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Evans, David, Judy Feldman, and Anne Root. "Smart New Ways to Manage Subcontractors." Money. March 15, 1994.
Outsourcing can expose an organization to potential risks and legal exposure.
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When you sign a contract to have another company perform the function of an entire department, or even a single task, you are handing the management and control of that function over to another company. While you'll have a contract, the managerial control will belong to another company. You can't assume that your outsourcing company will be driven by the same standards and mission that drives your company. Not to mention, the passion. The outscouring company will be driven to make a profit from the services that they are providing to you and other businesses like yours. 2 Hidden Costs You need to be aware of all the costs involved in outsourcing. While you will sign a contract with the outsourcing company that will cover the details of the service that they will be providing, anything not covered in the contract will constitute additional charges on your behalf. Additionally, you will experience legal fees when you retain a lawyer to review the contacts you will sign. Remember, this is standard outsourcing business. The outsourcing company has done this before and they are the ones that write the contract. Therefore, you will be at a disadvantage when negotiations start. 3 Threat to Security and Confidentiality The life-blood of any business is the information that keeps it running. If you have payroll, medical records or any other confidential information that will be transmitted to the outsourcing company, there is a risk that confidentiality may be compromised. If the outsourced function involves sharing proprietary company data or knowledge (. product drawings, formulas, etc.), this must be taken into account. Be sure to evaluate the outsourcing company carefully to make sure your data is protected and the contract has a penalty clause if an incident occurs. 4 Quality Problems The outsourcing company is purely motivated by profit. Because the contract will fix the price, the only way for them to increase profit will be to decrease expenses. As long as they meet the conditions of the contract, you will be responsible for covering new, unexpected expenses. In addition, you will lose the ability to rapidly respond to changes in the business environment. The contract will be very specific and you will pay extra for changes. 5 Tied to the Financial Well-Being of Another Company Because you will be turning over part of the operations of your business to another company, you will now be tied to the financial well-being of that company. There is always the risk that the outsourcing company goes bankrupt and will leave you holding-the-bag. 6 Bad Publicity and Ill-Will The word "outsourcing" brings to mind different things to different people. If you live in a community that has an outsourcing company and they employ your friends and neighbors, outsourcing is good. If your friends and neighbors lost their jobs because services were shipped to another state or country, outsourcing will result in negative publicity. In addition, if you outsource part of your operations, morale may suffer in the remaining workforce.