Outsourcing

What is?

Outsourcing is the business practice of hiring a party outside a company to perform services or create goods traditionally performed in-house by the company’s employees and staff. Companies usually undertake outsourcing as a cost-cutting measure or to improve efficiency. 

Outsourced functions can be performed by a third party, either onsite or offsite.

Business process outsourcing (BPO) is an overarching term for outsourcing a specific business process task, such as payroll. BPO is often divided into two categories: back-office BPO, which includes internal business functions such as billing or purchasing, and front-office BPO, which includes customer-related services such as marketing or tech support. Information technology outsourcing (ITO) is a subset of business process outsourcing.

Traditionally, outsourced IT functions have fallen into two categories: infrastructure outsourcing and application outsourcing. Infrastructure outsourcing can include service desk capabilities, data center outsourcing, network services, managed security operations, or overall infrastructure management. Application outsourcing may consist of new application development, legacy system maintenance, testing and QA services, and packaged software implementation and management.

In today’s cloud-enabled world, however, IT outsourcing can also include relationships with providers of; software-as-a-service, infrastructure-as-a-service, and platforms-as-a-service. These services are increasingly offered not only by traditional outsourcing providers but by global and niche software vendors or even industrial companies providing technology-enabled services.

Why Outsource?

Sometimes, a company experiences growth at a rate that its internal staff cannot support. To keep up the pace, the firm can hire a pre-trained workforce from a third-party firm to deploy as and where needed in its operations without interrupting its business flow.

Suggested rewording: A company might occasionally have certain short-term tasks or processes that need to be completed. Hiring a temporary, outsourced team of workers, to get these done, will be efficient in such a situation.

Also, the company can implement a new process. This new process can be outsourced to trained workers instead of investing the time, money, and effort to train and maintain internal workers.

Additionally, outsourcing firms often provide management personnel along with their work teams, which frees up internal employees to take on other work.

Some Examples

As a cost-saving measure, outsourcing can significantly impact sectors like manufacturing. In the U.S., for example, manufacturers have outsourced jobs to workers in countries like China and Bangladesh.

This practice is also known as “offshoring”. This involves outsourcing to a third party in a country other than the one where the outsourcing company is situated.

Outsourcing is not limited to manufacturing jobs. Customer service jobs, such as those in call centers, and computer programming jobs, also are outsourced by companies seeking ways to reduce costs. In addition, many companies outsource at least some functions of human resources tasks, such as employee benefits management and payroll.

Outsourcing can also involve purchasing components from another source, such as components for computer equipment. 

Apple is an example of sourcing exceptional quality components at competitive costs. Its products are designed in the U.S., and components are sourced from third-party vendors. 

Information technology (IT) services can also be outsourced. For example, cloud computing and software-as-a-service (SaaS) offer companies access to computer services and tools that once were managed in-house by companies’ IT departments.

Benefits/Advantages

The benefits of outsourcing often include one or more of the following:

• lower costs (due to economies of scale or lower labor rates)
• increased efficiency
• variable capacity
• increased focus on strategy/core competencies
• access to skills or resources
• increased flexibility to meet changing business and commercial conditions
• accelerated time to market
• lower ongoing investment in internal infrastructure
• access to innovation, intellectual property, and thought leadership
• possible cash influx resulting from the transfer of assets to the new provider
• avail skills that are not available in house/access to global talent
• flexibility to change vendor at anytime

Risks

Some of the risks of outsourcing include:

• slower turnaround time
• lack of business or domain knowledge
• language and cultural barriers
• time zone differences
• lack of control 
• The relationship with the third party that takes on the outsourced functions must be managed. This includes negotiating and signing contracts, which requires time and the involvement of a company’s legal counsel and the day-to-day communication with and oversight of the outsourced work.
• Security also is an essential factor in outsourcing. Many outsourcing relationships inevitably will involve the third party organization’s access to sensitive business data, trade secrets, and other confidential information necessary to perform contracted function

Commonly outsourced

Professional Outsourcing

The category of professional outsourcing encompasses all specialized services, including accounting, purchasing, administration, legal, CAD (insert expansion of the acronym), digital marketing, and anything else that’s too complex for your team. Many of the services included under the umbrella of professional outsourcing require a license or several years of training.

With professional outsourcing, you can access a wide range of services, paying just for those you need. This is especially useful for scaling a business and requiring specialized help in specific areas. For instance, you may need legal support just when setting up your business.

Many organizations find it convenient to get things done through external vendors as a part of their day-to-day activities. It is quite possible that organizations may not even be conscious that they are outsourcing.

Multi-Sourcing

Another way to combine the services you outsource is through multi-sourcing. Typically, multi-sourcing provides you with a mix of IT and other business functions. Therefore, it’s usually more suitable for large companies that want to outsource various IT operations and infrastructure to different vendors. Multi-sourcing is also a good option for any business that wants access to top specialists, an outcome-based approach, and transparency around its IT projects.

An effective multi-sourcing strategy should include a transparent system of governance and crystal clear clarity on metrics that matter.

IT Outsourcing

It’s also possible to contract a provider just for IT. If a company, irrespective of its size, has specific IT needs, this could be a better option. For instance, Start Ups need some IT support to maintain security, keep licenses up to date, and manage their networks, and this is an affordable way to receive those services. With IT outsourcing, you can receive support from infrastructure to application development. 

Process-Specific Outsourcing

With process-specific outsourcing, you contract a provider for a specialist service. There are three types of process-specific outsourcing.

The first is knowledge process outsourcing (KPO). This is for improving products and services through research and data analysis.

The second is legal process outsourcing (LPO), covering regulatory compliance, litigation, and other legal needs.

Finally, there’s recruitment process outsourcing (RPO), covering everything related to recruitment.

Business Process Outsourcing

One of the most common types of outsourcing is business process outsourcing (BPO). You can use BPO to handle your mundane business activities, such as administration, correspondence, and scheduling. You can also receive customer service and lead generation through BPO.

Manufacturing Outsourcing

As product life cycles in many industries continue to shrink, manufacturing outsourcing is becoming necessary for companies of all sizes. This is important for speeding up production times while retaining high quality.

Manufacturing outsourcing can reduce costs by paying for a factory, workers, equipment, infrastructure, and raw materials. 

Large organizations like Apple benefit from manufacturing outsourcing. 

Other organizations, including small organizations, can emulate such best practices.

Project Outsourcing

It’s possible to outsource all aspects or even just a portion of a project to a provider. This is a common strategy when a business lacks the time, skills, or funds to complete a project. Some types of project outsourcing include website redesign, the creation of a large piece of content, and marketing campaigns.

Operational Outsourcing

Operational outsourcing is widespread in the manufacturing industry, as it covers services like equipment repairs. However, service-based companies can also benefit from operational outsourcing for tasks like landscaping and delivery.

Types

There are several ways to outsource a business process, and depending on the process, one may be preferable over another. These types are:

• Onshoring – Relocating work or services to a lower-cost location in the company’s own country.
• Offshoring – Relocating work or services to third-party providers overseas.
• Nearshoring – Relocating work or services to nearby, often bordering regions and countries.
• Multisourcing – is the concept of working with multiple suppliers – who are also competitors. The opposite is called sole-source. Multi-sourcing’s strength is to continue providing disciplined services via a blend of internal and external sources.

Outsourcing agreements can also vary widely in scope. For specific processes, like programming or content creation, hiring freelancers on a job-to-job basis might be appropriate. On the other hand, a company outsourcing its entire IT department will require a long-term partnership with clearly stated requirements.

Insourcing vs. outsourcing

Companies may decide against outsourcing and instead, turn to insourcing. As the name implies, insourcing refers to the practice of having in-house teams perform functions that outside companies or contractors could handle. Thus, insourcing can be viewed as the opposite of outsourcing. Sometimes insourcing involves hiring new employees, either on a permanent or temporary basis, to execute the tasks being insourced. In addition, companies might need to invest in new equipment, hardware, and software when insourcing. They might also need to reengineer business processes.

Outsourcing trends

While outsourcing is viewed as a way to lower costs and gain efficiencies, it is increasingly becoming a strategic tool for companies. 

Leading companies understand that outsourcing some functions can help them gain a competitive advantage by accessing expertise or innovative technologies they don’t have in-house. It also helps them deliver products or services more quickly or enables them to shift resources to the areas of the business that are most critical. Moreover, outsourcing offers both cost-efficiency and increased workload flexibility.

References

Outsourcing https://www.techtarget.com/searchcio/definition/outsourcing

https://www.cio.com/article/272355/outsourcing-outsourcing-definition-and- solutions.html

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