As an entrepreneur, it's critical that you know the potential benefits of outsourcing and the drawbacks of outsourcing and how it can affect the success of your company.

Reasons Companies Outsource

There are several reasons that companies outsource various jobs, but the most obvious explanation seems to be the fact that it often saves money. Many of the companies that provide outsourcing services are able to do the work for significantly less money, since they don't have to provide benefits to their workers, and are responsible for fewer overhead expenses.

Furthermore, outsourcing enables companies to focus their attention on other business issues while having the details sorted out by outside experts. This means that a large amount of resources and attention that would have fallen on the shoulders of management professionals can instead be used for more important, broader issues within the company.

An Outsourcing Example

This reasoning can be applied to the outsourcing relationship between Xerox and EDS.

Xerox was traditionally known to be at the cutting edge of technology.

The company benefited tremendously from the release of the model 914 copier in 1959. As competitors began to emerge, Xerox's sales began to decline.

Successive efforts in improving product quality and reorganizing helped stem the tide, but Xerox still turned to outsourcing to better itself by devoting its own resources to other critical areas.

A few years ago, to improve operations, they partnered with outsourcing firm EDS to take on several key business fuctions.

While outsourcing can be advantageous, a CEO such as Xerox's Paul Allaire should be aware of some potential pitfalls.

Concerns that Xerox should monitor as an outsourcing contract begins include monitoring both customer satisfaction and service level agreements.

At the outset, everything may seem fine without any complications, but it is essential that all issues continue to be handled in a timely manner.

One of these issues is that outsourcing often eliminates direct communication between a company and its clients. Knowing this and contracting with a third-party, the satisfaction of customers still must remain at a level that is expected by the management of Xerox. Failure to do this will prevent Xerox from continuing their relationships with their regular customers and attracting new customers.

Additionally, there is also the danger of not being able to control some aspects of the company, as outsourcing may lead to delayed communications and project implementation. Any sensitive information is more vulnerable, and a company may become very dependent upon its outsource providers, which could lead to problems should the outsource provider back out on their contract suddenly.

In this era of business, where making money is of the utmost importance, one company may lessen the staff that was assigned to the contract to improve the profits for selfish gain. Also, perhaps support personnel may become lackadaisical and not be quite as responsive as they once were.

Xerox should frequently examine EDS's capabilities and service levels during the term of the contract and ensure that maximum effort is being given to meet both companies' needs.