Outsourcing may seem like a great option for a company in terms of saving time and providing expertise in areas. However, before a company makes their decision to outsource or not, the risks of outsourcing should be taken into consideration. If the risks outweigh the advantages, then the organisation should avoid outsourcing the activity in question at all costs.
Within the literature a wide range of outsourcing risks have been identified, these risks range from providing minor setbacks to major problems. The drawbacks can unfold immediately after implementation of outsourcing or several years after.
There appears to be a common acceptance of the most important risks involved. This research will be mainly focused on the risks categories identified by Lonsdale & Cox (2000). Although the risks are categorised, it is important to note that in reality they often overlap each other. Below are the main risk categories which Lonsdale & Cox (2000) have identified;
· Loss of core activities
· Being leveraged by suppliers
· Loss of strategic flexibility
· Suffering interruptions to supply
· Receiving poor quality of supply
· A fall in employee morale
· A loss of internal coherence
· Confidentiality leaks
· Loss of intellectual property rights
Although not as commonly listed, the author did find two other risk categories which he found to be of high importance;
· Unexpected costs – Belcourt (2006), Kumar & Eickhoff (2006)
· Reputational risks – Beasley et al (2004)
Loss of core activities
Many researchers including Lonsdale & Cox (2000), Aron et al (2005), Kremic et al (2006) argue that the loss of core activities is the biggest risk of any outsourcing arrangement. Aron et al (2005) say that when a company outsources an activity, they will inevitably lose some of the knowledge and skill associated. They go on by saying that it is most dangerous when an activity which was once considered minor to the businesses success becomes a core activity and the organisation do not possess the skills or knowledge to conduct that activity themselves.
Lonsdale & Cox (1998) suggest two different ways which the loss of core activities can occur.
The first, through management unintentionally outsourcing a core activity, which is usually as a result of poor management. Both Leavy (2004) and Lonsdale & Cox (1998) highlight that if the primary target when outsourcing is to reduce costs or headcount, managers can sometimes be blinded to the risks involved.
A previously mentioned, the second is where the activity later became a core activity. Leavy (2004) says that managers sometimes fail to recognise that activities which are core to their organisation change over time.
Being leveraged by suppliers
Being leveraged by suppliers is also considered to be one of the greatest risks of outsourcing by many researchers including; Lonsdale & Cox (2000), Aron et al (2005), Mol (2007). The most common way of being leveraged by suppliers is through price increases.