Outsourcing basically refers to the arrangement in which businesses delegate their processes/ company functions to external companies/sources.
Any business process which can be performed from an off-shore location can be outsourced. Few examples include:
- Finance/Payroll processing
- Medical Transcription
- Call Centre – both inbound & Outbound
- Order and Inventory management etc
- For lots of businesses, the prime reason they outsource is so that key stakeholders can focus their attention on more income generating activities.
Why companies outsource?
Some of the important reasons as to why outsourcing is prevalent is:
§ Cost effectiveness –Controlling operating and other costs is often an important consideration for any business.
§ Expertise and Quality – There are certain tasks which is not any company’s core competency, obviously it will take longer to complete and may produce unsatisfactory results or impact the quality of the product/output. Therefore, outsourcing would be a good option in this case as it will ensure quick turnaround & high-quality output.
§ Remain Focused – It helps companies to stay focused and work on their business objectives.
§ Ongoing Support – Your IT outsourcing partner provide you with the requisite support & maintenance.
§ Operational Change – Change is always a good thing and for companies who spend too much time doing a certain task Outsourcing is a great option to make the work process easier to handle.
§ Improves opportunities for growth – Outsourcing will create some free time for numerous employees, and this could be everything any business needs to take full advantage of the situation.
§ Increasing effectiveness and efficiency –Outsourcing businesses would offer latest technology, innovative approaches, and creative, cutting-edge solutions that otherwise take a back seat. This will help improve the overall efficiency.
§ Risk sharing with Partner Company- One of the most critical factors determining the outcome of your campaign is risk analysis. Outsourcing various components of your business’s processes will assist the company by shifting various responsibilities to the outsourced vendors. Since these outsourced vendors are specialists in what they do, they’ll plan all your risk-reducing factors much better.
Demerits of Outsourcing
Existing staff may feel disposable or threatened
Redundancies in staff
Issues with product/service quality (standards may differ geographically)
Problems with communication (language, time zones)
Loss of control over policies and procedures
Threats to data security
Other important terms
1. “Vested outsourcing”
Is a hybrid business model in which both parties (the company and the service provider) in an outsourcing or business relationship focus on shared values and goals to create an arrangement that is mutually beneficial to each? The Vested model argues that traditional outsourcing and businesses relationships are focused on win-lose arrangements where one party benefits at the other’s expense. In contrast, a vested agreement creates a win-win relationship in which both parties are equally invested in one another’s success. This shared-value mindset is the basis of a vested agreement. The parties must agree upon a “Desired Outcome” that can be objectively measured to determine if the relationship is successful. This outcome can include cost reductions, revenue increases, schedule improvements, increased market share and better levels of customer service.
More than simply focusing on the success of the contractual relationship, Vested commits both the company and the service provider to the success of each other’s overall business. This strengthens the sense of partnership and encourages a more lasting relationship. By sharing their expertise and aligning their goals, both parties are able to drive innovation, adapt to changing needs and mitigate risk while working towards mutual success.
2. Innovation outsourcing – When offshore outsourcing knowledge work, firms heavily rely on the availability of technical personnel at offshore locations. One of the challenges in offshoring engineering innovation is a reduction in quality.
3. Co-sourcing is a hybrid of internal staff supplemented by an external service provider. Co-sourcing can minimize sourcing risks, increase transparency, clarity and lend toward better control than fully outsourced. Co-sourcing services can supplement internal audit staff with specialized skills such as information risk management or integrity services, or help during peak periods, or similarly for other areas such as software development or human resources.
4. Offshore Software R&D Co-sourcing is the provision of software development services by a supplier (whether external or internal) located in a different country from the one where the software will be used. The global software R&D services market, as contrasted to Information Technology Outsourcing (ITO) and BPO, is rather young and currently is at a relatively early stage of development.
5. Identity management co-sourcing is when on-site hardware interacts with outside identity services. This contrasts with an “all in-the-cloud” service scenario, where the identity service is built, hosted and operated by the service provider in an externally hosted, cloud computing infrastructure.
6. On-demand outsourcing is a trend in outsourcing wherein major internal operations processes of a company are being shifted to a provider that is paid for by the number of transactions involved. The business transferring the services pays for the quality, special skills and the competence of the service provider’s employees. There has been an expansion of the outsourcing concept to include on-demand outsourcing. This refers to the process undertaken by business managers to adopt an outsourcing policy that ensures that the specific business and supplies including technical manpower are accessed as the need arises. It focuses a business strategy to improve its goods and services and to drive a business towards quality improvement.
7. Marketing outsourcing – The term outsource marketing has been used in Britain to mean the outsourcing of the marketing function. The motivation for this has been:
– cost reduction.
– specialized expertise.
– speed of execution
– short term staff augmentation
8. Business process outsourcing (BPO) is a subset of outsourcing that involves the contracting of the operations and responsibilities of a specific business process to a third-party service provider. Originally, this was associated with manufacturing firms, such as Coca-Cola that outsourced large segments of its supply chain.
9. Farmshoring refers to outsourcing to USA rural-located companies.
10. Homeshoring (also known as Homesourcing) is a form of IT-enabled “transfer of service industry employment from offices to home-based … with appropriate telephone and Internet facilities.”. These telecommuting positions may be customer-facing or back-office and the workers may be employees or independent contractors.
11. Insourcing is the process of reversing an outsourcing, possibly using help from those not currently part of the inhouse staff. Outsourcing has gone through many iterations and reinventions, and some outsourcing contracts have been partially or fully reversed. Often the reason is to maintain control of critical production or competencies, and insourcing is used to reduce costs of taxes, labour and transportation.
12. Nearshoring is having business processes, especially information technology processes, in a nearby country, often sharing a border with the target country. Commonalities usually include: geographic, temporal (time zone), cultural, social, linguistic, economic, political, or historical linkages.
13. Near-sourcing also known as near-sourced or near-source, is a business strategically placing some or all of its operations close to where its products are sold. Typically, this is contrasted with the trend to outsource low-wage manufacturing operations to developing nations (offshoring), and reflects a reversal of that trend. Businesses can near-source manufacturing, to customer service and IT services. It is a form of outsourcing, in that the work is done by an outside contracted company rather than internally (insourcing), but unlike offshore outsourcing, the work is done in fairly close proximity to either the company headquarters or its target market.
The right approach for outsourcing
There is no single right approach to outsourcing a project. Just as companies are different to one another, so too are outsourcing strategies. However, the following best practice method has already proven itself in many situations:
o Analyse the current state: Analyse the actual state of a task, a sub-region or a business process. From the analysis, you can determine the best further course of action and estimate the potential of an outsourcing strategy.
o Prepare: Organize a kick-off meeting with all of your company’s stakeholders to get the most out of your outsourcing project. In the meeting, you can lay the foundation for future joint work. It should highlight and discuss the benefits of the project, the content and timing of the project, and the next steps.
o Select a service provider: Compare potential service providers with each other. For the selection and interaction with potential service providers you need a product requirement and a scope statement. In product requirement documents you record all basic.
o Stick to your implementation timeline: Once the contract has been concluded, implementation can begin. Important: agree on a concrete timetable for implementation in the contract. As part of the project management, regularly check to see whether contractually agreed milestones are reached.
IT outsourcing models and pricing
The appropriate model for an IT service is typically determined by the type of service provided. Traditionally, most outsourcing contracts have been billed on a time and materials or fixed price basis.
But as outsourcing services have matured from simply basic needs and services to more complex partnerships capable of producing transformation and innovation, contractual approaches have evolved to include managed services and more outcome-based arrangements.
The most common ways to structure an outsourcing engagement include:
– Time and materials
– Unit/on-demand pricing
– Fixed pricing
– Shared risk/reward
– Variable pricing
– Performance-based pricing
References – Wikipedia, www.cio.com