What’s Outsourcing? Outsourcing is the contracting or
subcontracting of noncore activities to free up cash, personnel, time, and
facilities for activities in which a company holds competitive advantage.
Companies having strengths in other areas may contract out data processing,
legal, manufacturing, marketing, IT services, payroll accounting, or other
aspects of their businesses to concentrate on what they do best and thus reduce
average unit cost. Outsourcing is often an integral part of downsizing or
reengineering. It is also known as contracting out.
When businesses need expertise or skills that they
don't have within their organization, they often turn to outsourcing to solve
their problems.
Outsourcing means just what it says -- going
"out" to find the "source" of what you need. These days
many businesses outsource for what they need to serve their customers, both
internal and external. An external customer is the entity that ultimately
purchases a company's product or services, while an internal customer is the
company's own employees or shareholders. Business can obtain both products like
machine parts, and services like payroll, through outsourcing
IT Outsourcing. IT outsourcing is the use of external service
providers to effectively deliver IT-enabled business process, application
service and infrastructure solutions for business outcomes.
Outsourcing, which also includes utility services,
software as a service and cloud-enabled outsourcing, helps clients to develop
the right sourcing strategies and vision, select the right IT service
providers, structure the best possible contracts, and govern deals for
sustainable win-win relationships with external providers.
Outsourcing can enable enterprises to reduce costs,
accelerate time to market, and take advantage of external expertise, assets
and/or intellectual property.
Outsourcing Types.
Within the
wide possibilities range offered by the services outsourcing, we can found
different ones depending on the scope. Thus, we can distinguish mainly in
between:
Human
Resources: This is the
most common and widest type of outsourcing in which only workers are assigned,
either by a specific business need, specific knowledge in a particular
technology or company’s cost reduction. The client company is responsible of
providing the necessary resources for the development of activities or it can
be agreed a shared supply contract.
For example:
a Cell Phone service provider decides to recruit external staff to answer
customer service’s calls within their own facilities and using the information
systems of the company.
Full
Outsourcing: The
client is looking forward to omit or delegate all processes included in an area
or specific areas, the outsourcing company needs to provide the whole staff and
resources needed to implement the tasks under the services contract.
Off shoring: Companies seeking to advance their
activities in countries where fiscal pressures are less severe is increasing,
as well, they are looking to do so in countries were government’s control
allows massive production and exploitation with less restrictions, and
especially where hand labor is much cheaper than in the countries of origin. It’s
common for companies to invest in countries in development to achieve strategic
positions in the future, leading the activity towards new products and new
markets.
Out tasking. Often a company will not or can’t cope with
some specific processes and decides to outsource part or eventual
implementation of the activities of a particular area.
Outsourcing benefits.
Do not show
too risky to discover the main benefits of outsourcing: on organizational
resources are released and controlling costs.
Specifically,
these two points can totally change the situation of some companies, which is mandatory
to focus its activities on the core business (the core business) and reduce
costs. The proliferation of technology companies and high price competitiveness of products and services radically cheaper years ago-
are part of the great struggle for visibility and be a leader in the sector.
To meet the
high competitiveness, companies need to focus exclusively on what brings them
recognition and benefits , delegating activities that are not part of the critical core business to other companies and making use of
specialized companies in the services that take part of their requirements .
Within the
options range presented when developing a strategy for Company’s Outsourcing
are as common practice complete outsourcing of a department or area. This move frees up capital and focus on the activities of the
company.
The main
attraction is in the overall cost of the department or area, which is usually
cheaper to run the service with an external company, and allows stipulating the
set of people, equipment and additional costs as a fixed and overall spending
on assets. This translates into a better maintenance costs control of the area
where the total costs are established inside the contract with corresponding
utility. This option is especially attractive to the Management area and to the
Shareholders of the final business, as they can prevent more accurately the
different department’s costs, giving valuable information when planning their
investments, in addition to administrative and fiscal advantages expenses in
assets provide.
On the other
hand, suppliers acquire the ability to group efforts to provide services to
several companies. This way technology, materials and knowledge is offered at a
more competitive price and with a superior experience level over the other
clients.
If we add the
Off shoring potential we can conclude with the supplier’s grouping assisting
several businesses with a radically lower price.
Thinking
about the final product’s quality, in theory, everything should aim for a better
result regarding solutions and services since competition is generated. We can
choose the provider who offers the best quality and lower cost service or even
play with the quality / price relationship. In some cases, enterprises with a
better reputation and experience get outsourced instead of the original contractor,
while costs remain controlled.
From the
careers point of view, new jobs are generated due to the consultancies
proliferation. However, as discussed below, these positions do not benefit everyone.
Outsourcing problems.
Even with
many advocates, service outsourcing has big disadvantages, which often make it
an unwise practice, depending on the company’s situation.
Outsourcing
eliminates job positions at the main company; these positions are taken by the outsourcing
provider’s employee, that’s why these employees don’t generate any kind of
loyalty incentive with the main company. Besides, they have to deal with
negative circumstances such as: lower salaries, temporary contracts, lack of
identification, there’s no respect for their basic rights, professional careers
are broken, they lost their social benefits, etc.
The quality
level of an outsourced service can be lower than a service provided from the
in-house staff. If this fact was true, the market might offer a better
alternative, but the outsourced service doesn’t impact the business directly and
it reflects not so accurate its penetration in other branches of the company.
Often the
flow of outsourcing as a business model continues due to the success stories of
other organizations, or just with eagerness to adapt to the current trends.
Obviously, these projections represent big failure possibilities.
Outsourcing
doesn’t work automatically and requires a continuous and strategic effort.
Outsourcing Risks.
Beyond the
economic and management risks, outsourcing has great strategic challenges and can
directly affect the organization’s culture, procedures and habits.
The client
company acquires a great responsibility when choosing to outsource part of its
services, which is why they should support decision making at each point of the
process. The main risks are:
Supplier selection. The selection’s criteria should be based on
strategic criteria - not only economic- choosing the supplier that best meets
individual needs , whether by experience, adaptability , market reputation ,
etc. Choosing a suitable provider can’t destabilize the situation and quality
of the final company.
·
Service Continuity. There are a large number of situations that can lead
to an Outsourced project to be abandoned -from the supplier or client- ,
leaving the final company unable to react to supply the service or discontinue
production.
·
Inadequate Contract. Both companies must agree and explicitly stipulate
all the contract’s critical points, and also detailing service limits,
exceptions, functional and technical capabilities. The contract should clearly
reflect the customer’s claims and the provider's responsibility.
Mutual
dependence: When
the relationship between the final company and the contractor takes a broadly
historical character or trust, they can make the mistake of avoiding the
service that unites them as infinite. It may be a situation that any of them
-or both- want to terminate their relationship in the future and have not been
adequately documented processes and outcomes. If in addition the final company
is the main supplier’s customer, it falls in the risk of becoming bankrupt if
it were to cancel the contract.
Outsourcing
Reject. Outsourcing
tends to be viewed as something negative that generates internal redundancies
and makes prevails the cost versus service or product’s quality, reducing
optimal working conditions and undermining the good work environment. Instill
change in work team’s philosophy can be
expensive and very slow.
Supplier and
customer’s alignment. Objective’s transmission as well as the process methodologies’
instilling of the client company is essential. Projects failure is frequently
associated to foresight or strategy’s lack when trying to achieve milestones
due to ignorance issues.
Outsourcing best practices.
The current
organizational models are extremely dynamic. We can see how corporations converge towards new strategies and management models, so
ancient practices are obsolete in many areas.
Particular strategy should be strengthened, following some indicators.
Business model. Understand the client company’s values,
objectives and market position.
Strategy. In a frequently changing scenario it’s
necessary to be clear about the strategy and offer a dynamic approach to meet
changing requirements.
Change adaptation. It’s maybe one of the most important
present factors, where the business models are in constant transition. We can
found a clear example in the IBM’s history.
Background and technology’s knowledge. Precisely and dynamic vision about present
technologies, and significant support from other governing bodies in the
organization.
IT Strategies. New technologies’ adaptation as well as
adopting the proper positioning about the market movements. This involves a
constant concept review with the service company.
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