Outsourcing refers to the transfer of a business activity or function from a client/customer to a local or foreign third party service provider. Examples of commonly outsourced activities include: IT services; delivery, logistics and distribution services; human resources services; sales and marketing services; procurement services; customer call centre services; and finance and accounting services. The decision to outsource is typically developed at senior levels of corporate management and is usually contemplated as part of a larger strategic initiative. Well-structured outsourcing arrangements should lead to a more efficient allocation of roles and responsibilities among the parties to the arrangement and, from a customer’s perspective, can bring a range of benefits. The recognized benefits of outsourcing include: increased efficiency (which can translate into an important competitive advantage), reduced risk associated with running effective IT departments, controlled costs (by releasing capital for investment in other areas such as revenue-producing activities), increased reach by providing access to world class capabilities that might otherwise not be affordable, better investments, and an improved focus on core business activities. Ultimately, outsourcing should serve to make companies more flexible and agile, ready to meet the challenges of doing business in an increasingly technological and competitive world, while providing cost savings and service level improvements.
Generally the outsourcing processes that are outsourced are the supporting activities and not of extremely high strategic importance, but necessary for doing business or improving business. The key and the strategic benefit of Outsourcing is the Outsourcing Company can focus on Core Competency of their business by giving the supporting activities to experienced professionals (Outsourcing Service Providers) in relevant area.
What causes companies to outsource? The top three drivers that most often lead to an outsourcing event to be:
- Cost or internal headcount needs to be reduced.
- Internal capacity is constrained by increasing market demand.
- Internal manufacturing or service performance is insufficient or does not meet requirements (see Figure 1)
Interestingly, senior management chose constrained capacity rather than the need to reduce costs as the primary driver of outsourcing reviews. The overall result may indicate that those below senior management may be assuming that outsourcing is being considered because costs are out of line. Perhaps management could lower the resistance to outsourcing by more deliberately communicating the rationale and objectives of each outsourcing program.
In the largest companies, the strategic sourcing process primarily drives an outsourcing review. This is a sourcing risk management best practice, and is one that should be adopted by all organizations.
Two common types of outsourcing are Information Technology (IT) outsourcing and Business Process Outsourcing (BPO). Most companies are looking to improve business performance through 3 critical drivers:
- Reduction in cost
- Focus on core business operations for competitive advantage
- Achieving superior customer satisfaction and use it as a competitive strategy
Which activities can be best outsourced –
|Non core business functions, however critical|
|Have high volumes|
|Are repetitive and routine|
|Reflect consistent customer needs|
|Have opportunities to leverage|
|Are service and efficiency driven|
|Are easily measurable in terms of performance|
Which activities cannot be best outsourced –
|Core business functions and business drivers|
|Support key business processes|
|Get influenced by external forces|
|Require high content expertise|
|Are ad-hoc, periodic future oriented projects|
|Are difficult to measure|
|Have high impact on organization as a result of non performance, failure or mistake|
The steps need to be followed before outsourcing your projects
- Learn the benefits of outsourcing
- Point out the benefits you are looking for while outsourcing the projects to
- Find out the best location that suitable for your business
- Find out the best Service Provider from that location which can meet gain the benefits of outsourcing