Be it for reasons of profitability, strategic planning or to manage tight scheduling deadlines, increasing numbers of companies are turning to outsourcing. Although the concept is often associated with the construction sector, the vast majority of companies could undoubtedly externalize a number of organizational processes. Known also as contracting out, outsourcing comes replete with multiple benefits but does include challenges important to understand.
You must factor in the potential risks inherent in outsourcing prior to going this route. In this article, you will learn about the challenges to bear in mind to manage outsourcing efficiently.
The Challenges of Outsourcing
Outsourcing comes replete with multiple benefits and enables businesses to focus on their core specialities. This does not mean, however, that there are no drawbacks. You will want to conduct a comprehensive review of the situation at hand prior to drawing up an outsourcing contract.
Risks relating to occupational health and safety
Not all contractors are properly or fully qualified to carry out work to be outsourced. One of the qualification criteria which most impacts companies choosing to engage in outsourcing relates to compliance with worksite safety standards. Contractor negligence can lead to serious accidents, bodily injury or death for which a hiring organization could be held liable. Negligence can take the form of a lack of requisite training, deficient team supervision or laxity in enforcing safety regulations.
Risk assessment therefore becomes one of the responsibilities incumbent upon businesses which contract out work to third parties. This exercise helps determine which contractor is better suited than another to a given task, while minimizing the risk of fines or accidents.
Risks relating to time
One of the primary goals of outsourcing, over and above company focus on a specific type of expertise, is to generate savings in time. However, it is not uncommon to see costs skyrocket in the wake of a production stoppage. Truth be told, in the event of a major accident involving a worker not readily replaced in the near term or an equipment breakdown, a slowdown in operations can prove extremely costly.
Hence the importance of assessing and qualifying contractors prior to outsourcing work. By validating worker training, machinery used and contractor compliance with safety standards, it is possible to prevent potential production slowdowns.
Accidents are often unpredictable and you must be poised to react should one occur. That said, efficient contractor compliance management can decrease the number of accidents and limit the extent of any resulting downtime.
Risks relating to the quality of deliverables
One of the benefits of outsourcing is the quality of deliverables attained by an individual who has much more experience than oneself and the proper equipment to carry out the work. In certain instances, however, quite the opposite occurs. A supplier, improperly selected at the outset, can produce work of less than requisite quality. In the end, it is your reputation as a hiring organization which suffers the brunt from the standpoint of client satisfaction.
Although quality control may be defined by the contractor, you remain responsible for quality assurance. It is important to monitor production closely and make adjustments as required to avoid cost and schedule overruns.
Risks relating to loss ratio
A serious incident or accident can considerably impact the cost of insurance coverage and employer contributions owing. Indeed, your insurance rate is based on both your loss history and risk level. A good record will reward you with benefits whereas a poor record will burden you with penalties, sometimes consequential.
In an outsourcing environment, even if an incident or accident is not caused by one of your employees, you are responsible for and obligated to ensure operations supervision and oversight. By carrying out the necessary checks and consistently monitoring contractors, you can avoid errors which could result in a loss.
Risks relating to supplier dependency
Prior to outsourcing several company tasks, be certain that you have an action plan in place to reduce the impact of challenges such as a breach of contract or other major issue with a supplier. Should you decide to repatriate operations previously outsourced, you must assess the likely consequences and how much the move would cost. It could take months or even years to return to normalcy.
The same holds true for internal company competencies. Would your company be competitive if you were to focus your efforts on a single specialization? Depending on the industry in which you operate, knowledge and skills represent highly important values for distinguishing your company from others in your sector, especially in the minds of potential clients.
Risks relating to accidents
As indicated in several of the preceding points, incidents and accidents can wreak costly, irreparable damage, and precipitate other disturbing consequences. Were a worker to be seriously injured or die as a result of an incident or accident, internal and external investigations would likely ensue. These investigations, often exceedingly costly, can prove financially and psychologically damaging.
They may even give rise to civil or criminal lawsuits. Some hiring organizations have been accused of criminal negligence causing death in instances of incidents or accidents easily avoided through proper risk assessment and control.
By effectively managing outsourcing and prequalifying the contractors with whom you conduct business, you demonstrates due diligence. This can spare you fines and jail sentences relating to negligence.
These are a few examples of the challenges of outsourcing, challenges that must be taken into consideration. Some can prove costly from the dual standpoint of time and money. Others yet can cause long term damage and/or adversely impact your reputation. Hence the importance of conducting the proper checks and qualifying all contractors.
This having been said, it is important to understand that, when you choose the right contractor, outsourcing can also provide you with several benefits. Each industry is different and some require more monitoring and follow-up than others. One thing, however, is for certain. It is incumbent upon you to assess the risks inherent in outsourcing prior to opting for this route, regardless of the sector or industry in which you operate.
To learn more about the risks associated with outsourcing, we invite you to peruse this article on occupational health and safety risks in an outsourcing environment.
