Outsourcing is said to have started a few thousand years ago with the production and sales of food, tools and household appliances. As soon as small communities began to form, people with specialised profession began to trade with each other for goods and services. Therefore it can be said that each worker was outsourcing some activities to others.
According to the Webster universal dictionary; Outsourcing is "A company or person that provides information to find a supplier or service, to identify a source". Simply put, outsourcing means contracting with another company or person to do a particular function. Recently, the term "outsourcing" has been most commonly used for technology related initiative such as delegating some of a company's in-house operations processes to a third party.
WHY OUTSOURCING IS BECOMING A WIDELY USED APPROACH
Global competition is growing fierce and companies are looking for ways to increase their competitive edge without jeopardizing their profit margins. Companies are also realizing that staying current with technologies requires a great deal of effort, risk and expense, this is why outsourcing is being thought as an attractive alternative.
How one ranks the reason to outsource often depends on which chair one sits in. If a CEO (Chief executive officer) is surveyed, the results are different from that of the CFO (Chief financial officer) and their result is different for the CIO (Chief information officer). The important thing is to understand the reasons for outsourcing.
Some of the main reasons why a company may want to outsource are stated below;
- Organisational Driven Reasons
- Improvement Driven Reasons
- Cost Driven Reasons
- Revenue Driven Reasons
- Employee Driven Reasons
ORGANISATIONAL DRIVEN REASONS
The contact a company or organisation takes with the outsourcing firm determines the amount of the risk the company faces. For eg, looking at it from a CIO's perspective, in a fixed price contract, the amount of risk the outsourcer faces is more than the time and material contract. Regardless of the type of contract, the CIO will be sharing the responsibility for the future direction of the technology within his/ her company with the outsourcer. The CIO responsibility is to ensure the technology integration with business processes within the company, the outsourcer will assist by introducing the new technology with proper skills to implement.
Outsourcing in this aspect enhances effectiveness by allowing the outsourcer focus on what he/ she knows how to do best. Increase product and services value customer satisfaction and share holder value to transform the organisation.
IMPROVEMENT DRIVEN REASONS (taking advantage of future technology)
One of the strategic initiatives of an outsourcing firm is to stay current with new technologies and system. With the help of the outsourcing firm a company is able to stay current. The outsourcer is in a position to provide experienced personnel and to access the value of the new application. The company will spend less time, effort and risk because the outsourcing firm is familiar with the new technology. Most times a company will embrace the "centre of expertise" concept, just to have highly specialised personnel work on the new technology and provide support for the existing systems.
This helps solve issues and facilitate the knowledge transferred to the organisation/ company development. In this aspect outsourcing helps the company to;
- Acquire initiatives ideas
- Improve in the operating performance
- Improve credibility and image by associating with superior providers
COST DRIVEN REASONS
In this aspect there are many reasons why a company will want to save cost; some of these reasons are stated below;
- The size of the staff in the company
- The company size at a whole
- Hardware and software maintenance agreement, etc.
- Strategic direction of the company
One of the primary reasons why a company will want to save is the ability to take advantage of economies of scale. Outsourcing firms are able to consolidate data centre operations, which provides lower overhead cost on a per-customer basis. Outsourcing firms acts as aggregator for telecommunication networking and cost reduction. The outsourcing firm also helps in re-engineering and maintaining application for the company. Cash can be generated by reducing investment in assets and free up the resources for other purposes; turning fixed cost into variable cost.
REVENUE DRIVEN REASONS
Through outsourcing, a company gain market access and business opportunities through the provider's network. Provides flexibility needed to stabilize the various demands needed by the company. The sales and production capacity are expanded during period when such expansions could not be financed in the company. Outsourcing accelerates expansion by tapping into the provider's developed capacity, process and systems. It gives rooms for exploiting the skills commercially. All this leads to the improvement of the company.
MPLOYEE DRIVEN REASONS
Outsourcing give employees a stronger career path, they get to know what they are good in and then with the knowledge that they know what they can do, makes them to be committed and energy in non-core area.
It provides the ability for an employee core to focus on the core business, most necessary and peripheral operations are outsourced and this gives the employees an ability to concentrate instead of getting disturbed by minor issues
BENEFITS AN ORGANISATION CAN GAIN BY OUTSOURCING
With the benefits of outsourcing a company will be able to see big increase in its profits, productivity, and level of quality, business value, business performance and much more. Some of the benefits are listed below
1. Reduction and Control of Cost:
Outsourcing helps companies reduce their cost on resource management labour, space, etc. According to Accenture, outsourcing leads to a cost saving of 25% to 30% while outsource partners international estimate the cost savings to reach 50%. Getting an access to high-quality services at cost-effective price is the biggest benefit that you can get while outsourcing. In a company, full time employee requires a number of expenses that are not necessary for outsourced employees, i.e. Full time employees are been paid, even if there is nothing for them to do. In this situation, outsourcing helps the company to pay for the time that is spent completing the job and helps in completing the given project or given work at the right time. Companies that outsource usually have individuals available around the clock to provide assistance for the company.
2. Time to Market:
It offers round the clock work benefits and therefore reduces the time to market, that is, if the outsourcer has skills and expertise. It enables faster start-up, development and scalability for new operations. It gives the company a competitive edge, the company gets access to specialized services for different business processes and so provides their customers with best of breed services.
3. Increasing Efficiency:
The company's non-core business functions will be performed efficiently by the outsourcer, while the core business functions will be performed by the workers in the company. With the help of an expertise, along with the specialized processes and technology, it ensures better quality of output for the customer. This increases company focus.
It provides feasibility for instance, the most well planned project may suddenly end up behind schedule or under a time crunch due to minor errors, changes in plans or other incidental activities. Outsourcing thus provides opportunity for operations that have seasonal or cyclical demands to bring in additional resources whenever the company needs them and releases them when they are done with it.
5. Access to Diverse Technology:
Outsourcers have focus on particular services and play in volume and this enables them to keep to date with the technology required in these services and this helps them avoid technology obsolescence and leverage the access to diverse and advanced technologies.
6. Focus on Core Competencies:
This enables the workers in the company to divert attention from supplementary tasks and focus on their core business functions.
7. Making Faster Deliveries to Customer:
The outsourcer to the company will be able to provide fasters deliverables and the company in turn will be able to make quick deliveries to the customers. This in turn can also save time.
MAIN DRAWBACKS THE ORGANISATION FACE DUE TO OUTSOURCING
Despite the benefits a company gains from outsourcing, there are definitely drawbacks that the company has to be aware of in order to make a good evaluation.
1. Managerial/Control Problem:
Since an outsourcer is working for the company, it is more difficult to manage the services that the outsider provides than managing the services of the employees in the company.
2. Treat to Security and Confidentiality:
There is every tendency that the confidentiality of the company may be compromised. All companies have a secret or information that is bent of keeping them running. If the job to be outsourced involves sharing of confidential information, then security must be taken into consideration, therefore every outsourcing should be accessed by the company to ensure that the confidential data of the company are protected.
3. Loss of Flexibility:
If there is change in business conditions, it might lead to a loss in flexibility.
4. Failure to Deliver:
If a certain quantity of deliverables are trusted to an outsourcer to deliver and the outsourcer fails to deliver it, the company is likely to suffer the consequences despite the agreements it might have had with the outsourcer.
5. Loss of Jobs:
If a job is outsourced to a foreign country, it saves a lot of wages but yet it has reduced the local workforce of the country in which the company is located.
6. Company Value:
The company may not be building its value in terms of personnel, in-house knowledge and infrastructure thereby causing the value of an outsourcing agreement to be less effective than an internal department.
7. Undesirable Results:
There is every possibility that the finished results might not meet the quality standards and this leads to wasting of time and materials. Take for instance when the finished job does not meet the required results or outcome of the company, the company will want to outsource it again to get a perfect result for the job and therefore the company will be automatically paying twice for the job.
8. Negative Reputation:
Most people see outsourcing as a bad option for a company because it eliminates domestic jobs. Outsourcing has brought about bad publicity and ill will.
DIFFERENT TYPES OF OUTSOURCING APPROACH
There are three different ways or approaches to outsourcing. They are
- IT Outsourcing (ITO) or Application Service Provider (ASP)
- Selective or Partial or Multi- Outsourcing
- Comprehensive Business Process Outsourcing (BPO)
IT Outsourcing (ITO) or Application Service Provider (ASP):
- This is an approach that involves the outsourcing of the technical infrastructure and transaction processing component of the function,
- Maintaining the business process itself is done in-house.
- The client is in charge for possession and handling the complete business process but the ASP hosts the technology and provides all the technical maintenance it needs, such as networks, desktops, software applications, etc.
- Example, using a payroll system, ASP might want to host the payroll system of the company but all the data processing would be continue to be possessed by the client.
Selective or Partial or Multi- Outsourcing
- This is called a functional, best- of- breed approach
- Business processes are assessed individually, function- by- function to decide which processes should be outsourced and which vendors are most advantageous in meeting each functional need
- Providers are evaluated vendor- by- vendor so as to choose the best to meet each individual business need
- Example, a company might select a benefit consulting company to manage their benefits program, a conscript agency to take care of their staffing function, ASP to process payroll. All this shows the best- of- breed approach in vendor section.
Comprehensive Business Process Outsourcing (BPO):
- This involves the complete turn-over of an entire business area, for instance finance, to the outsource provider to take care of the full managerial process of the business and its transaction.
- Using BPO, the outsourcer is in complete possession of the business process, taking care of the infrastructure, technology, the people and the necessary business process.
- The newest form of outsourcing is Full BPO and it is the least mature approach.
- Most BPO engagements are customized in a way that unique environments are set aside for situation of each individual client.
A REAL LIFE EXAMPLE OF OUTSOURCING
OPTUS INKS THREE-YEAR OUTSOURCING DEAL WITH HP
Optus is an Australian leader in information technology, integrated telecommunications, leisure services, and delivering cutting-edge communications. SingTel became the parent company of Optus in 2001, making the way to become a strong and strategic telecommunications player within the region of Asia-Pacific.
HP produces new chances for technology to have a momentous impact on businesses, people, society and governments. It is the world's largest technology company; HP brings jointly a portfolio that extent printing, software, services, personal computing, and IT infrastructure to solve customer problems.
In an offer to advance the presentation and quality levels of the key application and support services of Optus, the company signed a three-year outsourcing agreement with the HP Enterprise Services.
In the contract, applications organization for a number of key applications would be taken care of by HP. It includes definite customer billing, the data warehouse and other core systems of Optus, an auxiliary of SingTel. The group that is to work on this project have already taking place in planning the progress of Optus' current support from a large number of suppliers to HP.
TERMS AND CONDITIONS
- In application to its Best Shore strategy, the usage of standardised tools and methods are what HP will use to speed up the transfer of services between the centres of deliveries around the world.
Optus expect to accomplish a noteworthy service level and an effective improvement across their IT portfolio, which will outcome in a better knowledge overall for all the customers...this was said by the chief information officer of Optus, Lawrie Turner
The managing director of HP Enterprise Services for Australia and New Zealand, David Caspari, said: "Combining HP's deep telecommunications and applications expertise with global Best Shore delivery capabilities will help Optus to improve application quality and achieve cost savings."
The deal ended successfully and the goal was achieved.