hero image

Benefits and Pitfalls of Outsourcing

image of Ngaire Guzzetti Ngaire Guzzetti
Ngaire Guzzetti 8 Jun 2022 Time to read: 

What do we mean by outsourcing?

Outsourcing refers to the practice where an organisation contracts another organisation to provide a service they would otherwise undertake in-house. The stimulus for this varies and is typically in response to achieving better outcomes, cost efficiencies or maintaining focus on strategic capabilities.  It is vital that both parties understand the implications and their responsibilities for the outsource arrangement to work effectively for the benefit of both organisations.  There can be layers of complexity including, potentially, the transfer of personnel from the first to the outsourced organisation.

Benefits of Outsourcing

There are a range of benefits to be gained from outsourcing. . Aside from potential cost savings, it can potentially achieve better performance levels using an expert provider, extend the scale of delivering non value-adding activities, or share risks inherent in business continuity.

Outsourcing non-core activities, allows the organisation to focus on strategic goals, adding value to core products or services which in turn enhances employee experience through progressive skills development, generation of innovative solutions which improves speed to market and consumer response.

Outsourcing Decision


When does it make sense? When should you not outsource?

The business case for outsourcing must be rigorously developed to ensure benefits are understood, verified and agreed.  The organisation must also recognise the investment required for the lifetime management of the arrangement to ensure value for money is achieved.

The benefits mix is not confined to calculating the direct savings against licensing fees, equipment, depreciation, facilities, and employee costs of wages, training and pensions, it must also consider the less tangible, softer, elements including internal cultural impact, loss of autonomy and control of the outsourced area, and proactive supplier management requirement.

Consideration must be given to the service definition. If requirements, features, scale, scope and performance criteria cannot be completely documented, the obligations of each party cannot be understood and the arrangement will struggle to perform potentially leading to increased costs over the longer term.  Do not outsource a problem because it feels easier – if the outsource were to fail, what would be the impact on the business?

How does IT Outsourcing impact your operating model?

When an organisation opts to outsource it must ensure actions remain consistent with overarching business strategy. Whilst outsourcing brings the benefit of allowing an organisation to focus on core activities, it may have negative impact if employees feel their environment is under threat whilst suddenly having to deal with potential challenges to the daily workflow through loss of control and possible communication issues.

These challenges can be overcome with vigorous upstream planning that captures operating practices, structures and interfaces, incorporates business continuity management and delivers a robust supplier management plan. Front-loading efforts in ensuring correct governance structure of any outsourced supplier mitigates risks of supply and relationship failure during the term of the outsourcing contract life.


How Best to Manage Outsourced Suppliers?

The benefits, investments and risks of, for example, potentially poorly defined services need to be weighed against the commitment needed to manage the supplier.  By default, outsourcing should reduce resource requirements so if a large amount of effort is forecast to manage the outsourced supplier, the organisation may wish to reconsider its options in terms of suppliers, timelines or scope.

A pre-determined governance schedule agreed by both parties prior to engagement that clearly details terms of reference, meeting schedules, and management information will promote an effective working relationship. A commercial framework featuring robust service levels with credits for non-compliance will stimulate the necessary behaviours and commitments of both parties, thereby maintaining or exceeding the quality levels of service provision.  Outsourcing must be managed effectively in order to maximise the value gains.

If you would like to discuss options in more depth, the Peru experts are on hand to provide advice and methodologies.

Related resources