Outsourcing

Outsourcing refers to a company that contract with another company to provide services that might otherwise be performed by in-house employees. Many large companies now outsource jobs such as call center services, e-mail services, and payroll. These jobs are handled by separate companies that specialize in each service, and are often located overseas.

A practice used by different companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally.

Outsourcing (or contracting out) is often defined as the delegation of non-core operations or jobs from internal production within a business to an external entity (such as a subcontractor) that specializes in that operation. Outsourcing is a business decision that is often made to lower costs or focus on competencies. A related term, off shoring, means transferring work to another country, typically overseas. Off shoring is similar to outsourcing when companies hire overseas subcontractors, but differs when companies transfer work to the same company in another country. "Outsourcing" became a popular buzzword in business and management in the mid-1990s.

Outsourcing involves transferring a significant amount of management control and decision-making to the outside supplier. Buying products from another entity is not outsourcing or out-tasking, but merely a vendor relationship. Likewise, buying services from a provider is not necessarily outsourcing or out-tasking. Outsourcing always involves a considerable degree of two-way information exchange, coordination, and trust.

Very simply outsourcing can be seen as a process in which a company delegates some of its in-house operations/processes to a third party. Thus outsourcing is a contracting transaction through which one company purchases services from another while keeping ownership and ultimate responsibility for the underlying processes. The clients inform their provider what they want and how they want the work performed. So the client can authorize the provider to operate as well as redesign basic processes in order to ensure even greater cost and efficiency benefits.

Although the above meaning of outsourcing may seem very similar to contracting, it is to be said that contracting and outsourcing are in no way related. Generally in contracting the ownership or control of the operation or process being contracted is with the parent company, whereas in outsourcing the control of the process is with the third party instead of the parent company. So in other words, outsourcing can be stated as phenomena in which a company delegates a part of its in-house operations to a third party with the third party gaining full control over that operation/process.

 

There are many reasons that companies outsource various jobs, but the most prominent advantage seems to be the fact that it often saves money. Many of the companies that provide outsourcing services are able to do the work for considerably less money, as they don't have to provide benefits to their workers, and have fewer overhead expenses to worry about.

Outsourcing also allows companies to focus on other business issues while having the details taken care of by outside experts. This means that a large amount of resources and attention, that might fall on the shoulders of management professionals, can be used for more important, broader issues within the company. The specialized company that handles the outsourced work is often streamlined and often has world-class capabilities and access to new technology that a company couldn't afford to buy on their own. Plus, if a company is looking to expand, outsourcing is a cost-effective way to start building foundations in other countries.

There are some disadvantages to outsourcing as well. One of these is that outsourcing often eliminates direct communication between a company and its clients. This prevents a company from building solid relationships with their customers, and often leads to dissatisfaction on one or both sides. There is also the danger of not being able to control some aspects of the company, as outsourcing may lead to delayed communications and project implementation. Any sensitive information is more vulnerable, and a company may become very dependent upon its outsource providers, which could lead to problems should the outsource provider back out on their contract suddenly.

While outsourcing may prove highly beneficial for many companies, it also has many drawbacks. It is important that each individual company accurately assess their needs to determine if outsourcing is a viable option.

Organizations that deliver such services feel that outsourcing requires the turning over of management responsibility for running a segment of business. In theory, this business segment should not be mission-critical, but practice often dictates otherwise. Many companies look to employ expert organizations in the areas targeted for outsourcing. Business segments typically outsourced include information technology, human resources, facilities and real estate management, and accounting. Many companies also outsource customer support and call center functions, manufacturing and engineering. Outsourcing business is often characterized by expertise not inherent to the core of the client organization.

The overhead costs of customer service are typically less where outsourcing has been used leading to many companies, from utilities to manufacturers, closing their in-house customer relations departments and outsourcing their customer service to third party call centers. The logical extension of these decisions was of outsourcing labor overseas to countries with lower labor costs, this trend is often referred to as off shoring of customer service.

Response to benefits of outsourcing

It is apparent that many organizations today are making the decision to outsource. In today’s global marketplace outsourcing has made itself accessible to many organizations on a National and International level. Offshore outsourcing has provided many businesses with the opportunity to harvest the benefits of lower labor costs and to exploit the value of less than par foreign currencies. Through outsourcing companies today have the ability to develop competitive strategies that will leverage their financial positions in the ever competitive global marketplace.

Some of the major advantages that today’s organizations can expect to obtain through outsourcing are:

Ability to purchase intellectual capital

Through outsourcing, today’s businesses have the ability to utilize the technological know- how of other organizations. This allows businesses to find the specific requirements they need to implement their target objectives.

Ability to focus on core competencies

Outsourcing allows businesses to delegate non-vital projects they need completed to vendors. This ultimately provides an organization with the ability to focus on distinctive core competencies which will help yield long term benefits. If an organization experiences long term advantages from well developed core competencies they are said to have achieved a sustainable competitive advantage.

Ability to better anticipate future costs

Organizations that choose to outsource have the ability to determine exact future costs. Prior to the contract development of any outsourcing agreement, the outsourcing company develops a request for proposal (RFP) document which highlights the major requirements and scope of the project which is to be outsourced. Through bids vendors have the ability to make offers to perform the outsourcing for the given project. When a bid has been accepted the organization has an exact figure illustrating what the expense will be to outsource the project

Ability to lower costs

Overall outsourcing is viewed by many organizations as a strong business tactic that ultimately is a superior economical approach to developing products and services.

Companies turn to resources outside their organizational structure, usually to save money and/or make use of the skilled professionals. For instance, a company might outsource its IT management because it is cheaper to contract a third-party to do so than it would be to build its own in-house IT management team. Or a company could outsource all of its data storage needs because it is easier and cheaper than buying and maintaining its own data storage devices. A business might also outsource its human resource tasks to another enterprise instead of having its own dedicated human resources staff

Concentration on core business areas

Back office operations of a company require high maintenance and specialized attention. Yet most of them are critical for the company's everyday activities. By outsourcing their back office operations businesses can concentrate on their core competencies while their back office operations are being managed smoothly by a specialized third party company.

 World-class technology at lower rates

Investing in new technology is very costly and often risky. As the technology market develops rapidly, it is difficult to keep up with latest innovations and solutions. Thus outsourcing to companies that have the resources, expertise and desire to continuously update their technological solutions, offers a true advantage of outsourcing.

Skilled manpower at affordable prices

Outsourcing gives a company the ability to get access to skilled and trained man power at extremely low rates. This in turn leads to an increase in productivity as well as cost savings. By outsourcing a company saves on recruitment, training and other human resource costs it would otherwise have to maintain internally. Also an advantage of outsourcing is that a company is able to utilize the kind of expertise it could not internally provide.

 Increased productivity

By employing skilled manpower in larger numbers at lower costs companies can really increase their productivity. This in turn would result in better customer satisfaction and increased profitability.

 Beat Competition

In today’s fast paced global economy a company needs to provide high-quality services to its customers in order to retain them, as well as provide the services for cheap prices. Outsourcing in this case can help the company maintain lower rates with better service solutions, thereby giving them a better market position or even a competitive advantage.

The disadvantages of outsourcing may include the following: 

 

• Loss of managerial control, because it is more difficult to manage outside service providers than managing one’s own employees working possibly in the same building. 
• Often the hidden costs are difficult to calculate or prepare for. These include legal costs related to putting together a contract between two companies and the time spent to coordinating the contract
• Another disadvantage of outsourcing can be a threat to security and confidentiality. If your company is outsourcing processes like payroll, medical transcriptions or other confidential information, a company must be very careful in choosing which process it wants to outsource and to which provider. 
• A possible loss of flexibility in reacting to changing business conditions, lack of internal and external customer focus and sharing cost savings may also be a disadvantage of outsourcing
• Other disadvantages of outsourcing may include unfavorable contract lengths, loss of competitive edge, problems in contract renewal, and contractual misunderstandings

Criticisms of outsourcing

Because "outsourced" workers are not actually paid agents of the company, it has been argued that there is less incentive for the agent to show loyalty or work ethic in its representation of said company. It has been therefore argued that quality levels of customer service and technical support of outsourced tasks are lower than where they have remained 'in-house'.

In hospitals whose environmental services have been outsourced, the regular staff members commonly complain that the outsourced services were performed better and less expensively when they were performed in-house. Outsource companies may not be able to meet the demanding quality standards which a health care facility is likely to require. Also, managers at outsource companies tend to assume that all hospitals are alike, thus underestimating the service needs of major institutions.

Criticism of outsourcing from the public and media sometimes tend to concentrate on lackluster customer service and technical support being provided by either local workers who are not actually employees of the company, or by overseas workers attempting to communicate with Americans in broken or incomprehensible English. Defenders of outsourcing say if this were true, then companies would experience market forces compelling them to return service and support handling back from the outsourced company. However, service and support are often not considered by customers as part of their original purchases. Customers only experience outsourced service and support after they have spent their money since sales is generally done in-house by the original company. Dealing with lackluster outsourced service is a negative surprise after the money is already spent.

Although there are several reasons in favor of outsourcing, a company must also consider the disadvantages of outsourcing. There are risks that need to be analyzed whenever a company embarks on a new business venture. Even though outsourcing is often the right solution for companies, one should not outsource simply for the sake of outsourcing. Several benefits and value addition have to be realized in order for companies justify outsourcing. It is a hot trend nowadays and seems an attractive option for many, but if the risks are not considered in detail, the disadvantages of outsourcing may dominate the advantages.

Acknowledgements:

http://en.wikipedia.org/wiki/Outsourcing#Ability_to_purchase_intellectual_capital

http://en.wikipedia.org/wiki/Outsourcing

http://www.answers.com/topic/outsourcing

http://www.wisegeek.com/what-is-bpo-business-process-outsourcing.htm

http://www.wisegeek.com/what-is-a-call-center.htm

http://www.cyfuture.com/knowledge-process-outsourcing.htm

http://www.cyfuture.com/hr-outsourcing-services.htm

http://www.cyfuture.com/accounting-outsourcing.htm

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