In this paper we discuss how outsourcing is used as a strategic tool by corporations to optimize and focus on the company's core business functions and competencies, by outsourcing non-core processes. Outsourcing is usually referred as a process of contracting or fixing business processes to a third-party provider. With respect to a company's strategy it is more about value creation and reengineering the company's processes in order to provide better services, quality and more value at low costs. Outsourcing is basically acquiring a product or service instead of manufacturing it in-house. Outsourcing can be used as a strategic option for any business sector, right from technology to pharmaceuticals. For example
Outsourcing is a strategic tool that is used by companies worldwide to meet challenges such as enhancing and protecting brand value, moving into global market, managing consolidation & changing markets and dealing with margin pressures. It is a strategic decision that improves the ability in creating value and to concentrate on the core competencies of the company.
Outsourcing is about re - engineering and to provide a greater value at a lower cost to customers, faster and higher quality. It is not a business fixing processes or a sub-contracting it is nothing but the provision of clearly defined operation and services that is sourced from "owned" or internal by an external third party entity which is specialized in the management of that process or operation.
By outsourcing, companies are improving core competencies and their business issues which give them a competitive advantage. Outsourcing as an industry has grown beyond the IT infrastructure today. Outsourcing not only covers information technology but also other operations like customer service, sales and marketing, finance, HR, real state, R&D, consulting, network management, etc as well.
The important points that are to be considered in outsourcing are goal development, supplier selection and implementation of the business process. Several manufacturing companies have either outsourced or formed strategic alliances with other companies thereby helping them to have a better management over the factories inventories, supplies, design and development, manufacturing costs and improve productivity, and customer satisfaction which offers the desired competitive advantage from the other companies worldwide.
Outsourcing lets a company to focus on their core expertise like IT, customer service, sales and marketing, finance, etc while letting people manage other process (Non-Core Process) which enables them significant and even massive cost reduction results. According to a recent survey over 500,000 jobs have been outsourced since the year 2000 by the biggest outsourcing companies. The top few companies that have outsourced the most jobs are IBM (63,700), EDS (22,400), Dell (17,450), Cognizant (15,000), Accenture (13,000) etc. According to these projections, outsourcing is still in the beginning stages. As technology increases, the numbers will begin to rise.
Today outsourcing cover a lot more than just the IT industry, it covers:
Information technology - maintenance and repair, training, applications development, consulting and reengineering, data management, network management, etc.
Administration - mailroom, reproduction, training, etc.
Customer service - tech support, field service, dispatch, etc.
Finance - payroll, accounting, purchasing, records, etc.
HR - relocation, recruiting, training, insurance, etc.
Real estate - facility management, food services, maintenance, security, etc.
Sales and marketing - mail, advertising, telemarketing, field sales, etc.
Distribution - freight, leasing, warehousing, operations, logistics, etc.
Transportation - fleet management, operations, maintenance, etc.
Health care - insurance, patient records, health services, etc.
As it is mentioned above we can summarize that organizations would think about outsourcing for the following reasons.
Emphasize on the company's core competencies.
Obtain a competitive advantage through new technologies, methods and procedures
Conduct Business process reengineering
Mitigation of risks
Reduction in operating expenses
Optimum utilization of resources
OUTSOURCING - A STRATEGIC DECISION
Outsourcing is indeed a strategic decision as it requires careful assessment and planning. The company outsourcing its process must carefully analyze and clearly understand the right reasons for outsourcing and its benefits. Strategically, only non-core functions are outsourced as it translates into cost reduction. However, the function outsourced should be carefully analyzed though the selected outsourcing partner having superior technology, higher quality standards and better manufacturing process as it gives a competitive edge. Outsourcing will allow companies to re-invest the organisations capital to fund new investments options and long term strategies which will allow them to grow.
The benefits of the internal processes and functions of a company and the selected outsourcing partner can be evaluated by employing competitive analysis tools and internal benchmarking. In contrast, careful restructuring of the company with respect to its core competencies and the outsourcing partner must be kept in focus while outsourcing.
Outsourcing non-core functions to an outside organization gives a competitive edge to the company as it can concentrate on internal reengineering. Using outsourcing as a strategic tool, a dramatic improvement in the performance of the company will be observed thereby providing value to the product in terms of productivity, quality and service which in turn provides value to the customer. Outsourcing will allow the organisation to leverage and maximise opportunities in the global marketplace, to decide the processes they want to outsource and where they would want to do it will drive to increasing profits. It will also enable them to match their current cost savings targets which will result in better efficiency.
Thus, offering the company and its customers a greater performance at lower cost and a competitive advantage from the other companies worldwide. Companies are also focussing on establishing relationships with partners who will help them take their business to higher levels by allowing trading opportunities in global markets and providing a knowledge base along with the technology, infrastructure and know-how which will enable them to differentiate themselves from the rest in their business and build a value chain. . Enterprises which want to expand globally are targeting markets across the globe to search for opportunities by finding new sources of skills and knowledge.
STEPS AND RISKS INVOLVED IN AN OUTSOURCING PROCESS.
There are three major steps which are critical for successful outsourcing
Goal development
Supplier selection
Implementation of business relationship
Goal development
Need assessment
Expectations
How well an outsourcing project is executed depends directly on upon the quantity of time and quality of assessment in mapping the company's requirements and expectations. In order to do so many analytical tools are used to benchmark and conduct through analysis. In certain cases internal or external consultants are hired. Another factor to consider would be how the existing resources human, operations, material and equipment are distributed and reallocated. Expectations and schedule must be clearly understood and designed. It plays an important role in selection of outsourcing partner and relationship management with other business partners as well.
Supplier selection
The following are the key factors to consider while choosing an outsourcing partner.
Similar business goals
Common strategic objectives
Compatibility in working culture
Functional or Technical expertise
High Quality standards
stability and credibility of the partner
Flexible and negotiable legal contracts
Shared Risk and opportunities
Cost efficiency
It is essential to see if the outsourcing partner's strategic goals complement the strategy of you company. Care must be taken to insure that the partner company is not too similar to ours since a risk of giving rise to a competitor may arise. The partner company may benefit and use the outsourcing as a competitive advantage. The expertise of the outsourcing partner must add value to your processes or supply chain either by intangible benefits such as better services or tangible benefits such as cost savings. One must also be wary when it comes to cost cutting since upfront cost reduction may mislead and be responsible for wrong decision making.
Usually in business partnership agreements are done over long term contracts which can last over half year to several years, in such cases the reputation and credibility is important to assess. Focus on quality is critical since it can affect the reputation and brand of a company. The outsourcing partner must be able to expand along with the company's expansion plans and grow alongside.It must be well prepared for the changes and adapt quick not only be able to supply adequate resources, but it should be able to expand and grow with the industry and the client also adapt to the requirements, market conditions and the technologies. This will determine a win-win relationship for both the partners as they can maximize profits and share risks.
The working culture of the organization must also be similar since many times communication and difference in working styles can cause problems. Clashes can arise between different teams therefore aspects such as language, values, commitments, written and verbal communications must be considered. Certain ground rules must be determined and followed to develop a healthy, cooperative and efficient working relationship.
In the existing business scenario due to the growing demand in outsourcing sector various outsourcing consulting providers exist in the market. They provide assistance by conducting due diligence to selected partners which narrow down the potential candidates. They also help identify best practices in the current industry. International organizations, like NEPCON West have offer workshops on benchmarking. They also offer customized training which aids in selection process of the outsourcing partner.
Implementation of business relationship
It is hard to decipher which one of the three steps is important than the other. But each procedure executed with care, planning would make the sequence of procedures easier.
Typically, following methodology and considerations would result in a strong and successful business relationship.
a) well understood strategies and fixed goals
b) Well-defined project goals and schedules
c) Flexibility in order to be agile to changes
d) spreading of Risks and incentives
e) Suppliers Cooperation
f) Transition management
g) Relationship monitoring and management
A supplier with constructive and compatible business strategies would end up forming a constructive relationship. Mostly it depends on the size of project, but the relation is not on the lines of a contractor or a partner. The relationship must be handled professionally and be considered as business only. The expectations, schedules of the project are to be agreed and defined in the early stages of the business.
Though a formal contract defining the dates and schedules is necessary, the relation should be
Although a contract outlining deliverables and schedules is necessary, the relationship should be flexible to incorporate the vast changing tools, technologies and the market conditions over periods of time. The risk and award must be shared among the parties to ensure a strong and dedicated commitment. The supplier can never be forced to accept failures unless there is a promise of an reward.
Outsourcing requires restructuring to some extent at the outsourcing company level. Apart from the general requirements like technology in can involve movement of employees. In a dire case scenario a group of employees may have to be shifted to a location within or away from the company. This transition period will be a core period for both the parties involved in the business relation. An honest and transparent communication channel with the employees involved will always be the best option.
It is essential to do a careful selection of the team members who will be leading the teams from both the company and outsourcing partner. They will be responsible in monitoring and managing the relationships between the organizations. Initial building of professional relationships is crucial for smooth running and efficient workflow. Team building, brainstorming sessions, management classes, and social events, social gatherings such as parties at company level or department level are also helpful. Some companies also provide training classes in their procedures and inculcate culture to their outsourcing partner.
CONCLUSION
Outsourcing as a strategic decision making process has evolved over time. Traditionally it was used as a tactical cost reducing solution but that can lead to failure in today's dynamic competitive and volatile business market. Outsourcing needs to be taken at an enterprise level view in order to make a strategic decision about which operations and business processes they want to keep in-house and which are best suited to third party outsourcing partners. Organizations have measured their risks and are prepared to take advantage, since it can immensely broaden the opportunities for collaborative innovation, efficient operations along with reductions in cost. To optimize production and get better services they will have to establish strategic partnerships. This will result in bigger business and transformational values making it a globally integrated enterprise.
