The pros and cons play out differently for firms of various sizes with respect to different HR processes. A company should decide what and when to outsource after considering the following factors:
Factors
1. Dependency Risk:
If a company has to adapt its operations to do business with a supplier, it might then find itself dependent on that vendor. Dependency risks increase when the outsourced activity requires the co-location of facilities, specialised equipment, dedicated capacity or specialised training.
If the supplier fails to perform the outsourced function that will disrupt other processes, this factor needs to’ be considered when we outsource. Thus, when activities are highly interdependent, a company might be reluctant to outsource any of them.
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2. Spill-over Risks:
Contracting with a supplier can expose a company to the possibility that confidential information might leak, perhaps even to competitors.
Spill-over risks are exacerbated (aggravated) when the interface between the outsourced activity and other internal functions is complex, requiring a company to reveal proprietary information to ensure a good fit between the two.
3. Trust:
To protect against dependency and spill-over risks, a company can rely on detailed legal contracts with vendors. But such documents are time-consuming and expensive to negotiate, and enforcement is uncertain and costly, thus discouraging outsourcing.
4. Relative Proficiency:
Outsourcers can take advantage of economies of scale and scope by aggregating the needs of several clients. Thus companies need to examine their proficiency relative to that of vendors on a case by case basis.
5. Strategic Capabilities:
A company should not outsource an activity that directly contributes to its strategic competitive advantage. If a company believes it can build a sustainable lead in an activity that offers long term competitive advantage, then it should refrain from outsourcing that function and instead devote efforts to building superior capability even if its current relative proficiency is modest and other factors make outsourcing attractive.