The Advantages of Outsourcing
Content
Global Outsourcing
Outsourcing is subcontracting a service such as product design or manufacturing, to a third-party company.[1] The decision to outsource is often made in the interest of lowering cost or making better use of time and energy costs, redirecting or conserving energy directed at the competencies of a particular business, or to make more efficient use of land, labor, capital, (information) technology and resources[citation needed]. Outsourcing became part of the business lexicon during the 1980s. It is essentially a division of labour. Outsourcing in the information technology field has two meanings. [2] One is to commission the development of an application to another organization, usually a company that specializes in the development of this type of application. The other is to hire the services of another company to manage all or parts of the services that otherwise would be rendered by an IT unit of the organization. The latter concept might not include development of new applications
Overview
Outsourcing involves the transfer of the management and/or day-to-day execution of an entire business function to an external service provider.[3] The client organization and the supplier enter into a contractual agreement that defines the transferred services. Under the agreement the supplier acquires the means of production in the form of a transfer of people, assets and other resources from the client. The client agrees to procure the services from the supplier for the term of the contract. Business segments typically outsourced include information technology, human resources, facilities, real estate management, and accounting. Many companies also outsource customer support and call center functions like telemarketing, CAD drafting, customer service, market research, manufacturing, designing, web development, print-to-mail, content writing, ghostwriting and engineering. Offshoring is the type of outsourcing in which the buyer organization belongs to another country. Outsourcing and offshoring are used interchangeably in public discourse despite important technical differences. Outsourcing involves contracting with a supplier, which may or may not involve some degree of offshoring. Offshoring is the transfer of an organizational function to another country, regardless of whether the work is outsourced or stays within the same corporation/company.[4][5][6] With increasing globalization of outsourcing companies, the distinction between outsourcing and offshoring will become less clear over time. This is evident in the increasing presence of Indian outsourcing companies in the United States and United Kingdom. The globalization of outsourcing operating models has resulted in new terms such as nearshoring, noshoring, and rightshoring that reflect the changing mix of locations. This is seen in the opening of offices and operations centers by Indian companies in the U.S. and UK. A major job that is being outsourced is accounting and preparation of tax returns.[7][8]
Multisourcing refers to large outsourcing agreements (predominantly IT).[9] Multisourcing is a framework to enable different parts of the client business to be sourced from different suppliers. This requires a governance model that communicates strategy, clearly defines responsibility and has end-to-end integration.
[10]
Strategic outsourcing is the organizing arrangement that emerges when firms rely on intermediate markets to provide specialized capabilities that supplement existing capabilities deployed along a firm’s value chain.[11] Such an arrangement produces value within firms’ supply chains beyond those benefits achieved through cost economies. Intermediate markets that provide specialized capabilities emerge as different industry conditions intensify the partitioning of production. As a result of greater information standardization and simplified coordination, clear administrative demarcations emerge along a value chain. Partitioning of intermediate markets occurs as the coordination of production across a value chain is simplified and as information becomes standardized, making it easier to transfer activities across boundaries. Due to the complexity of work definition, codifying requirements, pricing, and legal terms and conditions, clients often utilize the advisory services of outsourcing consultants or outsourcing intermediaries to assist in scoping, decision making, and vendor evaluation.
Activities for outsourcing
Research and Development
The competitive pressures on firms to bring out new products at an ever rapid pace to meet market needs are increasing. As such, the pressures on the R&D department are increasing. In order to alleviate the pressure, firms have to either increase R&D budgets or find ways to utilize the resources in a more productive way. There are situations when a firm may consider outsourcing some of its R&D work to a contract research organizations or universities. Reasons why a firm could consider outsourcing are:
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new product design does not work project time and cost overruns loss of key staff competitive response problems of quality/yield.
The key drivers for R&D outsourcing are emerging mass markets and availability of expertise in the field. In this context, the two most populous countries in the world, China and India, provide huge pools from which to find talent. Both countries produce over 200,000 engineers and science graduates each year. Moreover both countries are low cost sourcing countries. Other strategic drivers for outsourcing R&D are access to expertise and intellectual property, filling gaps in the capabilities of the R&D function, managing risk better, reducing the time to market, and focusing on the core competence or activities of the firm.
Manufacturing
Often companies will develop and market products but leave the manufacturing to other compaines that specialize in it. Thus a factory can do manufacturing for several companies and keep a large manufacturing plant operating at nearly full capacity when no individual contract could justify the expense of maintaining the infrastructure. An example of this would be Fabless semiconductor companies which do design etc but do not have their own, extremely expensive, fabrication facilities. Other examples would be companies that specialize in the tasks of procurting parts, assembly, QA, etc. and market this skills as their primary business to compaines that outsource manufacturing to them.
The Advantages of Outsourcing
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1.Outsourcing your non-core activities will give you more time to concentrate on your core business processes 2.Offshoring can give you access to professional, expert and high-quality services With outsourcing your organization can experience increased efficiency and productivity in non-core business processes 3.Outsourcing can help you streamline your business operations Offshore outsourcing can help you save on time, effort, manpower, operating costs and training costs amongst others 4.Outsourcing can make your organization more flexible to change 5.You can experience an increased control of your business with outsourcing 6.Your organization can save on investing in the latest technology, software and infrastructure as your outsourcing partner would be investing in these 7.Outsourcing can give you assurance that your business processes are being carried out efficiently, proficiently and within a fast turnaround time 8.Offshoring can help your organization save on capital expenditures 9.By outsourcing, your company can save on management problems as your offshore partner will be managing the team who does your work 10.By outsourcing, you can cater to the new and challenging demands of your customers 11.Outsourcing can help your organization to free up its cash flow 12.Sharing your business risks is possible with outsourcing 13.Outsourcing can give your business a competitive advantage as you will be able to increase productivity in all the areas of your business 14.Outsourcing can help your organization to cut is operational costs to more than half If you want your organization to stay ahead of competition, concentrate on core competencies and make use of the latest technologies, then outsourcing can help your organization achieve all this and more. In outsourcing, the advantages of outsourcing are more than the disadvantages of outsourcing. The pros of outsourcing have driven more organization to step into offshoring and experience the benefits that it has to offer.
The Disadvantages of Outsourcing
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1.At times, it is more cost-effective to conduct a particular business process, rather than outsourcing it 2.While outsourcing services such as payroll processing services and tax preparation services, your outsourcing provider will be able to see your company’s confidential information and hence there is a threat to security and confidentiality in outsourcing
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3.When you begin to outsource your business processes, you might find it difficult to manage the offshore provider when compared to managing processes within your organization 4.Offshoring can create potential redundancies for your organization 5.In case, your offshore service provider becomes bankrupt or goes out of business, your organization will have to immediately move your business processes inhouse or find another outsourcing provider 6.The employees in your organization might not like the idea of you outsourcing your processes and they might express lack of interest or lack of quality at work 7.Your outsourcing provider might not be only providing services for your organization. Since your provider might be catering to the needs of several companies, there might be not be complete devotion to you and your company 8.By outsourcing, you might forget to cater to the needs of your valuable customers as your focus will be on the business process that is outsourced 9.In outsourcing, you may lose your control over the process that is outsourced 10.Outsourcing, though cost-effective, might have hidden costs, such as the legal costs incurred while signing a contract between companies. You might also have to spend a lot of time and effort in getting the contract signed 11.With outsourcing, your organization might suffer from a lack of customer focus There can be several disadvantages in outsourcing, such as, renewing contracts, misunderstanding of the contract, lack of communication, poor quality and delayed services amongst others. The disadvantages of offshoring give organizations an opportunity to think about what they are stepping into. However the disadvantages of outsourcing are less than the advantages of offshore outsourcing. When outsourcing, you might not experience any of these disadvantages of offshoring, if you find a reliable outsourcing partner. Before outsourcing take the interests of your customers and employees into consideration and then make an informed decision. If your organization is genuinely interested in outsourcing, let not the disadvantages of outsourcing stop you.
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Reasons for outsourcing
Organizations that outsource are seeking to realize benefits or address the following issues:[12][13][14]
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Cost savings. The lowering of the overall cost of the service to the business. This will involve reducing the scope, defining quality levels, re-pricing, renegotiation, cost re-structuring. Access to lower cost economies through offshoring called "labor arbitrage" generated by the wage gap between industrialized and developing nations.[15] Focus on Core Business. Resources (for example investment, people, infrastructure) are focused on developing the core business. For example often organizations outsource their IT support to specilaised IT services companies.
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Cost restructuring. Operating leverage is a measure that compares fixed costs to variable costs. Outsourcing changes the balance of this ratio by offering a move from fixed to variable cost and also by making variable costs more predictable. Improve quality. Achieve a step change in quality through contracting out the service with a new service level agreement. Knowledge. Access to intellectual property and wider experience and knowledge.[16] Contract. Services will be provided to a legally binding contract with financial penalties and legal redress. This is not the case with internal services.
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Operational expertise. Access to operational best practice that would be too difficult or time consuming to develop in-house. Access to talent. Access to a larger talent pool and a sustainable source of skills, in particular in science and engineering.[4][18] Capacity management. An improved method of capacity management of services and technology where the risk in providing the excess capacity is borne by the supplier. Catalyst for change. An organization can use an outsourcing agreement as a catalyst for major step change that can not be achieved alone. The outsourcer becomes a Change agent in the process. Enhance capacity for innovation. Companies increasingly use external knowledge service providers to supplement limited in-house capacity for product innovation.[19][20] Reduce time to market. The acceleration of the development or production of a product through the additional capability brought by the supplier. Commodification. The trend of standardizing business processes, IT Services and application services enabling businesses to intelligently buy at the right price. Allows a wide range of businesses access to services previously only available to large corporations. Risk management. An approach to risk management for some types of risks is to partner with an outsourcer who is better able to provide the mitigation.[21] Venture Capital. Some countries match government funds venture capital with private venture capital for startups that start businesses in their country. [1] Tax Benefit. Countries offer tax incentives to move manufacturing operations to counter high corporate taxes within another country.
More information on the pros of outsourcing can be found in Thomas Friedman's The World is Flat. In particular, the section on the "5th flattener of the world" may be informative.
Criticisms of outsourcing
Quality Risks
Quality Risk is the propensity for a product or service to be defective, due to operations-related issues. Quality risk in outsourcing is driven by a list of factors. One such factor is opportunism by suppliers due to misaligned incentives between buyer and supplier, information asymmetry, high asset specificity, or high supplier switching costs. Other factors contributing to quality risk in outsourcing are poor buyer-supplier communication, lack of supplier capabilities/resources/capacity, or buyer-supplier contract enforceability. Two main concepts must be considered when considering observability as it related to quality risks in outsourcing: the concepts of testability and criticality. Quality fade is the deliberate and secretive reduction in the quality of labor in order to widen profit margins. The downward changes in human capital are subtle but progressive, and usually unnoticeable by the out sourcer/customer. The initial interview meets requirements, however, with subsequent support, more and more of the support team are replaced with novice or less experienced workers. India IT shops will continue to reduce the quality of human capital[citation needed], under the pressure of drying up labor supply and upward trend of salary, pushing the quality limits. Such practices are hard to detect, as customers may just simply give up seeking help from the help desk. However, the overall customer satisfaction will be reduced greatly over time[citation needed]. Unless the company constantly conducts customer satisfaction surveys, they may eventually be caught in a surprise of customer churn, and when they find out the root cause, it could be too late. In such cases, it can be hard to dispute the legal contract with the India outsourcing company, as their staff are now trained in the process and the original staff made redundant. In the end, the company that outsources is worse off than before it outsourced its workforce to India[citation needed].
] Quality of service
Quality of service is measured through a service level agreement (SLA) in the outsourcing contract. In poorly defined contracts there is no measure of quality or SLA defined. Even when an SLA exists it may not be to the same level as previously enjoyed. This may be due to the process of implementing proper objective measurement and reporting which is being done for the first time. It may also be lower quality through design to match the lower price. There are a number of stakeholders who are affected and there is no single view of quality. The CEO may view the lower quality acceptable to meet the business needs at the right price. The retained management team may view quality as slipping compared to what they previously achieved. The end consumer of the service may also receive a change in service that is within agreed SLAs but is still perceived as inadequate. The supplier may view quality in purely meeting the defined SLAs regardless of perception or ability to do better. Quality in terms of end-user-experience is best measured through customer satisfaction questionnaires which are professionally designed to capture an unbiased view of quality. Surveys can be one of research[22]. This allows quality to be tracked over time and also for corrective action to be identified and taken.
Language skills
In the area of call centers end-user-experience is deemed to be of lower quality when a service is outsourced. This is exacerbated when outsourcing is combined with offshoring to regions where the first language and culture are different. The questionable quality is particularly evident when call centers that service the public are outsourced and offshored.[citation needed] The public generally find linguistic features such as accents, word use and phraseology different which may make call center agents difficult to understand. The visual clues that are present in face-to-face encounters are missing from the call center interactions and this also may lead to misunderstandings and difficulties.[23] In addition to language and accent differences, a lack of local social and geographic knowledge is often present, leading to misunderstandings or mis-communications.
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Public opinion
There is a strong public opinion regarding outsourcing (especially when combined with offshoring) that outsourcing damages a local labor market. Outsourcing is the transfer of the delivery of services which affects both jobs and individuals. It is difficult to dispute that outsourcing has a detrimental effect on individuals who face job disruption and employment insecurity; however, its supporters believe that outsourcing should bring down prices, providing greater economic benefit to all. There are legal protections in the European Union regulations called the Transfer of Undertakings (Protection of Employment). Labor laws in the United States are not as protective as those in the European Union.[24] On June 26 2009, Jeff Immelt, the CEO of General Electric, called for the United States to increase its manufacturing base employment to 20% of the workforce commenting that the U.S. has outsourced too much and can no longer rely on consumer spending to drive demand.[25]
Social responsibility
Outsourcing sends jobs to the lower-income areas where work is being outsourced to, which provides jobs in these areas and has a net equalizing effect on the overall distribution of wealth. Some argue that the outsourcing of jobs (particularly off-shore) exploits the lower paid workers. A contrary view is that more people are employed and benefit from paid work. Despite this argument, domestic workers displaced by such equalization are proportionately unable to outsource their own costs of housing, food and transportation. On the issue of high-skilled labor, such as computer programming, some argue that it is unfair to both the local and off-shore programmers to outsource the work simply because the foreign pay rate is lower. On the other hand, one can argue that paying the higher-rate for local programmers is wasteful, or charity, or simply overpayment. If the end goal of buyers is to pay less for what they buy, and for sellers it is to get a higher price for what they sell, there is nothing automatically unethical about choosing the cheaper of two products, services, or employees.[26]
Social responsibility is also reflected in the costs of benefits provided to workers. Companies outsourcing jobs effectively transfer the cost of retirement and medical benefits to the countries where the services are outsourced. This represents a significant reduction in total cost of labor for the outsourcing company. A side effect of this trend is the reduction in salaries and benefits at home in the occupations most directly impacted by outsourcing.
Staff turnover
The staff turnover of employee who originally transferred to the outsourcer is a concern for many companies. Turnover is higher under an outsourcer and key company skills may be lost with retention outside of the control of the company. In outsourcing offshore there is an issue of staff turnover in the outsourcer companies call centers. It is quite normal for such companies to replace its entire workforce each year in a call center.[27] This inhibits the build-up of employee knowledge and keeps quality at a low level.
Company knowledge
Outsourcing could lead to communication problems with transferred employees. For example, before transfer staff have access to broadcast company e-mail informing them of new products, procedures etc. Once in the outsourcing organization the same access may not be available. Also to reduce costs, some outsource employees may not have access to e-mail, but any information which is new is delivered in team meetings.
Qualifications of outsourcers
The outsourcer may replace staff with less qualified people or with people with different non-equivalent qualifications.[28] In the engineering discipline there has been a debate about the number of engineers being produced by the major economies of the United States, India and China. The argument centers around the definition of an engineering graduate and also disputed numbers. The closest comparable numbers of annual graduates of four-year degrees are United States (137,437) India (112,000) and China (351,537).[29][30]
] Failure to deliver business transformation
Business transformation promised by outsourcing suppliers often fails to materialize. In a commoditised market where many service providers can offer savings of time and money, smart vendors have promised a second wave of benefits that will improve the client’s business outcomes. According to Vinay Couto of Booz & Company “Clients always use the service provider’s ability to achieve transformation as a key selection criterion. It’s always in the top three and sometimes number one.” While failure is sometimes attributed to vendors overstating their capabilities, Couto points out that clients are sometimes unwilling to invest in transformation once an outsourcing contract is in place.[31][unreliable source?]
] Productivity
Offshore outsourcing for the purpose of saving cost can often have a negative influence on the real productivity of a company. Rather than investing in technology to improve productivity, companies gain non-real productivity by hiring fewer people locally and outsourcing work to less productive facilities offshore that appear to be more productive simply because the workers are paid less. Sometimes, this can lead to strange contradictions where workers in a developing country using hand tools can appear to be more productive than a U.S. worker using advanced computer controlled machine tools, simply because their salary appears to be less in terms of U.S. dollars. In contrast, increases in real productivity are the result of more productive tools or methods of operating that make it possible for a worker to do more work. Non-real productivity gains are the result of shifting work to lower paid workers, often without regards to real productivity. The net result of choosing non-real over real productivity gain is that the company falls behind and obsoletes itself overtime rather than making investments in real productivity.
Standpoint of labor
From the standpoint of labor within countries on the negative end of outsourcing this may represent a new threat, contributing to rampant worker insecurity, and reflective of the general process of globalization.[32] While the "outsourcing" process may provide benefits to less developed countries or global society as a whole, in some form and to some degree - include rising wages or increasing standards of living these benefits are not secure. Further, the term outsourcing is also used to describe a process by which an internal department, equipment as well as personnel, is sold to a service provider, who may retain the workforce on worse conditions or discharge them in the short term. The affected workers thus often feel they are being "sold down the river."
Security
Before outsourcing an organization is responsible for the actions of all their staff and liable for their actions. When these same people are transferred to an outsourcer they may not change desk but their legal status has changed. They no-longer are directly employed or responsible to the organization. This causes legal, security and compliance issues that need to be addressed through the contract between the client and the suppliers. This is one of the most complex areas of outsourcing and requires a specialist third party adviser. Fraud is a specific security issue that is criminal activity whether it is by employees or the supplier staff. However, it can be disputed that the fraud is more likely when outsourcers are involved, for example credit card theft when there is scope for fraud by credit card cloning. In April 2005, a high-profile case involving the theft of $350,000 from four Citibank customers occurred when call center workers acquired the passwords to customer accounts and transferred the money to their own accounts
opened under fictitious names. Citibank did not find out about the problem until the American customers noticed discrepancies with their accounts and notified the bank.
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What is Outsourcing?
Outsourcing began in the early eighties when organizations started delegating their noncore functions to an external organization that was specialized in providing a particular service, function or product. In outsourcing, the external organization would take on the management of the outsourced function. Most organizations choose outsourcing because outsourcing offers a lot of advantages. When organizations outsource to countries like India, they benefit from lower costs and high-quality services. Moreover organizations can concentrate more on core functions once they outsource their non-core functions. Outsourcing can also help organizations make better use of their resources, time and infrastructure. In outsourcing, the outsourcer and the outsourcing partner have a greater relationship when compared to the relationship between a buyer and a seller. In outsourcing, the outsourcer trusts the outsourcing partner with vital information. Outsourcing is no longer confined to the outsourcing of IT services. Outsourcers in the US and UK now outsource financial services, engineering services, creative services, data entry services and much more. Most organizations are opting to outsource because outsourcing enables organizations to access intellectual capital, focus on core competencies, shorten the delivery cycle time and reduce costs significantly. Organizations feel outsourcing is an effective business strategy to help improve their business.
What is Insourcing?
The opposite of outsourcing can be defined as insourcing. When an organization delegates its work to another entity, which is internal yet not a part of the organization, it is termed as insourcing. The internal entity will usually have a specialized team who will be proficient in the providing the required services. Organizations sometimes opt for insourcing because it enables them to maintain a better control of what they outsource. Insourcing has also come to be defined as transferring work from one organization to another organization which is located within the same country. Insourcing can also mean an organization building a new business centre or facility which would specialize in a particular service or product. Organizations involved in production usually opt for insourcing in order to cut down the cost of labor and taxes amongst others. The trend towards insourcing has increased since the year 2006. Organizations who have been dissatisfied with outsourcing have moved towards insourcing. Some organizations feel that they can have better customer support and better control over the work outsourced by insourcing their work rather than outsourcing it. According to recent studies, there is more wok insourced than outsourced in the U.S and U.K. These countries are currently the largest outsourcers in the world. The U.S and U.K outsource and insource work equally.
Why Outsource to India?
Today, outsourcing has almost become the order of the day. So why are global organizations choosing outsourcing? More and more global companies are choosing to outsource today for a number of reasons, such as, cost-effective services, increased
efficiency, increased productivity, shared risks, reduced operating costs, increased quality, better services and more time to focus on core competencies. These are just a few of the reasons why organizations are outsourcing today. But why outsource to India and why do companies outsource to India. India is the most ideal place to outsource to, because India offers several advantages.
India has been a pioneer in providing outsourcing solutions and has been providing a range of outsourcing services to countries across the globe. Today, India can be called as the world’s outsourcing hub. Outsourcing to India can help your organization benefit from cost-effective services, high-quality services, reduced operating costs, greater flexibility and faster-time-to-market amongst others. These are just a few reasons why companies outsource to India. Another reason why outsourcing to India makes good business sense is because India has high-end technology and best-of-breed infrastructure. India has now become the world’s most preferred outsourcing location. India is also the global hub for software enabled services and software development. Outsourcing to India can give your organization a competitive edge. The following are a list of reasons why companies outsource to India.
1. Cost-effective services
The numero uno reason why global organizations outsource to India is because India offers cost-effective services. Outsourcing to India can help you save more than half of your operating costs! India has a large, educated, trained and technically skilled manpower and this number only keeps growing every year. Unlike the west, where technical talent is rare, India has a large pool of highly-skilled professionals. Having a large technically skilled manpower has enabled India to provide cost-effective services without compromising on quality. Outsourcing to India, can help you save on your operating costs, while increasing your productivity, quality and efficiency.
2. High-quality services
India uses the latest in software, technology and infrastructure to provide global customers with high-quality outsourcing solutions. India has proved that it is technically superior when compared to other countries that provide outsourcing solutions. So, when you
outsource your work to India, you can be assured that the best technology and software would be used for your services. India has the largest English-speaking audience after the U.S. India also has a highly educated manpower that is talented, educated, experienced, technically-skilled and computer literate. Outsource to India and be assured of high-quality services.
3. Time Zone Advantages
The time zone advantages between India and countries in the U.S and U.K has proved to be another important factor why companies outsource to India. Organizations who wish to provide their customer with 24x7x365 days customer support or helpdesk services can outsource to India.
4. India’s stable government
India has celebrated more than 60 years of democracy and has one of the world’s most stable governments. Building up the IT sector has been a top priority for the Indian government. India has a ministry of information technology that quickly approves the implementation of IT projects and streamlines regulatory processes. The Indian government has even released a bill termed as the “IT act 2000” India has been rated to have the most excellent investment potential in the coming years. The Indian government has given complete support to the IT and ITES industry in India. With ample support from the government, Indians have been able to build high-tech IT parks which has the best in technology and infrastructure. The Indian government has even permitted 100% foreign equity. India’s fast growing economy has been yet another reason why companies are outsourcing to India.
5. The Indian Advantage
Cost-effective services are one of the primary advantages that India offers, but it is not the only advantage of outsourcing to India. Outsourcing to India can give you access to professional and skilled outsourcing solutions within a fast turnaround time. By outsourcing to India, your organization can concentrate on core business activities and save on time, effort, manpower and infrastructure. More than 20 Indian software companies have achieved the prestigious SEI-CMM level. India also has the highest number of ISO-9000 software organizations. Outsource to India and give your organization a competitive advantage.
6. Global organizations’ most preferred choice
India has been the most preferred choice among global organization when it comes to outsourcing. In the U.S alone, more than 80% have ranked India as their first choice, when outsourcing software and IT services. The U.S has also recognized India as an outsourcing superpower. The number of organizations outsourcing services to India has only been increasing over the years. This is reason enough to outsource to India.
Outsourcing is subcontracting a service such as product design or manufacturing, to a third-party company.[1] The decision to outsource is often made in the interest of lowering cost or making better use of time and energy costs, redirecting or conserving energy directed at the competencies of a particular business, or to make more efficient use of land, labor, capital, (information) technology and resources[citation needed]. Outsourcing became part of the business lexicon during the 1980s. It is essentially a division of labour. Outsourcing in the information technology field has two meanings. [2] One is to commission the development of an application to another organization, usually a company that specializes in the development of this type of application. The other is to hire the services of another company to manage all or parts of the services that otherwise would be rendered by an IT unit of the organization. The latter concept might not include development of new applications
Overview
Outsourcing involves the transfer of the management and/or day-to-day execution of an entire business function to an external service provider.[3] The client organization and the supplier enter into a contractual agreement that defines the transferred services. Under the agreement the supplier acquires the means of production in the form of a transfer of people, assets and other resources from the client. The client agrees to procure the services from the supplier for the term of the contract. Business segments typically outsourced include information technology, human resources, facilities, real estate management, and accounting. Many companies also outsource customer support and call center functions like telemarketing, CAD drafting, customer service, market research, manufacturing, designing, web development, print-to-mail, content writing, ghostwriting and engineering. Offshoring is the type of outsourcing in which the buyer organization belongs to another country. Outsourcing and offshoring are used interchangeably in public discourse despite important technical differences. Outsourcing involves contracting with a supplier, which may or may not involve some degree of offshoring. Offshoring is the transfer of an organizational function to another country, regardless of whether the work is outsourced or stays within the same corporation/company.[4][5][6] With increasing globalization of outsourcing companies, the distinction between outsourcing and offshoring will become less clear over time. This is evident in the increasing presence of Indian outsourcing companies in the United States and United Kingdom. The globalization of outsourcing operating models has resulted in new terms such as nearshoring, noshoring, and rightshoring that reflect the changing mix of locations. This is seen in the opening of offices and operations centers by Indian companies in the U.S. and UK. A major job that is being outsourced is accounting and preparation of tax returns.[7][8]
Multisourcing refers to large outsourcing agreements (predominantly IT).[9] Multisourcing is a framework to enable different parts of the client business to be sourced from different suppliers. This requires a governance model that communicates strategy, clearly defines responsibility and has end-to-end integration.
[10]
Strategic outsourcing is the organizing arrangement that emerges when firms rely on intermediate markets to provide specialized capabilities that supplement existing capabilities deployed along a firm’s value chain.[11] Such an arrangement produces value within firms’ supply chains beyond those benefits achieved through cost economies. Intermediate markets that provide specialized capabilities emerge as different industry conditions intensify the partitioning of production. As a result of greater information standardization and simplified coordination, clear administrative demarcations emerge along a value chain. Partitioning of intermediate markets occurs as the coordination of production across a value chain is simplified and as information becomes standardized, making it easier to transfer activities across boundaries. Due to the complexity of work definition, codifying requirements, pricing, and legal terms and conditions, clients often utilize the advisory services of outsourcing consultants or outsourcing intermediaries to assist in scoping, decision making, and vendor evaluation.
Activities for outsourcing
Research and Development
The competitive pressures on firms to bring out new products at an ever rapid pace to meet market needs are increasing. As such, the pressures on the R&D department are increasing. In order to alleviate the pressure, firms have to either increase R&D budgets or find ways to utilize the resources in a more productive way. There are situations when a firm may consider outsourcing some of its R&D work to a contract research organizations or universities. Reasons why a firm could consider outsourcing are:
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new product design does not work project time and cost overruns loss of key staff competitive response problems of quality/yield.
The key drivers for R&D outsourcing are emerging mass markets and availability of expertise in the field. In this context, the two most populous countries in the world, China and India, provide huge pools from which to find talent. Both countries produce over 200,000 engineers and science graduates each year. Moreover both countries are low cost sourcing countries. Other strategic drivers for outsourcing R&D are access to expertise and intellectual property, filling gaps in the capabilities of the R&D function, managing risk better, reducing the time to market, and focusing on the core competence or activities of the firm.
Manufacturing
Often companies will develop and market products but leave the manufacturing to other compaines that specialize in it. Thus a factory can do manufacturing for several companies and keep a large manufacturing plant operating at nearly full capacity when no individual contract could justify the expense of maintaining the infrastructure. An example of this would be Fabless semiconductor companies which do design etc but do not have their own, extremely expensive, fabrication facilities. Other examples would be companies that specialize in the tasks of procurting parts, assembly, QA, etc. and market this skills as their primary business to compaines that outsource manufacturing to them.
The Advantages of Outsourcing
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1.Outsourcing your non-core activities will give you more time to concentrate on your core business processes 2.Offshoring can give you access to professional, expert and high-quality services With outsourcing your organization can experience increased efficiency and productivity in non-core business processes 3.Outsourcing can help you streamline your business operations Offshore outsourcing can help you save on time, effort, manpower, operating costs and training costs amongst others 4.Outsourcing can make your organization more flexible to change 5.You can experience an increased control of your business with outsourcing 6.Your organization can save on investing in the latest technology, software and infrastructure as your outsourcing partner would be investing in these 7.Outsourcing can give you assurance that your business processes are being carried out efficiently, proficiently and within a fast turnaround time 8.Offshoring can help your organization save on capital expenditures 9.By outsourcing, your company can save on management problems as your offshore partner will be managing the team who does your work 10.By outsourcing, you can cater to the new and challenging demands of your customers 11.Outsourcing can help your organization to free up its cash flow 12.Sharing your business risks is possible with outsourcing 13.Outsourcing can give your business a competitive advantage as you will be able to increase productivity in all the areas of your business 14.Outsourcing can help your organization to cut is operational costs to more than half If you want your organization to stay ahead of competition, concentrate on core competencies and make use of the latest technologies, then outsourcing can help your organization achieve all this and more. In outsourcing, the advantages of outsourcing are more than the disadvantages of outsourcing. The pros of outsourcing have driven more organization to step into offshoring and experience the benefits that it has to offer.
The Disadvantages of Outsourcing
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1.At times, it is more cost-effective to conduct a particular business process, rather than outsourcing it 2.While outsourcing services such as payroll processing services and tax preparation services, your outsourcing provider will be able to see your company’s confidential information and hence there is a threat to security and confidentiality in outsourcing
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3.When you begin to outsource your business processes, you might find it difficult to manage the offshore provider when compared to managing processes within your organization 4.Offshoring can create potential redundancies for your organization 5.In case, your offshore service provider becomes bankrupt or goes out of business, your organization will have to immediately move your business processes inhouse or find another outsourcing provider 6.The employees in your organization might not like the idea of you outsourcing your processes and they might express lack of interest or lack of quality at work 7.Your outsourcing provider might not be only providing services for your organization. Since your provider might be catering to the needs of several companies, there might be not be complete devotion to you and your company 8.By outsourcing, you might forget to cater to the needs of your valuable customers as your focus will be on the business process that is outsourced 9.In outsourcing, you may lose your control over the process that is outsourced 10.Outsourcing, though cost-effective, might have hidden costs, such as the legal costs incurred while signing a contract between companies. You might also have to spend a lot of time and effort in getting the contract signed 11.With outsourcing, your organization might suffer from a lack of customer focus There can be several disadvantages in outsourcing, such as, renewing contracts, misunderstanding of the contract, lack of communication, poor quality and delayed services amongst others. The disadvantages of offshoring give organizations an opportunity to think about what they are stepping into. However the disadvantages of outsourcing are less than the advantages of offshore outsourcing. When outsourcing, you might not experience any of these disadvantages of offshoring, if you find a reliable outsourcing partner. Before outsourcing take the interests of your customers and employees into consideration and then make an informed decision. If your organization is genuinely interested in outsourcing, let not the disadvantages of outsourcing stop you.
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Reasons for outsourcing
Organizations that outsource are seeking to realize benefits or address the following issues:[12][13][14]
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Cost savings. The lowering of the overall cost of the service to the business. This will involve reducing the scope, defining quality levels, re-pricing, renegotiation, cost re-structuring. Access to lower cost economies through offshoring called "labor arbitrage" generated by the wage gap between industrialized and developing nations.[15] Focus on Core Business. Resources (for example investment, people, infrastructure) are focused on developing the core business. For example often organizations outsource their IT support to specilaised IT services companies.
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Cost restructuring. Operating leverage is a measure that compares fixed costs to variable costs. Outsourcing changes the balance of this ratio by offering a move from fixed to variable cost and also by making variable costs more predictable. Improve quality. Achieve a step change in quality through contracting out the service with a new service level agreement. Knowledge. Access to intellectual property and wider experience and knowledge.[16] Contract. Services will be provided to a legally binding contract with financial penalties and legal redress. This is not the case with internal services.
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Operational expertise. Access to operational best practice that would be too difficult or time consuming to develop in-house. Access to talent. Access to a larger talent pool and a sustainable source of skills, in particular in science and engineering.[4][18] Capacity management. An improved method of capacity management of services and technology where the risk in providing the excess capacity is borne by the supplier. Catalyst for change. An organization can use an outsourcing agreement as a catalyst for major step change that can not be achieved alone. The outsourcer becomes a Change agent in the process. Enhance capacity for innovation. Companies increasingly use external knowledge service providers to supplement limited in-house capacity for product innovation.[19][20] Reduce time to market. The acceleration of the development or production of a product through the additional capability brought by the supplier. Commodification. The trend of standardizing business processes, IT Services and application services enabling businesses to intelligently buy at the right price. Allows a wide range of businesses access to services previously only available to large corporations. Risk management. An approach to risk management for some types of risks is to partner with an outsourcer who is better able to provide the mitigation.[21] Venture Capital. Some countries match government funds venture capital with private venture capital for startups that start businesses in their country. [1] Tax Benefit. Countries offer tax incentives to move manufacturing operations to counter high corporate taxes within another country.
More information on the pros of outsourcing can be found in Thomas Friedman's The World is Flat. In particular, the section on the "5th flattener of the world" may be informative.
Criticisms of outsourcing
Quality Risks
Quality Risk is the propensity for a product or service to be defective, due to operations-related issues. Quality risk in outsourcing is driven by a list of factors. One such factor is opportunism by suppliers due to misaligned incentives between buyer and supplier, information asymmetry, high asset specificity, or high supplier switching costs. Other factors contributing to quality risk in outsourcing are poor buyer-supplier communication, lack of supplier capabilities/resources/capacity, or buyer-supplier contract enforceability. Two main concepts must be considered when considering observability as it related to quality risks in outsourcing: the concepts of testability and criticality. Quality fade is the deliberate and secretive reduction in the quality of labor in order to widen profit margins. The downward changes in human capital are subtle but progressive, and usually unnoticeable by the out sourcer/customer. The initial interview meets requirements, however, with subsequent support, more and more of the support team are replaced with novice or less experienced workers. India IT shops will continue to reduce the quality of human capital[citation needed], under the pressure of drying up labor supply and upward trend of salary, pushing the quality limits. Such practices are hard to detect, as customers may just simply give up seeking help from the help desk. However, the overall customer satisfaction will be reduced greatly over time[citation needed]. Unless the company constantly conducts customer satisfaction surveys, they may eventually be caught in a surprise of customer churn, and when they find out the root cause, it could be too late. In such cases, it can be hard to dispute the legal contract with the India outsourcing company, as their staff are now trained in the process and the original staff made redundant. In the end, the company that outsources is worse off than before it outsourced its workforce to India[citation needed].
] Quality of service
Quality of service is measured through a service level agreement (SLA) in the outsourcing contract. In poorly defined contracts there is no measure of quality or SLA defined. Even when an SLA exists it may not be to the same level as previously enjoyed. This may be due to the process of implementing proper objective measurement and reporting which is being done for the first time. It may also be lower quality through design to match the lower price. There are a number of stakeholders who are affected and there is no single view of quality. The CEO may view the lower quality acceptable to meet the business needs at the right price. The retained management team may view quality as slipping compared to what they previously achieved. The end consumer of the service may also receive a change in service that is within agreed SLAs but is still perceived as inadequate. The supplier may view quality in purely meeting the defined SLAs regardless of perception or ability to do better. Quality in terms of end-user-experience is best measured through customer satisfaction questionnaires which are professionally designed to capture an unbiased view of quality. Surveys can be one of research[22]. This allows quality to be tracked over time and also for corrective action to be identified and taken.
Language skills
In the area of call centers end-user-experience is deemed to be of lower quality when a service is outsourced. This is exacerbated when outsourcing is combined with offshoring to regions where the first language and culture are different. The questionable quality is particularly evident when call centers that service the public are outsourced and offshored.[citation needed] The public generally find linguistic features such as accents, word use and phraseology different which may make call center agents difficult to understand. The visual clues that are present in face-to-face encounters are missing from the call center interactions and this also may lead to misunderstandings and difficulties.[23] In addition to language and accent differences, a lack of local social and geographic knowledge is often present, leading to misunderstandings or mis-communications.
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Public opinion
There is a strong public opinion regarding outsourcing (especially when combined with offshoring) that outsourcing damages a local labor market. Outsourcing is the transfer of the delivery of services which affects both jobs and individuals. It is difficult to dispute that outsourcing has a detrimental effect on individuals who face job disruption and employment insecurity; however, its supporters believe that outsourcing should bring down prices, providing greater economic benefit to all. There are legal protections in the European Union regulations called the Transfer of Undertakings (Protection of Employment). Labor laws in the United States are not as protective as those in the European Union.[24] On June 26 2009, Jeff Immelt, the CEO of General Electric, called for the United States to increase its manufacturing base employment to 20% of the workforce commenting that the U.S. has outsourced too much and can no longer rely on consumer spending to drive demand.[25]
Social responsibility
Outsourcing sends jobs to the lower-income areas where work is being outsourced to, which provides jobs in these areas and has a net equalizing effect on the overall distribution of wealth. Some argue that the outsourcing of jobs (particularly off-shore) exploits the lower paid workers. A contrary view is that more people are employed and benefit from paid work. Despite this argument, domestic workers displaced by such equalization are proportionately unable to outsource their own costs of housing, food and transportation. On the issue of high-skilled labor, such as computer programming, some argue that it is unfair to both the local and off-shore programmers to outsource the work simply because the foreign pay rate is lower. On the other hand, one can argue that paying the higher-rate for local programmers is wasteful, or charity, or simply overpayment. If the end goal of buyers is to pay less for what they buy, and for sellers it is to get a higher price for what they sell, there is nothing automatically unethical about choosing the cheaper of two products, services, or employees.[26]
Social responsibility is also reflected in the costs of benefits provided to workers. Companies outsourcing jobs effectively transfer the cost of retirement and medical benefits to the countries where the services are outsourced. This represents a significant reduction in total cost of labor for the outsourcing company. A side effect of this trend is the reduction in salaries and benefits at home in the occupations most directly impacted by outsourcing.
Staff turnover
The staff turnover of employee who originally transferred to the outsourcer is a concern for many companies. Turnover is higher under an outsourcer and key company skills may be lost with retention outside of the control of the company. In outsourcing offshore there is an issue of staff turnover in the outsourcer companies call centers. It is quite normal for such companies to replace its entire workforce each year in a call center.[27] This inhibits the build-up of employee knowledge and keeps quality at a low level.
Company knowledge
Outsourcing could lead to communication problems with transferred employees. For example, before transfer staff have access to broadcast company e-mail informing them of new products, procedures etc. Once in the outsourcing organization the same access may not be available. Also to reduce costs, some outsource employees may not have access to e-mail, but any information which is new is delivered in team meetings.
Qualifications of outsourcers
The outsourcer may replace staff with less qualified people or with people with different non-equivalent qualifications.[28] In the engineering discipline there has been a debate about the number of engineers being produced by the major economies of the United States, India and China. The argument centers around the definition of an engineering graduate and also disputed numbers. The closest comparable numbers of annual graduates of four-year degrees are United States (137,437) India (112,000) and China (351,537).[29][30]
] Failure to deliver business transformation
Business transformation promised by outsourcing suppliers often fails to materialize. In a commoditised market where many service providers can offer savings of time and money, smart vendors have promised a second wave of benefits that will improve the client’s business outcomes. According to Vinay Couto of Booz & Company “Clients always use the service provider’s ability to achieve transformation as a key selection criterion. It’s always in the top three and sometimes number one.” While failure is sometimes attributed to vendors overstating their capabilities, Couto points out that clients are sometimes unwilling to invest in transformation once an outsourcing contract is in place.[31][unreliable source?]
] Productivity
Offshore outsourcing for the purpose of saving cost can often have a negative influence on the real productivity of a company. Rather than investing in technology to improve productivity, companies gain non-real productivity by hiring fewer people locally and outsourcing work to less productive facilities offshore that appear to be more productive simply because the workers are paid less. Sometimes, this can lead to strange contradictions where workers in a developing country using hand tools can appear to be more productive than a U.S. worker using advanced computer controlled machine tools, simply because their salary appears to be less in terms of U.S. dollars. In contrast, increases in real productivity are the result of more productive tools or methods of operating that make it possible for a worker to do more work. Non-real productivity gains are the result of shifting work to lower paid workers, often without regards to real productivity. The net result of choosing non-real over real productivity gain is that the company falls behind and obsoletes itself overtime rather than making investments in real productivity.
Standpoint of labor
From the standpoint of labor within countries on the negative end of outsourcing this may represent a new threat, contributing to rampant worker insecurity, and reflective of the general process of globalization.[32] While the "outsourcing" process may provide benefits to less developed countries or global society as a whole, in some form and to some degree - include rising wages or increasing standards of living these benefits are not secure. Further, the term outsourcing is also used to describe a process by which an internal department, equipment as well as personnel, is sold to a service provider, who may retain the workforce on worse conditions or discharge them in the short term. The affected workers thus often feel they are being "sold down the river."
Security
Before outsourcing an organization is responsible for the actions of all their staff and liable for their actions. When these same people are transferred to an outsourcer they may not change desk but their legal status has changed. They no-longer are directly employed or responsible to the organization. This causes legal, security and compliance issues that need to be addressed through the contract between the client and the suppliers. This is one of the most complex areas of outsourcing and requires a specialist third party adviser. Fraud is a specific security issue that is criminal activity whether it is by employees or the supplier staff. However, it can be disputed that the fraud is more likely when outsourcers are involved, for example credit card theft when there is scope for fraud by credit card cloning. In April 2005, a high-profile case involving the theft of $350,000 from four Citibank customers occurred when call center workers acquired the passwords to customer accounts and transferred the money to their own accounts
opened under fictitious names. Citibank did not find out about the problem until the American customers noticed discrepancies with their accounts and notified the bank.
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What is Outsourcing?
Outsourcing began in the early eighties when organizations started delegating their noncore functions to an external organization that was specialized in providing a particular service, function or product. In outsourcing, the external organization would take on the management of the outsourced function. Most organizations choose outsourcing because outsourcing offers a lot of advantages. When organizations outsource to countries like India, they benefit from lower costs and high-quality services. Moreover organizations can concentrate more on core functions once they outsource their non-core functions. Outsourcing can also help organizations make better use of their resources, time and infrastructure. In outsourcing, the outsourcer and the outsourcing partner have a greater relationship when compared to the relationship between a buyer and a seller. In outsourcing, the outsourcer trusts the outsourcing partner with vital information. Outsourcing is no longer confined to the outsourcing of IT services. Outsourcers in the US and UK now outsource financial services, engineering services, creative services, data entry services and much more. Most organizations are opting to outsource because outsourcing enables organizations to access intellectual capital, focus on core competencies, shorten the delivery cycle time and reduce costs significantly. Organizations feel outsourcing is an effective business strategy to help improve their business.
What is Insourcing?
The opposite of outsourcing can be defined as insourcing. When an organization delegates its work to another entity, which is internal yet not a part of the organization, it is termed as insourcing. The internal entity will usually have a specialized team who will be proficient in the providing the required services. Organizations sometimes opt for insourcing because it enables them to maintain a better control of what they outsource. Insourcing has also come to be defined as transferring work from one organization to another organization which is located within the same country. Insourcing can also mean an organization building a new business centre or facility which would specialize in a particular service or product. Organizations involved in production usually opt for insourcing in order to cut down the cost of labor and taxes amongst others. The trend towards insourcing has increased since the year 2006. Organizations who have been dissatisfied with outsourcing have moved towards insourcing. Some organizations feel that they can have better customer support and better control over the work outsourced by insourcing their work rather than outsourcing it. According to recent studies, there is more wok insourced than outsourced in the U.S and U.K. These countries are currently the largest outsourcers in the world. The U.S and U.K outsource and insource work equally.
Why Outsource to India?
Today, outsourcing has almost become the order of the day. So why are global organizations choosing outsourcing? More and more global companies are choosing to outsource today for a number of reasons, such as, cost-effective services, increased
efficiency, increased productivity, shared risks, reduced operating costs, increased quality, better services and more time to focus on core competencies. These are just a few of the reasons why organizations are outsourcing today. But why outsource to India and why do companies outsource to India. India is the most ideal place to outsource to, because India offers several advantages.
India has been a pioneer in providing outsourcing solutions and has been providing a range of outsourcing services to countries across the globe. Today, India can be called as the world’s outsourcing hub. Outsourcing to India can help your organization benefit from cost-effective services, high-quality services, reduced operating costs, greater flexibility and faster-time-to-market amongst others. These are just a few reasons why companies outsource to India. Another reason why outsourcing to India makes good business sense is because India has high-end technology and best-of-breed infrastructure. India has now become the world’s most preferred outsourcing location. India is also the global hub for software enabled services and software development. Outsourcing to India can give your organization a competitive edge. The following are a list of reasons why companies outsource to India.
1. Cost-effective services
The numero uno reason why global organizations outsource to India is because India offers cost-effective services. Outsourcing to India can help you save more than half of your operating costs! India has a large, educated, trained and technically skilled manpower and this number only keeps growing every year. Unlike the west, where technical talent is rare, India has a large pool of highly-skilled professionals. Having a large technically skilled manpower has enabled India to provide cost-effective services without compromising on quality. Outsourcing to India, can help you save on your operating costs, while increasing your productivity, quality and efficiency.
2. High-quality services
India uses the latest in software, technology and infrastructure to provide global customers with high-quality outsourcing solutions. India has proved that it is technically superior when compared to other countries that provide outsourcing solutions. So, when you
outsource your work to India, you can be assured that the best technology and software would be used for your services. India has the largest English-speaking audience after the U.S. India also has a highly educated manpower that is talented, educated, experienced, technically-skilled and computer literate. Outsource to India and be assured of high-quality services.
3. Time Zone Advantages
The time zone advantages between India and countries in the U.S and U.K has proved to be another important factor why companies outsource to India. Organizations who wish to provide their customer with 24x7x365 days customer support or helpdesk services can outsource to India.
4. India’s stable government
India has celebrated more than 60 years of democracy and has one of the world’s most stable governments. Building up the IT sector has been a top priority for the Indian government. India has a ministry of information technology that quickly approves the implementation of IT projects and streamlines regulatory processes. The Indian government has even released a bill termed as the “IT act 2000” India has been rated to have the most excellent investment potential in the coming years. The Indian government has given complete support to the IT and ITES industry in India. With ample support from the government, Indians have been able to build high-tech IT parks which has the best in technology and infrastructure. The Indian government has even permitted 100% foreign equity. India’s fast growing economy has been yet another reason why companies are outsourcing to India.
5. The Indian Advantage
Cost-effective services are one of the primary advantages that India offers, but it is not the only advantage of outsourcing to India. Outsourcing to India can give you access to professional and skilled outsourcing solutions within a fast turnaround time. By outsourcing to India, your organization can concentrate on core business activities and save on time, effort, manpower and infrastructure. More than 20 Indian software companies have achieved the prestigious SEI-CMM level. India also has the highest number of ISO-9000 software organizations. Outsource to India and give your organization a competitive advantage.
6. Global organizations’ most preferred choice
India has been the most preferred choice among global organization when it comes to outsourcing. In the U.S alone, more than 80% have ranked India as their first choice, when outsourcing software and IT services. The U.S has also recognized India as an outsourcing superpower. The number of organizations outsourcing services to India has only been increasing over the years. This is reason enough to outsource to India.
