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Outsourcing is a new buzzword that, on the face of it, holds the promise of flexibility and profitability. But there may be several disadvantages that are not all that obvious.

A major attraction of outsourcing is that it allows the business to focus on its core business and competencies, leaving peripheral and support functions (e.g. IT, security, personnel administration and so on) to be serviced by outside experts. For smaller employers, outsourcing might also have the advantage of a reduction in numbers, thereby possibly removing the business from the statutory thresholds that imply increased obligations, e.g. submission of employment equity plans.

Before a business embarks upon outsourcing, however, there are a few potential downsides to consider. First, it is imperative for employers to contract only with reputable service providers with a proven track record of compliance and good human resource management capability. Second, where outsourcing involves dismissal of staff that become redundant as a result, it contributes to (rather than helps to resolve) the country’s chronic unemployment problem. It might also – and often does – create uneasiness and uncertainty among those who remain, in turn causing talented staff to move on to more secure pastures.

Third, there is still great uncertainty in legal circles over the question whether and under what circumstances outsourcing constitutes a transfer of a business as a going concern, thus activating the onerous provisions of s 197 of the LRA. In cases where it falls under that section, both the old and the new employer in an outsourcing situation will be saddled with certain statutory obligations that might render the outsourcing not worth their while. Good legal advice should therefore be obtained.

Fourth, employers (with very benevolent motives) sometimes outsource non-core functions to existing staff with the idea that they would become entrepreneurs for their own account by supplying expertise back to the old employer as independent contractors. While this might stimulate the entrepreneurial spirit, many such enterprises fail because the entrepreneur now also has to run an own business – and manage his or her staff – with little or no experience, knowledge or back up. The result is either business failure, or staff who carry their unhappiness about their employer (the entrepreneur focused solely on getting the job done) onto the premises of the client.

A fifth problem is that the introduction of a service provider in the form of a labour broker may upset established relations in the workplace and create friction, or at least a dualism, between the employer’s own employees and those of the service provider. This would need to be monitored and carefully managed.

Less obvious, perhaps, is the fact that long-term exclusive outsourcing arrangements create a dependency that might isolate the organisation from the market. By giving the vendor the exclusive right to understand one’s business, one may be making it harder in the longer term to terminate the relationship.

Further, the higher the number of external service providers, the greater the need for the organisation to enlist the services of project or contract managers to supervise the different agreements.

Finally, the vendor may build up relationships with the business’s peers and partners and become a surrogate for the business in dealings with them. Unless the rules are clearly spelt out and the business makes an effort to maintain its visibility and links with peers and partners, there is a very real risk of its relationships with them disappearing.

In conclusion, while outsourcing offers potential benefits in terms of cost, service levels and access to talent, it is a strategic decision requiring careful thought about risks, benefits and governance.

Written by Barney Jordaan of Jordaan · Stander for

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