FAQ / How can outsourcing provide cost savings? What are the benefits and possible risks?

There is no mystery in the suppliers’ advantage – they have scale that allows them to use shared service centers, and processes and automation tools that enable them to be more productive. Not all situations are the same. The extent of savings requires a careful analysis of the customer’s environment and matching the customer’s needs with the supplier’s capabilities. The advantages of outsourcing typically include not only cost savings, but also improved processes, ready access to more skills, and pricing that more rapidly scales up and down with demand.

The principal risks in outsourcing arise from the changes that can occur during the life of the contract. These contracts are typically 5 to 10 years long. There are host of changes that can and will occur in that time period, including changes in the customer’s markets and corresponding business needs, changes in the customer’s business structure (such as acquisitions, divestitures and joint ventures), changes in laws, changes in technology, and changes in cost. Add to that the risk that the customer could be at an information and power deficit compared to the supplier given the supplier’s control of resources, third party contracts, and cost information. The contractual arrangement has to be carefully structured to managed these risks.

Keywords: joint ventures,