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.
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.
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.
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.
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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