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Outsourcing vs In-House

Applied IT (Year 12) - Project Management (U4)

Christian Bien

What is Outsourcing?

Outsourcing is the process to which products/services are provided and contracted by an external provider.

Advantages of Local Outsourcing

Below are some benefits of outsourcing production or services locally:

  • Cost efficiencies - Outsourcing producers could have significantly larger production facilities or more specialised equipment to lower the unit cost of production

  • Mass production - Outsourcing can produce large output demanded by businesses. Producing large outputs reduce the unit costs of production.

  • Greater focus on core business areas - eliminating focus on manufacturing aspects of their business, businesses can dedicate more resources to increasing client relationships, marketing and research and development.

  • Eliminates required investment in infrastructure and technology - in addition, businesses do not need to constantly upgrade equipment and can get access to the latest manufacturing equipment

  • Access to skilled workers - eliminates the need for businesses to recruit and train employees

Advantages of Global Outsourcing

In addition to the above benefits of local outsourcing, global outsourcing also offers additional benefits including:

  • Lower company tax rates - businesses may be able to save money by producing elsewhere to take advantage of lower company tax rates such as Ireland at 12.5%, Germany at 15%, Cambodia at 20% while Australia's company tax rate is 30% (27.5% for small business).

  • Lower regulation and red tape - other countries can have significant less barriers to production. For example, outsourcing can avoid strict environmental, planning and employee regulation.

  • Lower wage costs - Australia has relatively high minimum wages. Outsourcing can take advantage of lower wage costs in developing countries.

What is In-House?

​In-House production is where a product/service is manufactured or provided under the control of the business.

Advantages of In-House Production

Below are some advantages for a business to consider when thinking about producing in-house rather than outsourcing:

  • Greater quality control - the business is able to examine the quality of the manufacture of goods or providing of services.

  • Easier customisation - the business is able to easily modify production to suit special orders or request by customers. Outsourcers may have difficulty understanding the client requirements of special orders.

  • Greater volume production control - the business can easily adjust its volume of production in accordance to demand. If there is low demand for a product, the business can easily decrease production whereas outsourcing could be contracted to a fixed volume. May be cost effective at small volumes.

  • No transportation delays - businesses have to wait for outsourced production to arrive at the business which is especially long for global outsourcers.

  • Lower shipping and distribution costs

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