Opportunities through outsourcing

The term "outsourcing" has been used to describe the outsourcing of company activities or entire business divisions to external service providers or partners since the late 1980s. Regular benefits expected from outsourcing include focusing on core business activities, reducing the depth of in-house production, and potential cost savings. Due to the increasing globalization, outsourcing can become increasingly important in order to remain competitive – on the other hand, globalization also creates more and more opportunities to outsource certain business areas.

Wide range of applications for outsourcing

Often, successful outsourcing projects carried out in the past can inspire further enthusiasm – hence, many companies only become aware, with increasing outsourcing routine, that there are still further opportunities to outsource processes or activities. A starting point for such considerations could be that production and sales companies can focus on their core tasks – production and sales – and on value-adding activities by successfully outsourcing them. Specifically, in relation to the production sector, companies can benefit from cost advantages resulting from the specialization and scaling of external manufacturers through the production of parts or components. The storage of products or types of materials, also known as "just-in-time procurement", can also be outsourced to external service providers in order to reduce storage costs and improve efficiency in the supply chain.

An outstanding example of outsourcing remains the outsourcing of individual IT services or the entire IT infrastructure to an external provider. Companies can benefit from the specialized resources and expertise of external IT service providers (and thus achieve performance optimization) while at the same time focusing on their core competencies. Furthermore, business divisions such as marketing or even sales can be outsourced to external sales organizations in order to gain access to specialized expertise and an existing sales network. It is also conceivable to outsource internal service functions, such as the canteen, in order to reduce costs and focus on the core business.

AI and automation as "Game Changers"?

With the topic of outsourcing, developments – enormous opportunities, but also risks – due to artificial intelligence (AI) must also be taken into account. If it involves automation, there are certainly areas that no longer need to be outsourced to other companies in the traditional sense and are therefore in a certain way competing with outsourcing. However, despite AI, the focus of the present contribution lies in business areas that (despite AI) can typically (yet) not be meaningfully taken over by AI and can therefore still be successfully outsourced to specialized companies.

Regarding the attempt to save costs, outsourcing is a result of the classic make-or-buy decision. This decision has an impact on the ratio between variable and fixed costs. In outsourcing, the proportion of variable costs typically increases, since the external service providers are paid based on the services actually provided, whereas the fixed costs of the company are usually reduced. However, it is a prerequisite that the company can reduce the capacities freed up by outsourcing in order to reduce the associated costs such as depreciation or interest, etc.

Possible disadvantages of outsourcing

However, make-or-buy decisions should not solely be based on traditional cost-price comparisons. It is important to also consider qualitative strategic criteria. In advance, it is necessary to verify whether there are any barriers to outsourcing, and what strategic relevance the areas to be outsourced have for the company. Because through outsourcing, the opportunities for direct influence on performance creation are naturally reduced. It is therefore important to consider the long-term effects on the company and its competitiveness.

Finally, it should also be considered that outsourcing can also involve a loss of control, as well as skills and thus a certain dependence on an external service provider, which can lead to disadvantages for the company in the long run. After outsourcing, missing knowledge and expertise can only be brought back into the company very hard, or only with great effort and costs. As a possible risk, it should also be considered that outsourcing can be associated with the loss of strategic flexibility – in this respect, one must be able to rely on the external partner to the extent that future changes and challenges can be managed accordingly, and one can assume that the service will remain of consistent quality (this must also be taken into account when negotiating the contract with the external partner).

It is even conceivable that, for example, through outsourcing in the personnel/human resources area, communication problems within the company arise, because daily communication no longer takes place with "colleagues" from another department within the company (typically associated with higher loyalty), but with contact persons of an external service provider. Under certain circumstances, this can also lead to resistance among the company's own employees. Last but not least, the aspects of confidentiality, data security, and data availability are also not to be underestimated, especially in the personnel area.

A careful analysis of the specific circumstances and requirements of the company is crucial to make the right decision between outsourcing or in-house execution. Expertise, data security, and industry knowledge of the potential external partner are essential decision criteria.

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