The Pitfalls of Outsourcing

by The Editorial Team on October 13, 2014

Are the costs savings really worth it if your company loses all customer loyalty?

While outsourcing non-core business activities have become commonplace in American businesses, sometimes the quest for savings and that all-important “bottom line” is really not worth the risk.

While many companies actualize what may appear to be substantial savings, there are hidden and not so hidden dangers that should be considered – especially with offshore outsourcing.

The internet is rife with horror stories about dealing with offshore companies. One does not have to look far to find complaints about quality control. Once your prototype, web application or business function goes outside of the United States, the laws governing labor, safety, ingredients, labeling, etc are unenforced.

Your company may order a stainless steel Widget and end up with one million inferior units which are made of inferior iron. You may even end up with an unmarketable or dangerous product (e.g.: lead paint, substandard parts that don’t fit, unsafe products, web applications that fry your systems).

Certainly, a product that won’t meet US governmental standards and regulations is absolutely no use to your company.

There are often hidden costs related to outsourced contracts. One price may be quoted – say, for HR or onboarding services – then the little extras they forgot to mention begin to show up on the invoices. There might be a service fee for overtime incurred by the firm, or R&D costs that are passed along to you.

Can you say “scope creep“? Suddenly, what looked like a good deal is not so cost-effective.

Your company may end up paying a very high price for a dangerous or sub-par deliverable, poor service, and dangerous products.

Sending any work outside of your company means that you give up management control.  You can no longer call the shots, or effectively intervene with another company’s process. You are at the mercy of their schedules, their manufacturing procedures, their quality control (or lack thereof) – even their national holidays. Some nations (India) have lots and lots of holidays. All of Europe goes on vacation in August.

How do you, with a looming deadline on the delivery of this year’s better and faster Widgets, resolve the fact that everyone in the factory your company has hired is on vacation in the south of Spain?

In addition to the vacation and timeline problems, your company is now tied to the financial well being of the company with whom you have now contracted. If they have monetary problems, if they go out of business, you are now up to the creek without the proverbial paddle.

With onshore outsourcing, you may have some ability to recover your capital outlay.

With offshore outsourcing, you probably won’t. Political events, wars, strikes, social unrest, trade embargos and US Government bans can affect business activities abroad, and your company will have to absorb the losses. If the company you have hired to do your payroll goes into receivership, you will probably get some of your money back. Someday. If there is any money left.

Companies that outsource their customer service and client-interface activities abroad have found these partnerships to be problematic. Most US consumers find it difficult to deal with a person who is not a native speaker. In situations that tend to be highly stressful in the first place, the inevitability of having to repeatedly ask for clarification is just about guaranteed to lead to dissatisfied customers. In all too many cases, customers simply take their business elsewhere.

“Many US consumers simply hang up when they hear that foreign accent”

It may not be culturally diverse, but it is a fact. Most North American consumers want what they want when they want it, and they do not want to go through the same information or process more than once. If they cannot receive the goods or services they want, they will go somewhere else.

Another major pitfall is the potential loss of intellectual, personal, personnel, and proprietary property and information. Each time you surrender your company information to a third party, there is a possibility of theft. Employee’s identifications can be stolen. Sensitive HIPPA information could be sold. Your proprietary intellectual property can be pirated. Some countries have no qualms about stealing your designs and ideas. In fact, their governments may encourage such activities.

“By outsourcing your manufacturing, you may soon find yourself put out of business by a cheaper priced “prototype” of your own Widget, made by a foreign company, based completely on the hard work done by your own business”

Finally, there is a stigma in the US attached to companies that use outsourcing – especially those using offshore outsourcing as a normal business practice.

Whether it is true or not, the perception is that jobs are being lost to companies and countries that have no labor laws, no employee protections and histories of human rights violations.

Brands like Nike, Purina, and Wal-Mart have been painted with the tainted brush of using sweatshops, impure or poisonous ingredients, and inhuman working conditions. Many clothing companies overseas use child labor and, in some cases, even political prisoners to manufacture clothing for American consumers.

More and more, concerned and informed American customers all around the world are choosing to read labels, buy locally, and support companies that support economic recovery and American ideals.