Spillover Effects as Reasons for Not Outsourcing

Potential benefits should be the primary reason why an organization should decide to outsource. Strategic outsourcing of certain processes should allow companies to focus on their core competencies and therefore make the entire organization more effective. Passing on the work to others should also ensure that it is done right. It is simply a glorified example of division of labor that allows people to work on what they are good at therefore making the whole system more efficient.

Costs are probably the most common consideration when deciding on whether to outsource or not. Both insourcing and outsourcing have their own advantages and disadvantages. When costs become the only consideration, organizations simply have to compare agency costs (costs associated with insourcing) with potential transactions costs (costs associated with outsourcing). Because businesses are always after profit and lower costs mean higher profit margins, whichever will cost them less should win the decision.

Spillover effects, especially in terms of knowledge, are among the most common reasons for not outsourcing. Many companies tend to be paranoid about leakage of private information that may be used against them. They worry that they may gain competitors by sharing knowledge or that information learned from them may make its way to their current competitors. However, it seems that this in not entirely a valid reason for not outsourcing especially in today’s knowledge-driven environment.

First of all, organizations must understand that processes should be company-specific and when one engages the services of a BPO company, customized solutions are designed to address specific needs or problems of the organization. Because of this, what suits an organization will not necessarily suit another. The same is true about knowledge itself. Information that is not unique to an organization will be gained by others because it is easily transferred while sharing company-specific information will do little to spoil the organization. Therefore, sharing knowledge and information should not be seen as damaging.

Furthermore, because knowledge and learning has become an essential aspect of competitive success, sharing information has become more and more necessary to survive. A knowledge-driven business environment means that learning should be given a prime importance within organizations and the best way to learn is to collaborate with other organizations. In the end, they should realize that they, too, have much to gain by sharing information.

Upon closer examination of other reasons not to outsource, it seems they could be irrelevant if benefits and costs are considered. Less control over quality and availability is a trivial problem that can be solved by good coordination and loss of advantages from team production should not be a factor if the other is viewed as a strategic partner and not just some external entity. Furthermore, the hold-up problem can be avoided if both parties have much to gain from the inter-organizational relationship. Lastly, the inability to apply tacit knowledge would be insignificant especially if the process to be outsourced is not highly dependent on routines and capabilities specific to the organization.

By: boredumb
Published: 02/03/08