Outsourcing means paying an outside company to do work the organisation could do itself. Advantages: lower cost, focus on core activities, expertise, flexibility and shared risk. Disadvantages: loss of control, dependence, communication problems, data security risk and quality issues. Outsource processes that are complex but not strategically important.
Advantages and disadvantages
| Advantages | Disadvantages |
|---|---|
| Cost savings: no need to invest in staff, systems and premises; economies of scale | Loss of control over quality and decisions |
| Focus on core activities that create competitive advantage | Dependence on the provider's performance and finances |
| Expertise and efficiency from a specialist | Communication and cultural barriers, especially offshore |
| Flexibility to scale up or down | Data security and privacy risks |
| Shared risk, for example on compliance and technology upgrades | Quality and service problems if poorly managed |
Harmon's process strategy matrix
Harmon's rule: outsource processes that are complex but not strategically important. Keep and improve those that are both important and complex.
Related structures
| Option | What it is |
|---|---|
| Shared service centre | One in-house unit provides a service, such as finance, to all divisions |
| Offshoring | Moving work to another country, in-house or outsourced |
| Hollow organisation | Outsources all non-core activities |
| Modular organisation | Outsources parts of the product, such as components |
| Virtual organisation | A network of independent partners linked by technology |
Managing an outsourcing contract
- Due diligence on the provider's finances, security and track record.
- A clear service level agreement (SLA) with measurable targets and penalties.
- Data protection terms and the right to audit.
- A named relationship manager and regular reviews.
- An exit plan to bring the work back or switch provider.
Outsourcing in ACCA SBL
This sits in organisation and process change (syllabus area H). A typical task asks whether to outsource a function such as IT or finance. Use Harmon to judge whether the process is core, weigh the advantages and disadvantages with case figures, and recommend controls. For Historic Places (March 2025 pre-seen), outsourcing payroll could make sense; outsourcing conservation expertise would not.
FAQs
What is outsourcing?
Paying an outside company to carry out an activity that the organisation could do itself, such as payroll, IT support, customer service or manufacturing.
What is business process outsourcing (BPO)?
Outsourcing a whole business process, often a back-office one such as finance, HR or customer contact centres, to a specialist provider.
What are the main advantages of outsourcing?
Lower costs, focus on core activities, access to expertise, flexibility to scale up or down, and sharing some risks with the provider.
What are the main disadvantages of outsourcing?
Loss of control, dependence on the provider, communication and cultural problems, data security risks, and possible drops in quality.
What is the difference between outsourcing and offshoring?
Outsourcing is about who does the work (an outside company). Offshoring is about where (another country). A business can offshore to its own overseas centre, or outsource to a company down the road.
What should not be outsourced?
Core competences that give competitive advantage, and highly strategic activities. Harmon's matrix suggests improving these in-house.