on the employment and economy of a region, and even of a whole country.

The risks of outsourcing for the company’s internal life

Subcontracting could also undermine the company at an internal level. We can easily figure out how an increased demand could not be met due to an inability of the subcontractor to raise the production level. The company does not necessarily have the power to redefine the subcontractor’s priorities, which can result in production delays. The supply chain of the parent company will also be delayed.

Moreover, the company could lose some of its competencies and know-how – e.g. by subcontracting the production. This could jeopardize the company’s future, as its competencies could run low on the long run.

In addition to this, the quality of the services delivered is not always as good after the outsourcing as it was before, and there is no guarantee that the subcontractor will be able (or even willing) to adapt to the company’s future needs.

Also, if the outsourcing is negatively perceived by the employees, a sense of insecurity, fear and a negative social atmosphere can ensue. Let us remember that fear represents one of the major reasons for a loss of motivation and a demobilization of employees in a company.

The risks linked to the creation of a new business entity

In case the outsourcing process should lead to the creation of a new company, the latter would be facing a number of issues. We have observed, among other things, that it can lack skills in the areas of marketing and merchandising. Such skills can sometimes be disregarded, as the parent company often guarantees, in the beginning, an important turnover.

Another delicate issue is that of the nomination of the boss of the created company. It is important to emphasize that the person in charge of the concerned department (e.g. the Chief Accountant, the Chief HR Officer, the Head of Sales...) does not necessarily display the profile of an SMC entrepreneur.

The risks linked to the employees affected by the outsourcing operation

The last risk we will mention here relates to “outsourced” employees. Whether the outsourcing process leads to the creation of a company, a sale, a relocation or dismissals, the outsourced employees will have to make great efforts to adjust to the new situation. In any of these cases, they will have to integrate into a different culture and adapt to a new organization of work. Their career path will be directly impacted.

The potential opportunities of outsourcing

We have observed a number of successful outsourcing processes that generated positive effects in the short and long term. These effects can take place either within or the outside the company. Here we discuss some of them:

Positive incidences on the internal life of the parent company

a) At organizational level: There are numerous organizational advantages. An important benefit that can easily be assessed is the financial impact. Outsourcing indeed allows both for a mitigation of internal fixed costs and for a command of activity-related costs. The costs thus vary according to the demand of the parent company.

Outsourcing allows big companies to reduce their structures and make them more flexible. As a consequence, the company can focus on its "core business" and increase its competitiveness.

In the case of a fast growth, the company can mitigate the pernicious effects linked to the development of its structure thanks to the outsourcing of certain activities.

Finally, the competencies, quality and respect of the deadlines of outsourced support functions can be controlled, as the company can resort to competition at any time.

b) At human level: At human level too, opportunities are quite significant. The commitment, motivation and performances of employees become one of the main goals of the Board.

By focusing on the "core business", it hopes to develop the skills and efficiency of employees within the company. The wage policy is thus reviewed, so as to best acknowledge and valorize the skills and efficiency displayed.

employees could also dispose of more important means both for their professional lives and in terms of training and personal development.

All this is going to contribute to the development of the company’s competitiveness, which can objectively increase the security of employment and the perception the employees have thereof.

In this environment, the role of employees changes. They can display autonomy and initiative, which will allow for the development of the individual and collective sense of responsibilities. This change will mainly benefit customers.

Positive impact on the environment of the company: the creation of new entities

When well-managed – i.e. when it takes potential risks into account, outsourcing can give birth to new organizational entities. These entities are either subsidiaries, or autonomous companies that may belong to their management. This approach creates SMC’s, which is healthy for both economic dynamism and the labor market.

These new human-size organizations offer obvious advantages. Thanks to their reduced size and their cutting-edge skills (we can speak of "niches"), it will be easier for them to stay close to customers and to the needs of the market. They will thus better anticipate problems and adapt to change. They generally display specific and even specialized skills.

This focus on one or a limited number of products can turn them into very competitive entities. This is all the more true given that this context allows their employees to experience autonomy, polyvalence and creativity.

This situation also makes it easier to assess the true competencies and performance of managers, and thus to apply a merit pay policy.

Moreover, these companies enter the market with a differentiating advantage as compared to competitors, as they usually enjoy the support of the parent company and the guarantee of immediately disposing of an important turnover. They can thus quite quickly take some risks and try to launch a competitive marketing at national and even international level. This can lead to significant perspectives of development.

So, if employees display a profile that matches these new requirements, this may create significant economic and human dynamics that could, in turn, generate economic performance and jobs.

Such opportunities will only arise under certain conditions:

The conditions for a successful outsourcing process

The conditions of success for an outsourcing process are multiple and complex. They have to do with diverse social and economic partners and require that certain rules in the management of the process within the parent company are respected.

Action should be taken in order to contribute to the construction and integration of the company and avoid any sense of division or of deconstruction of its identity.

It is important to point out that individuals can also be destabilized by what another company is going through. They are being hit by the economic crisis and their trust in economic and political decision-makers is limited. The point here is not to discuss whether this sentiment is justified, but rather to work toward a better identification of employees to their company.

Let’s try to assess some of these conditions of success that are inherent to the parent company and its management of the outsourcing process. Also, we have seen that this outsourcing phenomenon affects its environment just as much as the company itself. It is thus important to see how the environment can prepare for this evolution of the market.

The conditions of success for the actors of the ousourcing process

I. At the level of the parent company itself: The parent company should seriously assess the opportunities and risks of an outsourcing operation. The reasoning should be global (i.e. take both the inner and outside lives of the company into consideration) and include a projective assessment of the company’s future.

Decision-makers should care about the evolution of their profession and the consequences of the outsourcing process for the evolution of the competencies demanded. The financial dimension alone clearly turns out to be insufficient.

When a decision to outsource is made, it is imperative to systematically inform all employees as to why (the content) and how (the form) this operation will take place. Transparency is key to a successful period of change. Nothing destabilizes employees – and consequently, the company – more than rumors and speculations. It is up to decision-makers to anticipate them and prevent their development.

We have observed that communication alone is not enough to counter the sense of insecurity of employees. It is indeed very important that it also conveys a project and that concrete actions are taken in order to allow for the construction of a new identity that contributes to the sense of belonging of staff members.

The Board would gain from making decisions that will have an effect on the present of the company: a new wage policy can be implemented at this moment; an investment can be made in order to support the means of production that will stay in the company; a tailor-made training program can be introduced; etc.

In short, the parent company should work towards the re-creation of its unity and spirit, so as to mobilize the remaining human potential around a given project and give them a new orientation.

II. At the level of activities sold (the outsourcing process takes the form of a sale): The choice of the buyer will be important, for the risk is real that the new entity’s activities will be rationalized or relocated once the corresponding market has been taken over.

As for the employees concerned, the Board of the parent company would gain from informing them as quickly as possible. They will indeed have to very quickly go past their emotions and get interested in their integration into the new organization.

III. At the level of activities suppressed (when the outsourcing process implies the suppression of jobs): The parent company will have to manage a classical process of economic dismissals (with the creation, in certain cases, of job units). In certain situations, the involvement of social, economic and political partners could contribute to a mitigation of the socioeconomic impact of the decision and thus help preserve the parent company’s public image.

IV. At the level of the created company: The first years will be decisive for the survival and development of the new entity. The authorities can also largely contribute to the successfulness of the new company by setting up a policy of active support.

The new entity will very quickly have to think in terms of strategy, identity, profession, markets and competencies. The employees who used to work in the parent company may not know how to cope with this kind of tasks. The choice of the management will be decisive in order to ensure a successful transition.

A major difficulty this new management will have to face is the resistance to change of a more or less important part of the employees. The question that will arise is the following: how to quickly change the way, employees who were used to a large organization work?

The conditions of success for the active population: the development of professional and personal skills

The active population is required to adapt to the changes resulting from the globalization of markets and the deep mutations of the organization of work. To do so, the development of its professional and personal skills represents an important key to its successfulness.

The goal of this development is to fight against inertia and to turn individuals into actors of the change. To do so, they have to display a real openness to innovation and to professional, intellectual and geographical mobility.

Moreover, today’s market needs people who display a more developed personal initiative and ability to take risks. These are the par excellence driving forces of the economy.

This axis of competencies will have an impact not only on the company (i.e. on its training and development programs) but also on schools and professional training centers. Here too, the political and economic authorities are essential partners who will have to lead the population through the structural changes of the society.

Conclusion

The globalization of markets intensifies and has a concrete influence on economic structures. Outsourcing operations make up one of the corollaries of this phenomenon. This trend is an unavoidable reality and our purpose is not to challenge it.

We have seen that this type of operation presents significant risks. Besides the risk of undermining the technical competencies of the parent company – with an increased dependence on subcontractors – the underestimation of the psychological consequences for the human factor represents the most important risk.

Moreover, we have seen that very interesting opportunities can arise from outsourcing processes, such as the creation of SMC’s, the enhancement of the parent company’s competitiveness, shorter response times…

In order to take advantage of the opportunities and avoid the traps, a few conditions of success – that come in addition to the necessary economic analysis of the advantages of  outsourcing activities and of focusing on the "core business" – deserve to be mentioned:

  • Given the importance of the human factor, it is desirable that employees become partners of the operation, so as to share the preoccupations of the Direction. They can indeed largely contribute to the setting-up of the action plan and communication of the outsourcing process. An important transparency in the approach, the information and the sharing of a vision are concepts that have proved their worth in this respect and that contribute to the valorization of the individual and collective responsibility of the employees.
  • Outsourcing is a generator of SMC’s which can, in turn, create new niches. Thanks to their size and potential competitiveness,  these SMC’s represent a hope for tomorrow’s economy. Though the parent company could take part in the setting-up of a competent and efficient management, political and economic partners too could give them an efficient support, without taking charge. We could also imagine a tax relief, a simplification of administrative procedures, or advisory for an international development.
  • Political and economic authorities would gain from getting the continuous development of the active population’s competencies going, in close collaboration with companies. This would allow them to anticipate the needs of the labor market and to respond more easily to the mutations of economic structures.

Related articles:

this article is available in :