Understanding the Term ‘Outsourcing’

Outsourcing is a concept that has evolved greatly in the field of business and has been used as a common word since the 1990s by the management. Outsourcing is considered to be a step of delegating a task to an outsourced company that specializes in doing such tasks and has the capabilities to do so unlike the company that acts as a client to the outsourcing company.

Another definition of the term outsourcing is as follows. “Outsourcing is the transfer or delegation to an external service provider the operation and day-to-day management of a business process.” (The Outsourcing Law )

“A related term, offshoring, means transferring work to another country, typically overseas. Offshoring is similar to outsourcing when companies hire overseas subcontractors, but differs when companies transfer work to the same company in another country.” This shows that the terms outsourcing and offshoring cannot be used interchangeably. (Wikipedia )

Offshoring is considered a term that is usually used for cases when a company shifts some of its operations to another country and then has its employees that work on the particular day-to-day task. In this way, offshoring cannot be used with the same meaning and understanding of the term outsourcing.

Outsourcing is usually done for a number of business units that need to be developed for the company often at the time of establishment or expansion and hence, employs or rather holds contracts with other companies to carry these daily operations by themselves. The company just acts as a client company to the outsourcing company and answers questions that may occur in the mind of the outsourcing team.

Outsourcing requires a lot of cooperation from the company and the outsourcing team because, for one reason, the outsourcing team must follow and abide by the rules of the organization to which they are contracted for. Another reason is that the company that is outsourcing its operations, must coordinate and help answer questions of the outsourcing team.

Outsourcing requires that the outsourcing team be provided with a part of the management of the organization which basically deals with the management of the entire process. The client company must allow the team and trust them with the management of the operations and not interfere in the way they carry out the operations until and unless, extremely necessary.

“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.” Businesses can get a number of operations outsourced as quoted above along with processes such as business process re engineering. (Wikipedia )

There are a number of companies that act as outsourcing agencies to help those businesses that face time limitation problems or difficulty in bringing about chnages within the organization due to some old rules and regulations. Business process re engineering is considered a very common practice to be assigned to outsourcing agencies.

For example, Pakistan State Oil currently had under gone business process re engineering of its processes and for this purpose, Siemens had been employed. Siemens provided the organization with a method of achieving their goal along with also helping them bring such a process into application on the existing processes of the organization.

An alternative to outsourcing has been recognized to be having shared services. This increases the chnaces of having economies of scale and allowing the organization and others to have its different branches or subsidiaries to share the same functions. This increases the multi-functionality of the process and the application.

“Rather than having a department (e.g. human resources) devolved over a number of offices, a shared service is the centralizing and convergence of these. This often involves the centralizing of back office functions such as HR and Finance but can also be applied to the middle or front offices.” (Wikipedia )

Types of Outsourcing Services

According to three sources, there are several types of outsourcing services. They are described below. The first kind of outsourcing service is that of technology services which includes creating networks, electronic commerce models and building applications etc. another type is that of business process outsourcing that deals with “finance / accounting, human resources, logistics, procurement / supply chain management, security”. (The Outsourcing Law )

Another source says that the two types of outsourcing are ‘traditional’ and ‘green field’ outsourcing. In a ‘traditional’ outsourcing technique, the client company provides the outsourcing team with an existing function and its management. The client company will not have a new operation for the team to handle but rather concentrates mainly on management of a specific function.

An example has been provided by the source to explain the type of outsourcing as “an information technology outsourcing may include a transfer of responsibility for management of data centers and networks (LAN, WAN, and telecommunications).” (The Outsourcing Law )

In green field outsourcing, the team is provided with a completely brand new process to manage such as wireless telecommunication for an organization that has never been done or introduced in the organization before. This would be a kind of break through for the organization when it is managed by the outsourcing team.

Wikipedia has recognized outsourcing services to be of several kinds such as that of research, data analysis, and information technology operations, engineering design, Medicare, legal support services, software development and many more. All these activities show for what reasons an organization can hire an outsourcing team and delegate them work.

For example, in the reason for research, there have been several organizations that hold large research projects and developments. Even when a new product is to be developed or an existing product is to be made unique in its category, a company first goes through the research phase of finding out the consumers’ views and how they think the product can be changed.

This research can be carried out by outsourcing the team and asking them to conduct a research and this team must be equipped with the requirements of the organizations and the result that is required. The outsourcing of such a task can help the organization utilize the time saved in carrying out another process or operation.

“Generally larger research projects are cut into various sub projects or tasks. The outsourcing is then carried out based on the viability and competitiveness of the outsourcing destinations. Thus exploiting the competitiveness available at various parts of the world into a single large project.” General Electric is known to be the pioneer of such kind of outsourcing. (Wikipedia )

Why Should Outsourcing Be Carried Out?

Outsourcing is done for those situations which the organization feels that it can not handle on its own. There could be situations where a company may be unable to create a particular budget for a project and neither allocates the resources for that project. In this case, the solution becomes outsourcing the project.

A major reason why outsourcing is done is that when an organization faces a great challenge with an uncooperative Information Technology department. If the organization’s management is unable to convince and persuade the department to deliver on time, the organization needs to outsource.

“CEO and/or CFO are being "held hostage" by a non-responsive IT department. Compared to competitors, the enterprise is not keeping pace with changes in technology. High inventory costs. High personnel turnover. IT budget is not predictable or affordable. IT organization does not have a strong grasp of company's objectives, critical success factors and/or bottom line. IT organization does not provide industry best practices, processes and/or services to internal/external customers.” (The Outsourcing Law )

When Not to Outsource

A time when outsourcing does not seem as a feasible solution is when the problem concerns technical support. Technical support is a major function of an organization and it holds a lot of importance. Technical support is one thing that must remain in control of the organization and not the outsourcing company. Technical support provides a major contribution to achieving competitive advantage.

“You have to look at the overall importance of offering quality technical support. When you're talking about capacity and how much you can sell, you have to look not only at technical capacity, but also your customer service capacity. If you're selling within your technical capacity but over your technical support capacity, you're in for ruin. Outsourcing technical support is certainly an option, but it's not something we would do.” (MoreBusiness.Com )

The reason why technical support must not be outsourced is because technical support is the main interface of the organization with which a customer interacts. A company needs to keep that control within its own hands so that the customer may recognize the organization rather than the outsourcing company.

An example of an organization that has achieved this advantage is that of AT&T. “Although the wait is often longer, once you get a member of the technical support staff, you're generally in capable hands. Other calls to AT&T WorldNet have shown that the people on the line are well-trained and well-managed. They know their product, and they know what they're doing. The technical support staff is thereby helping to build brand loyalty.” (MoreBusiness.Com )

Advantages of Outsourcing

The benefits of outsourcing listed by a source are “Outsourcing saves money, outsourcing frees valuable staff resources, outsourcing increases business effectiveness, outsourcing facilitates reallocation of resources, business process outsourcing is still new, decentralized budgets are a challenge and outsourcing may limit technical flexibility.” (Bersin, Josh )

The major benefit of outsourcing is that it lowers costs considerably. An example for such an advantage that has been achieved by a company would be that of Ford Motors. Ford has lowered its costs of producing a new car by simply replacing its employees with machines. These machines can work faster than a team of people and hence, this increases the productivity of the company.

Along with the productivity, Ford also insists that the quality must also improve by using machines rather than people. “Today these workers are replaced by machines because they are cheaper in the long run, produce better quality products, or a combination of the two (the firm is trying to increase its quality to cost ratio, quality being defined by the consumer and inferred from revenue).” (Wikipedia )

It has also been stated by this source that the economists have been known to say that the only incentive for a company to employ machines over people is that the quality and cost ratio increases. If it does not increase and remains almost the same, then the company would not be motivated to replace the employees with machines.

The ability to save money depends upon the size of the company and the capability of the outsourcing team. It can also depend upon the processes that are being outsourced but in the overall sense, costs are considered to be lowered when outsourcing is performed by a company.

“Professor Drezner reports that for every dollar spent on outsourcing to India, the United States reaps between $1.12 and $1.14 in benefits. Drezner also points out that large software companies such as Microsoft and Oracle have increased outsourcing and used the savings for investment and larger domestic payrolls.” (Wikipedia )

Another advantage of outsourcing is that it allows the business outcomes to have distributed and concentrated management. It helps the company to allow accurate and continuous management of the business processes rather than the company managing all the processes all by itself. This would lead more towards mismanagement.

“In a recent Accenture survey of more than 800 health, manufacturing, retail and travel executives in the US and Europe, 86% said outsourcing gives them more control over business results in a variety of critical areas, the most important being the ability to plan.” (CAMagazine.Com )

“One of the big advantages to outsourcing is flexibility--it can be a lot easier to cut back on a vendor than an employee. (Think of how you would feel if you had to tell an employee who is dependent on her job that you only need her half-time now.) Another advantage is that you don't have to become an expert in a particular area--you can depend on the outsourced company to be the expert.” (Lowe, Keith )

The reasons for outsourcing an Information Technology department had been discussed in the paper above, but the advantages had not been mentioned. Some of the reasons for doing so are as follows: “improved cost management controls, improved service quality, staffing, equipment and software tools and client can focus core business competencies.” (CAMagazine.Com )

Disadvantages of Outsourcing

Along with the pros of outsourcing, there are also some cons associated with the term. Outsourcing is not beneficial in all cases and situations. In some situations, outsourcing may be more of hazardous to the organization rather than advantageous. This is the reason why pros and cons must be weighed before the decision to outsource is made.

“A disadvantage to outsourcing is that you are putting part of your company in someone else's hands. You have to ask yourself if you can trust them, if you think they'll stay in business and if they can adapt to your growing/changing needs.” (Lowe, Keith )

It had been discussed above that outsourcing means providing another external company with the reins of management for that particular function. This could be a difficult decision for the organization and must be made tactfully and with complete benefit/ cost analysis. It is a tough decision to make whether the organization can afford outsourcing or not.

There have been certain companies that have faced with the danger of fraud within the organization by the outsourcing team. “Outright fraud is also a concern. In 2005, Intel discovered and fired 250 Indian employees after they faked their expense reports. The firings followed from Intel's internal Business Practice Excellence program of expenses claims.” (Wikipedia )

Another issue with outsourcing is that of quality. Quality is an attribute that can only be reached if the expectations of a customer are met completely and satisfactorily. It is a major point that6 is considered when producing a product or a service to the custoemr or any other organization in order to keep the name of the recognized as a reputable one.

“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.” (Wikipedia )

The above quotation shows that the company needs to make sure that the outsourcing team it is employing must be capable enough so that neither the suppliers nor the customers must be ignored in any way. The value chain of the organization must be streamlined and must have obstacles in the way.

Conclusion

“Outsourcing can be an extremely complex and complicated undertaking. Each facet of the exercise needs to be carefully considered and properly executed. There is little margin for error if full value is to be obtained.” Hence in order to do so, there are certain guidelines that must be followed by an organization to decide on whether to outsource a certain process or not.

Article Source: http://www.rightbiz.com

Robert Smith has spent more than 20 years working as a professor at the University of California. Now he spends most of his time with his family and shares his Univesity experience with the customers of Custom Essay Writing Service. He is a right person to contact on technical issues where to buy custom essay.

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