Outsourcing? A Broad outline……

We need to understand the literal meanings of “Work,” “Job,” and “Chore” before we get into outsourcing per se.

  • Work: Exertion or effort directed to produce or accomplish something; labour; toil.
  • Job: A piece of work, a specific task done as part of the routine of one’s occupation or for an agreed price: Example – She gave him the job of mowing the lawn.
  • Chore: A small or odd job; routine task. (For example – taking out garbage)

Proprietary concerns with very low number of employees, small businesses with slightly larger number of employees and medium or large enterprises manage work, jobs and chores (all are considered essential to the day-to-day running of the business and its successful outcome) through various means. The work, job and chores require different levels of skills and involvement by the business group irrespective of its size and do take certain amount of resources such as labour, time and cost to achieve.

Now looking at the definition of “Outsourcing”  – It is the management of an entire business function or functions through external service provider or providers.

Now let us look at the nuances of outsourcing in detail.

Proprietary Concerns– Let us take the case of a small automobile garage run by an individual who is the owner and the prime worker. He may have a few people to help him out in his work. Jobs and chores are assigned to the small group and managed by the owner. In the case of a small proprietary concern, the scope for outsourcing  is minimal and the cost advantage very low.

Small Business Concern– Suppose the same automobile garage did extremely well and the number of vehicles handled increased dramatically. The owner may not be able to function in the same way as he did earlier. He is still the driving force, but may not the prime worker any more. He may still handle the vehicles of a few valued customers, but the bulk jobs get done by others. The logistics and administrative work involved in running the business also would have increased manifold. At this point the owner has the choice of either doing the job in-house through additional employees or outsourcing certain business functions, common tasks and chores to external service providers.

Medium and Large Business concerns– Going in the same lines, a very large nationally networked automobile servicing concern would have a large employee base and much vaster business functions compared to a small business concern. Such businesses also have the choice of doing all the business functions in-house or to resort to outsourcing certain business functions, common tasks and chores to external service providers.

Why Outsource

Some of the reasons why business concerns resort to outsourcing are given below:

  • Improve business focus to carry out core functions. For example, the core functions of an automobile manufacturer are design – manufacture – marketing of their brand of automobiles. Maintenance of their manufacturing plant, operations of their utilities / infrastructure, physical security of their plants, in plant logistics management, sales & service etc are essential but non-core activities.
  • Free internal resources for other purposes. Once the non-core functions are outsourced the internal resources could be used for more strategic and focused core functions. Down sizing of employee groups used in non-core activities is also possible. For example, the Plant maintenance group could be down sized and the excess people from this group could be shifted to Project groups, new plants etc.
  • Gain access to high-class capabilities through third parties for outsourced functions (as per their core competencies). For example, there could be vendors specialised in automobile paint shop system / infrastructure maintenance to whom that job could be entrusted, at a price.
  • Use other vendors for skills or capabilities that are not available internally. It is difficult to build an internal team with all the essential skill sets. It may be financially more viable to use other vendors for some of the skills.
  • Reduce and control operating costs. One of the perceived and proven aspects of outsourcing is the reduction in operating costs.
  • Reduce HR management / training costs by reducing the number of own employees. Outsourcing helps in reduction of own employee count. This in turn reduces the overheads expenses for managing the employees day-to-day affairs, training, career progression etc.

Strategic and Tactical Outsourcing

Strategic outsourcing of business functions is carried out by businesses to meet long-term goals. This would require business analysis to identify functions to be outsourced, cost benefit, operational controls, risk assessment, legal implications etc.

Tactical outsourcing of business functions is carried out by business to meet short-term requirements. For example, getting large number of data entries through a vendor than doing through in-house sources.

While outsourcing is done to get some specific work done on regular long-term basis or to cover short-term peaks, we need to know other modes of getting work done through similar modes too.

Crowdsourcing is a method used to obtain solutions to specific problems by broadcasting the problem to a large group of solvers as an open call. The crowd could typically form up into online communities. This mode explodes the problem to a large network of amateurs, volunteers, and freelance experts and allows brainstorming within the groups / sub groups. The crowd would submit solutions, sift them through online discussions and recommend the best solutions to the Crowdsourcer (or the problem owner). The winning individuals are at times compensated monetarily, or with prizes, or just with recognition. By this mode, solution to specific problems could be sought at comparatively lower cost and often quickly. The sourcing organization gets to tap a wider range of talent than its own limited resources. Some examples for Crowdsourcing are new product ideas, innovations to existing products, new or modified branding ideas, proposals / implementation methodology for Governmental initiatives affecting a large number of people etc.

Co-sourcing is a mode where certain services are performed internally with specific assistance from some external service provider. A few examples of Co-sourcing are the process of auditing accounts, risk management, fraud investigations and software development through internal resources, assisted by external specialized service providers.

Business Risk in Outsourcing

Increased business risk due to perceived loss of control is a key inhibitor to outsourcing. The reality is that, outsourcing can reduce business risk in four major categories namely strategic risk, operational risk, financial risk and compliance risk, if the outsourcing process has been done with due diligence.

#•••••••••Operational Risks: This covers the financial and legal risks that arise when transitioning into an outsourcing relationship.
#•••••••••Commercial Risks: Companies resort to outsourcing to reduce operating cost. The service contract would lock them to a price with escalation over a period of time.  Market levels are dynamic and the customer company may end up paying too much for the services they receive.
#•••••••••Business/Strategic Risks: Businesses need to adjust to their operating environment and identify new strategic initiatives. If the service provider is not able to accommodate new goals, the customer company might want to exit the contract prematurely.
#•••••••••Legal / Compliance Risks: These cover privacy issues, regulatory factors, statutory obligations, outsourcing laws and legal liability that are also dynamic in nature.

Steps to reduce or mitigate outsourcing risks are as follows:

#•••••••••Be realistic: The business should get a service that works optimally at an affordable price. Setting unrealistic expectations and transferring too much risk and liability to a supplier could lead to the supplier falling short in their performance and adds to the cost by way of contingency / risk premiums. Mutually agreed Service Level Agreements (SLA) would help in this aspect.
#•••••••••Do your due diligence: Companies should assess the capabilities of the service providers being considered and the internal structure of the company to ensure smooth functioning.
#•••••••••Have the right governance structure: The success of outsourcing would depend on the internal governance structure and a well drawn up contract.  It needs to be win-win situation for the parent company and the service provider.
#•••••••••Try to anticipate change: Change is most certain in outsourcing relationships. To reduce the risk of potential conflicts between the parties in this regard, the contract should set down clear procedures for dealing with change. Mutually agreed Performance metrics, Change order process, Default penalties, High performance incentives and bonuses etc would reduce the need for frequent and further negotiations in this regard.
# •••••••••Trust is transient: A well-drawn and understood contract would mitigate the people centric conflicts of interest.

To Outsource or Not is a decision that needs much thought and analysis. The willingness of the top management team to outsource certain business functions will need necessary change management deep down within the organisation. Opposition to any change is natural and if a buy-off in this regard is made in the beginning, implementation of the outsourcing decision becomes that much easier. Communication on the impact of the changes in the organisation structure and functions would help the existing employees to understand the reasons and benefits of outsourcing.

As indicated earlier, any outsourcing has to bring in a win-win situation to the parent business and the vendor, if the venture is to succeed and flourish.

The views given above are purely personal and may not be applicable to all types of outsourcing decisions.

Kaycee

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2 thoughts on “Outsourcing? A Broad outline……

  1. Pingback: The Positive Points About Outsourcing and The Decision To Do It | My Urgent Information

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