Outsourcing is the process by which a company contracts another company to provide particular services. These services/ functions would be otherwise carried out in-house, by the company’s own employees. Outsourcing is becoming more and more popular in today’s business environment, and most companies outsource some work or other.
Call centre services, payroll, maintenance etc are some of the kinds of work typically outsourced. Generally, companies outsource functions that are non-core to their business. The firms that outsource work are known by the terms client and buyer.
The firms to which work is outsourced are known variously as vendors, third-party providers or service providers.
Advantages of Outsourcing
There could be several reasons why companies outsource work. But the foremost reason is the money it saves. Many service providers can offer to get the work done at lower costs, as they have fewer overhead expenses and perhaps operate in a different economical environment.
In outsourcing, it is often narrow functions such as payroll, data entry etc that are given to specialist vendors. These specialist companies can therefore do the work more efficiently as they have specialized tools, facilities and personnel trained for that particular kind of work.
When a company outsources peripheral work, it is able to concentrate on core business issues. The details are taken care of by specialists, and the company’s own management professionals have more time and resources at hand for working on the most crucial issues within the company. Outsourcing is also an excellent option to a company that plans to expand geographically, as the company can start its operations in a different country more inexpensively through a local provider.
Different Kinds of Outsourcing
There are several different kinds of outsourcing, based on the nature of work outsourced. As we saw earlier, some companies tie up with service providers for narrow functions. However it is also common these days to outsource entire operations. This type of outsourcing can be placed in two broad categories, namely Information Technology Outsourcing (ITO) and Business Process Outsourcing (BPO). Business process outsourcing can again be sub divided into call centre outsourcing, human resources outsourcing (HRO), finance and accounting outsourcing and claims processing outsourcing.
When entire operations are outsourced this way, the contract can run into millions and billions of dollars. It is common for the client’s employees to be transferred to the vendor company. Companies like IBM, HP, EDS and Accenture are some of the leading service providers in the outsourcing business.
A company outsourcing work goes about the process in four stages. As the first step, it has to develop the strategy for outsourcing. This means that the company has to first of all identify its business case for outsourcing, and also have a clear idea of the role of outsourcing in its business. The next step is to evaluate potential service providers and decide on projects and locations. Contract development comes as the next step, where the buyer and vendor negotiate and settle on legal, pricing and service level agreement terms. The outsourcing contract is on from this stage, and in the fourth stage the buyer has to manage the outsourcing relationship.
Whatever the business case, the success of an outsourcing relationship depends on the following factors. The client organization should have set up proper executive-level support for the outsourcing project. It should also have ongoing communication with both the service provider and in-house departments and personnel involved. It is also important to manage the outsourcing relationship with the service provider along the right track. And last but not the least, both the client and vendor should allow for flexibility to accommodate changing business needs.
Challenges and Problems
A standard challenging situation in outsourcing is offshore outsourcing. Language, culture and time zone can all create problems.
With outsourcing, sometimes a company loses direct contact with its clients, thus preventing it from developing lasting customer relationships. Delayed communications or implementation is another potential trouble zone. These render the company in a situation of being in less control than desired. Also, sensitive information may become more vulnerable when third parties are brought into the picture.
With both benefits and disadvantages in the picture, it is important that a company evaluates and assesses its needs and situation before joining the outsourcing bandwagon.