Outsourcing Roles

Key economic and strategic considerations for deciding which roles to outsource and which to keep in-house.


The Trend to Outsourcing

One of the most significant trends in the employment landscape in recent years has been the growth in the contingent workforce. The shedding of non-core functions reduces complexity, increases focus, lightness and flexibility, and frees up management and resources to grow the core business. The outsourcing of roles is both an economic and a strategic decision. As such, it requires careful consideration rather than an ad hoc approach.

The Economic Case for Outsourcing Roles

Replacing permanent workers with contingent ones (i.e., externalization) has been part of the effort to squeeze out the fixed costs of employment and increase flexibility. One result of this practice is a redistribution of job instability from a permanent workforce to the temporaries. Within this simplistic "make" or "buy" decision, there are a growing number of subtle variations making the effective management of employment somewhat complicated.

Advantages and Disadvantages of Outsourcing

The advantages and disadvantages of an internalized labor force and externalized labor force, including economic and strategic factors, are summarized in the table below.

Internalized Employment

Advantages Disadvantages
  • Greater stability and predictability of the organization's stock of skills and capabilities
  • Better co-ordination and control
  • Enhanced socialization
  • Lower transaction costs
  • Increased managerial and bureaucratic costs stemming from administering the employment relationship, including staff expenses, training, benefits, etc.
  • Constraints on the organization's ability to adapt to environmental changes

Externalized Employment

Advantages Disadvantages
  • Reduced overheads and administration costs
  • Flexibility to balance workforce requirements to meet fluctuating demands
  • More discretion in the number and types of workers used
  • Access to vendor innovations while focusing on the development of core capabilities
  • The organization's continued reliance may mitigate the development of core skills and capabilities, critical for long term organization performance.

What Roles Can Be Outsourced?

The four quadrant skills' based workforce segmentation model offers a "broad brush" approach for the organization's leaders to think more deeply about their employment strategies. Roles that require skills of lower value and uniqueness (i.e., more generic), and available to multiple organizations, are more likely to be prime candidates for outsourcing. These roles occupy Quadrant 3, Doers, and also to some extent Quadrant 2, Professionals, Skilled and Semi-Skilled workers, in the four quadrant segmentation model. This is why we are seeing a proliferation of outsourcing of various lower-level services and administration functions across a range of industries.

Key Factors in Outsourcing Decisions

Economic and strategic considerations should figure in any evaluation of which roles to outsource. In addition, in which quadrant each role sits in the skills' based segmentation model should be a prime factor in your outsourcing decisions.

There are also a range of other environmental, organizational and demographic factors you need to consider when deciding which roles to outsource. These factors include the following:

  1. relevance of the skills to the core competencies of your organization
  2. size of your organization
  3. complexity of your organizational systems
  4. nature of customer relations and customer interfacing roles
  5. continuity of work
  6. supply of labor and contractors
  7. industrial issues

There are a range of complex factors you need to attend to if you are to ensure that your organization's outsourcing decisions are rationally-based. Are you using the right tools and data to give your outsourcing decisions the best chance of success?

Expert View Author: BA(Hons), BEng(Hons), MBA

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