Outsourcing

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Transferring business processes. Explanation of Outsourcing.


  

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What is outsourcing? Definition

Outsourcing is a strategic management model wherein business processes are transferred to another company. The concept is: to let a third party service provider perform the management and/or day-to-day execution of one or more business functions. This third party service provider is Insourcing those same processes. Outsourcing occurs when a company uses an outside firm to provide a necessary business function that might otherwise be done in-house.

 

It is different from Subcontracting, because the function is provided on an ongoing basis, rather than for a specific project. It can be provided on the same or another location, in the same country or in a separate country (Offshoring).

 

In its most advanced form, outsourcing makes it possible to build a large, entirely virtual company with only a single employee: the entrepreneur himself.

 

Why business process outsourcing? Main Motives

The most important motives for outsourcing are:

  1. To make an organization more competitive, by staying focused on its Core Competence.
  2. To achieve cost reduction and efficiency.
  3. Access to special resources or capabilities. Compare: 3rd Party Logistics (3PL)
  4. To stimulate entrepreneurship in small organizational entities.

outsourcing business models

At least three business process outsourcing models can be distinguished:

  1. Shared Service Center. (See below)
  2. Spin-off. This spin-off company leaves the parent company to specialize in certain activities which are outsourced by the parent company.
  3. Outsourcing to an external organization. Compare: Organization Chart.

Other Potential Benefits of Outsourcing

  • Renewed focus on core business.
  • Mitigation of risks by reliance on an expert.
  • Improved customer satisfaction through improved processes not part of the enterprise's culture or experience.
  • Ability to reward workers with career opportunities in a specialty company.
  • Project improvement.
  • Service improvements.
  • Skills upgrade.
  • Skills retention.
  • Skills access.
  • Technology infusion.
  • Cost accounting and overall visibility of accounting and performance in a business process.
  • Cost reduction.
  • Management of volatility in costs through financial engineering.
  • Asset conversion.
  • Avoidance of capital investment.

Glossary of typical Outsourcing terminology:

 

Application Service Provider (ASP)

An ASP is a company that provides applications and related services over the Internet. Examples include email, payroll processing and ERP applications.

 

Business Process Outsourcing (BPO)

BPO is the outsourcing of Back Office and Front Office functions, typically performed by white collar and clerical workers. Examples include accounting, human resources and medical coding and transcription.


Competitive Insourcing

Competitive Insourcing is a process whereby internal employees are competing in bidding against competitive, third-party bidders for a defined scope of work. See also Insourcing.


Contract Manufacturing

Contract Manufacturing is the outsourcing of a manufacturing job to an onshore or offshore third-party. With the necessary infrastructure and know-how to perform the job.


Co-Sourcing or Cosourcing

Cosourcing is where a business function is performed by both internal staff and external resources, such as consultants or outsourcing vendors, with specialized knowledge of the business function.


Facilities Management

An outsourcing solution in which the customer entrusts to an external services provider the responsibility for operations and maintenance of one or more facilities. Compare: Kraljic Model.

 

Insourcing

Insourcing is the transfer of an outsourced function to an internal department of a company, to be managed entirely by employees. The term has also been used to describe foreign companies that start facilities in the United States and employ U.S. workers.


Nearshoring

Nearshoring is outsourcing within nearby territory, accessible by short travel or telephone in the same or neighboring time zone.


Offshoring

Offshoring is outsourcing overseas or in a separate country. Outsourcing to a contiguous country may be considered as Nearshoring (see above).


Service Level Agreement (or SLA)

An SLA is a contract or addendum to a contract that defines the type, value and conditions of the outsourcing services to be provided. Typically, SLAs deal with the quality of service conditions, such as response time, availability, speed, et cetera.


Shared Services

Shared Services is the outsourcing of a business function within an enterprise to a highly skilled internal department or group. For example, the purchasing department at one plant, may provide purchasing services to all other plants, within a given manufacturing company. Shared services may also be provided to third parties.

 

Outsourcing Special Interest Group


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Outsourcing Forum

Recent User Comments
 - United Kingdom Pricing of Outsourcing "Could someone advise how pricing is done in the outsourcing industry?"    1
April Elecciri - USA Co. Size matters in Outsourcing Customer Services "My experience is the bigger the co. moving to outsourcing with customer service the higher the risk in customer satisfaction. Offshoring increases the risk even higher."    1
Art Payne - USA Offshoring of Creative Work and Knowledge Work "I recommend the amusing and instructive case by management writer Stephen Brown in Harvard Business Review September 2008 about the question: Is high-end knowledge and creative work immune to global offshoring?
According to commenter Richard Phelps, the prevailing view among Western executives has been that whereas workers in emerging economies are welcome to take on transactional work through outsourcing and offshoring arrangements, and are even able to perform some low-level knowledge processing, they are simply not equal to the demands of highly creative work. However the facts suggest otherwise.
Commenter John Chuang says actually creative work has a long history of being outsourced (in the form of partnerships with specialized advertizing and media agencies). So offshoring this type of work to the richest networks and emerging global knowledge hubs is certainly to be expected.
Western companies and countries take precautions."		    0
Cliff - USA Disadvantages of Outsourcing "All the above mentioned benefits made me think: OK, but what are the limitations and disadvantages of outsourcing? I can think of these:
1. Less management control over the outsourced activities
2. Increased overhead costs (for the activities which are not being outsourced).
3. Potential security or confidentiality issues.
4. Complexity, resulting in a slower reaction to changing circumstances.
5. Potential quality issues, resulting in irritated clients, lower sales."		    15
Paul - USA OAM Small Business "For large companies the paradigm described in the article makes sense. But my company works with small businesses who employ 1 or 2 of our agents to do full-time work on their behalf. For these small companies, they can treat our agents as their employees and literally create an offshore backoffice overnight."    0
Best User Comments
Mohit - India SLA "In Indian BPO industry the SLA is treated as a curse by many employees, this should not be done and the definition mentioned above is the true meaning of the SLA. In India usally employees think that companies want employees to sign the SLA for stability. "    8
John - NL Integral Outsourcing "A trend, coming from the UK, is 'Integral Outsourcing', basically outsourcing the outsourcing. In the past decennia several (non-core) processes have been outsourced in many organizations. For example company canteens, catering, cleaning, and security. A problem with this is you still need managers to verify if the outsourcing partners are performing well, and if all outsourced processes are running smoothly. A time-consuming and complex task. This task can now be outsourced as well to specialized so called 'Integrated Facility Management firms'."    -1
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Outsourcing Education & Events


 

Compare with Outsourcing:  Business Process Reengineering  |  Vertical Integration  |  Horizontal Integration  |  Co-Creation  |  Value Stream Mapping  |  Value Chain  |  Core Competence  |  Bricks and Clicks  |  Delta Model  |  Management Buy-out  |  Acquisition Integration Approaches  |  SWOT Analysis  |  Benchmarking  |  3rd Party Logistics (3PL)  |  Vendor Managed Inventory

 

Return to Management Hub: Change & Organization  |  Finance & Investing  |  Human Resources  |   Program & Project Management  |  Strategy  |  Supply Chain & Quality

 

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  ● Daniel (USA) Outsourcing affects Customer Satisfaction "I agree that outsourcing affects customer satisfaction due to the degree of distancing the advantage of understanding and comprehension of not only the English language but the inability to assist in matters that require immediate assistance."

  ● Lincoln Booth (New Zealand) Loss of Touch with the Business "My experience with outsourcing is that it looks like a quick fix, which could save money but in the long run is very costly. This is due to the loss of touch with the business and loss of history, as well as the contracting party not taking onus."
  ● Milad (Iran) Outsourcing good or bad? "In my point of view outsourcing is as terrible as it's perfect for some companies just like ZARA that keeps most of its part centered and makes 20% profit yearly. And so many others that source everything out and they fail to manage it. So you should find the best for yourself."

  ● Bas (Netherlands) Outsourcing is just a myth... "Disadvantages...?
The efficiency gains which are supposed to be achieved by externalizing activities are mostly unproven, unless maybe in reports with questionable independency. Outsourcing is merely a rationalized myth and many companies experiment with it or do some limited outsourcing because it is a fashionable concept in the boardrooms."
  ● CROOS (SRI LANKA) Disadvantages of Outsourcing "Reduced sales, Loss of control, Slow responce time, Quality problems, Can't understand foreign accents, Slow resolution times, Can't produce desired results, Irritated customers, Irritated employees, Irritated unions, Loss of high caliber people."
  ● SH Ong (Malaysia) Outsourcing Disadvantages "Some additional comments from my personal experience after Cliff-USA: 1. Devastated brand name in long term if limited commitment of Service Provider. 2. Threat to business if Service Provider turning outsource business as their Core Competence and become great competitor. 3. Loss of reputation from job cutting after outsourcing business."
  ● Vivek Singh (India) Outsourcing Disadvantage "The disadvantages of o/s are of different nature according to the type and amount of o/s. For example in a construction project o/s can be done by giving a part of the project work as back to back sub-contract. There, "developing a great competitor" is a potential threat. Product quality and time schedule can be controlled. But if the o/s is done e.g. for certain prefab items viz. hume pipes, bearings etc., then product quality and delivery schedule becomes more difficult to control. By developing an understanding, the risks of o/s can be mitigated, if not eradicated."
  ● nickdu (China) Outsourcing's disadvantage "In some developing countries, most 3rd party companies only have the cost advantage, and their staff"s quality is not high, so you can not let them keep up with your pace to develop or renew your business process or model."
  ● Steve Balogun (Nigeria) Disadvantages of Outsourcing "Agreed that outsourcing has many advantages, but to me, its disavantages seem to over weight the advantages:
1.The activities outsourced may be haphazardly handled. That is may not be executed to the satisfaction of the Customer.
2. Increased overhead, which may in turn decreased the bottomline.
3. The Customer may not have control over the outsourced activities.
4. It exposes the processes of the Customer that outsourced activities. That is privacy may be impares."
  ● Tim (USA) Disadvantages? "I will preface this by saying that I work for an IT outsourcer. I speak to many prospects & customers regarding these issues. When I read all of these notes, I wonder if these are disadvantages of Oustourcing, or just the consequences of poorly constructed relationships between vendor & customer. Any of the issues written here could apply to the internal IT provider as well as an Outsourcer. At least with an outsourcer, you can point to a invoice and not pay them when some of these issues arise. If the internal IT department is guilty of any of these (and plenty of IT departments are), you can do nothing except complain."
  ● H. Zoomers (Netherlands) Still more Disadvantages / Risks of Outsourcing "- Loss of Core Competence (if associated with the outsourced functions)
- Discontinuity of Service (in case the outsoucing supplier is declared bankrupt or otherwise stops functioning)
- Possible need to transfer the outsourced processes back at a later stage, which can be time- and effort consuming (an example is previously outsourced IT departments, which are presently often seen as strategic)
- Loyalty of Outsourcing Partner (may decrease over time)."
  ● Maarten de Groot (Netherlands) Reasons for Backsourcing of Information Systems "Here is my contribution on disadvantages of outsourcing:
Natasha F. Veltri, Carol Saunders, C. Bruce Kavan write in California Management Review Fall 2008 that Information Systems Backsourcing is a growing business practice in which a company takes back in-house assets, activities, and skills that are part of its information systems operations that were previously outsourced to one or more outside IS providers.
They report 3 main reasons for backsourcing of IT systems:
1. Problems with the outsourcing arrangement (escalating costs, poor service quality, loss of control over outsourced activities, and a know-how mismatch on the part of the provider).
2. Opportunities generated by internal changes (new executives, redefinition of the role of IS).
3. Opportunities because of changes in the business environment(mergers, acquisitions and divestitures)."