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An academic view of Outsourcing (part 2)

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pros and cons outsourcing

Advantages of Outsourcing

Companies outsource for five main reasons. They are, in order of importance: (1) cost saving, (2) gaining outside expertise, (3) improving operations and service, (4) focusing on core competencies, and (5) gaing outside technology. (Mentioned in An academic view of Outsourcing (part 1) )


Cost savings

virtual assistant- cost savings

The number-one reason driving outsourcing for many firms is the possibility of significant cost savings, particularly for labor.

Gaining Outside Expertise

In addition to gaining access to a broad base of skills that are unavailable in-house, an outsourcing provider may be a source of innovation for improving products, processes, and services.

Improving Operations and Services

An outsourcing provider may have production flexibility. This may allow the client firm to win orders by more quickly introducing new products and services.

Focusing on Core Competencies

An outsourcing provider brings its core competencies to the supply chain, This frees up the client firm’s human, physical, and financial resources to real-located to core competencies.

Gaining Outside Technology

The client firm can outsource to state-of-the-art providers instead of retaining “legacy” systems. The client firm does not have to invest in new technology, thereby cutting risks.

Other Advantages

There are additional advantages in outsourcing, For example, the client firm may improve its performance and image by image by associating with an outstanding provider. Outsourcing can also be used as a strategy for downsizing, or “reengineering”, a client firm.


Disadvantages of Outsourcing

There are number of potential disadvantages in outsourcing:

Increased Transportation Costs

Delivery costs may rise substantially if distance increases from an outsourcing provider to a client firm. However, for some of outsourcing services such as data entry, virtual assistant, web research that are done through the Internet, it is not a critical matter.

transportation costs

Loss of Control

This advantage can permeate and link to all other problems with outsourcing. When managers lose control of some operations, costs may increase because it’s harder to assess and control them. For example, production of most of the world’s laptops is now outsourced. This means that companies like Dell and HP find themselves using the same contractor (Quanta) to make their machines in China. This can leave them struggling to maintain control over the supplier.

Creating Future Competition

Intel, for example, outsourced a core competency, chip production, to AMD when it could not keep up with early demands. Within a few years, AMD became a leading competitor, manufacturing its own chips.

Negative Impact on Employees

Employee morale may drop when functions are outsourced, particularly when friends lose their jobs. Employees believe they may be next, and indeed they may be. Productivity, loyalty, and trust- all of which are needed for a healthy, growing business- may suffer.

Long-term Impact

Some disadvantages of outsourcing tend to be longer term than the advantages of outsourcing. In other words, many of the risks firms run by outsourcing may not show up on the bottom line until some time in the future. This permits CEOs who prefer short-term planning and are interested only in bottom-line improvements to use the outsourcing strategy to make quick gains at the expense of longer-term objectives.  

The disadvantages of outsourcing may or may not occur, it depends on the firms and which activities the firms outsource, but should be thought of as possibilities to be managed effectively.


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