1. Reduce and Control Operating Costs
The single most important reason for outsourcing is to reduce and control operating costs. Access to the outside provider's lower cost structure — the result of economies of scale or some other advantage based on specialization — is clearly and simply one of the most compelling reasons for outsourcing.
Companies that try to do everything themselves may incur higher research, development, marketing and deployment expenses — expenses that have to be passed onto the customer or taken off the bottom line. Today's customers are too sophisticated to accept the cost of an organization's attempt to maintain singular control over all its resources.
2. Improve Company Focus
Outsourcing lets the company focus on broader business issues while having operational details assumed by an outside expert. It is an organization-shaping management tool, which can lead to a clearer, more effective focus on meeting customers' needs.
For many companies, the most compelling reason to outsource is that “how” type issues siphon off huge amounts of management's time and attention — often stuck in middle-management gridlock, creating financial and opportunity costs. Outsourcing can accelerate growth by expanding investment in the areas that offer the greatest competitive advantage.
3. Share Risks
There are tremendous risks represented by the investments an organization makes. When companies outsource they become more flexible, more dynamic, and better able to change themselves to meet changing opportunities.
Markets, competition, government regulations, financial conditions, and technologies all change extremely quickly. Keeping up with these changes is very difficult — sharing the burden with a specialist partner makes it easier.
4. Free Resources for Other Purposes
Every organization has limits on the resources available to it. The constant challenge is to ensure that its limited resources are expended in the most valuable areas.
Outsourcing permits an organization to redirect its resources from non-core activities toward activities that have the greater return in serving the customer.
5. Make Capital Funds Available
Outsourcing is a way to reduce the need to invest capital funds in non-core business functions. Instead of acquiring resources through capital expenditures, they are contracted for on an as-used operational expense basis.
Outsourcing makes capital funds available for core areas, and can improve certain financial measurements of the firm by eliminating the need to show return on equity from capital investments in non-core areas.
6. Resources Not Available Internally
Companies outsource because they do not have access to the required resources within the company.
For example, if an organization is expanding its operations — especially into a new geography — outsourcing is a viable and important alternative to building the needed capability from the ground up.
