Disadvantages in internal audit: - costs (costs benefit analysis) -lack of understanding of co and its industry - acceptance by co's staff

(relationship problem) - over-dependence-- reduce learning curve - may not be available when u need them 1. Hidden Costs Any additional products/services you require from the third-party not covered in the contract will incur and additional cost. There will also be ancillary costs such as hiring a lawyer to review the contract and make any addendums or amendments needed. There is also cost incurred if you spend a significant amount of time trying to agree the business terms of the contract. This combination may mean that at times it is more cost effective to produce the product or service internally, even though the headline outsource cost appears more economic. 2. Security Risks When outsourcing functions which require visibility of confidential information there will obviously be an information security/confidentiality risk. Examples of confidential information include payroll data and your customers personal information. You need to evaluate the outsourcing company carefully to assess and attempt to mitigate the risk to the business. 3. Control Issues When you outsource a function from your organization to a third-party you are effectively signing over management control and decision making for that function to another organization. Whilst you will have a contract in place to cover the service level agreement, it wont cover management decisions, and the third-party will probably not be driven by the same factors that drive your organization, resulting in potential conflicts. 4. Financial Ties When you agree to outsource a function to a third-party you are tying your organization to the financial well-being of the third-party. Again you need to carefully assess the risk, which will be assessed based on a combination of: the financial strength of the third-party, how bespoke the service they are offering is, how core to your day-to-day operations the outsourced function is. 5. Morale Implications You should give consideration to the impact outsourcing will have on existing employees, especially if the outsourcing initiative provides only marginal financial benefit. Consider if outsourcing will boost morale (likely if existing employees move onto work more essential to the strategic mission of the organization) or damage morale (likely if many existing employees are laid off). 6. Implications of SLA The third-party organization, just like any other organization, will do everything it can to drive down costs. This means it is likely to meet the quality level set in the SLA but no more. If there is a change in the business environment it may not be possible to adapt rapidly as you will have to agree the change scope and costs with the third-party first. Remember, you will not be the only customer they are serving so the change may take time. Summary

Whether youre a project manager or program manager considering outsourcing the production of a product or service to a third party, it is important to understand the potential pitfalls of such an undertaking. The points outlined in this article should show that the obvious candidate functions for outsourcing are those which are run-of-the-mill and common to all organizations. Even so, before entering into any agreement you must carefully assess the advantages and disadvantages of outsourcing. 1. Loss Of Managerial Control Whether you sign a contract to have another company perform the function of an entire department or single task, you are turning the management and control of that function over to another company. True, you will have a contract, but the managerial control will belong to another company. Your outsourcing company will not be driven by the same standards and mission that drives your company. They 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 will sign a contract with the outsourcing company that will cover the details of the service that they will be providing. Any thing not covered in the contract will be the basis for you to pay additional charges. Additionally, you will experience legal fees to retain a lawyer to review the contacts you will sign. Remember, this is the outsourcing company's business. They have 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 the confidentiality may be compromised. If the outsourced function involves sharing proprietary company data or knowledge (e.g. product drawings, formulas, etc.), this must be taken into account. 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 will be motivated by profit. Since 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 pay. 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 Since 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. It wouldn't be the first time that an outsourcing company could go bankrupt and 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 they were shipped across the state, across the country or across the world, outsourcing will bring bad publicity. If you outsource part of your operations, morale may suffer in the remaining work force.

Disadvantages of Outsourcing one of the biggest disadvantages of outsourcing is undesirable results. This is especially true when a company hires a third-party vendor to mass produce a product. In the event that the finished products do not meet quality standards, the manufacturing process must be repeated by a different vendor. Not only is this a waste of time and materials, it can also be very costly for the company who outsourced the project. They are essentially paying twice for the same job. In addition there is always the possibility that the company may lose sales, during this same period because of the lack of available product. Another disadvantage of outsourcing is a loss of jobs. Many times work is outsourced simply as a means to save money. Outsourcing to a foreign country typically saves a company a great deal in wages. So, the choice is made to reduce their local workforce, at the expense of the laid-off employees. In turn, it can cause community uproar and even a decrease in business and profits. This happens when local consumers make the decision to shop elsewhere, as a way to voice their disdain. Outsourcing customer service jobs, to foreign countries, is on the rise. Many large corporations including credit card companies, shopping networks and computer manufacturers are making this change. The problem with this is a lack of communication. It can be very frustrating for a consumer who is calling in with a customer service issue. When this individual cannot understand the customer service representative they are speaking with, it just causes more frustration and does little to solve the problem. Cost of outsourcing is higher than the current costs Based on analyses or business cases it might turn out that outsourcing of activities and processes only increases the costs instead of decreasing the costs. This could be a reason not to outsource. However there are also strategic considerations to outsource such as increasing quality or access to technological capabilities that are not available internally. Outsourcing is not always be driven by cost reductions. Lost of knowledge and / or competences A companys unique selling point can be based on firm specific knowledge and certain competences enhancing competitive advantages and return on investments. If you outsource these firm specific competences to an external provider, your competitiveness can be at stake. This can be a reason not to outsource. It is a strategic choice to outsource certain firm specific knowledge and competences. An example is Nike, which moved from a full production-orientated organisation to a marketing organisation. All their product knowledge and other competences is transferred to external parties. Confidentiality of information or idea Outsourcing certain specific information, confidential information or ideas is risky and requires a wellthought-out strategic decision. To outsource confidential information, or firm specific information to a relatively unknown supplier would be risky, since it can be copied easily. What is the risk that the supplier takes advantages from it? The decision to outsource confidential information or not partial depends on the confidentiality of the potential provider. Quality Risk Outsourcing can expose an organization to potential risks and legal exposure. As an example, if a car is recalled for faulty parts and that part was outsourced, the car manufacturer carries the burden of correcting the potentially damaged reputation of the car maker. While the vendor would need to make good on the faulty product by contract, the manufacturer still has the black eye from the incident and carries the burden of correcting the negative public perception.

Quality Service Unless a contract specifically identifies a measurable process for quality service reporting, there could be a poor service quality experience. Some contracts are written to intentionally leave service levels out to save on costs. Language Barriers If a customer call center is outsourced to a country that speaks a different language, there may be levels of dissatisfaction for customers dealing with the language barriers of someone with a strong accent.

Employee/Public Opinion There can be negative perceptions with outsourcing and the sympathy of lost jobs. This needs to be managed with sensitivity and grace. Organizational Knowledge An outsourced employee may not have the same understanding and passion for an organization as a regular employee. There is the potential that an outsourced employee will come in contact with customers and not be as knowledgeable of the organization, resulting in a negative customer experience. Labor Issues Organized labor in the United States has very strong feelings about outsourcing to other countries that have a less standard of living and worse working conditions. This viewpoint can affect how the workforce responds to outsourcing and can affect their daily productivity. Legal Compliance And Security It is important that issues regarding legal compliance and security be addressed in formal documentation. Processes that are outsourced need to be managed to ensure there is diligence with legal compliance and system security. An example of this is outsourcing the IT function and having an outsourced employees use their access to confidential customer data for their own gain. Employee Layoffs Outsourcing commonly results in the need to reduce staffing levels. Unless it can be planned through attrition, layoffs are inevitable. This is difficult at best and if not managed appropriately, can have a negative impact on remaining employees. Finally, when researching vendors for outsourcing be sure to think through your specific needs and get at least three Requests for Proposals (RFP) to ensure you are getting the best value for your dollar.