What is outsourcing

What is outsourcing

In today’s rapidly evolving world, more and more organizations are being created with different functional areas of action, with increasing responsibilities and services offered.

Some companies or organizations find themselves in situations where they do not have enough free resources, know-how, resources, or time to deal with the problems themselves.

External assistance is also needed to integrate with the efforts of the existing team to ensure an efficient and trouble-free operation of information resources. This requires the use of outsourcing services as a tool for successful business practice.

Outsourcing (from the English outsourcing, which stands for Outside Resource Using or “use of external resources”) became part of the business vocabulary in the 80s of the twentieth century, and after the 90s there is a development of this practice in many organizations.

More generally, the term refers to outsourcing, and in particular, outsourcing can be defined as the delegation of parts of repetitive, regular, side activities outside the company (from internal to specialized structures) and focusing on their entrepreneurial projects and activities.

If people are temporarily hired to whom activities that are part of the main processes of the company are transferred, it is not about outsourcing, but about the so-called temporary, transitional assistance.

In terms of IT, outsourcing may involve the outsourcing of services covering the entire IT management process in the company or only a single, well-defined service such as data storage. Reference: “Management and engineering in organizations”, https://www.worldforgemagazine.com/management-and-engineering-in-organizations/ Practice shows that outsourcing information provision activities can have a significant positive effect, but only with good organization.

In the management of organizations, outsourcing is increasingly being applied as a successful business practice. Today, everything is subject to outsourcing – activities, processes, and people. The outsourcing of activities and processes in the field of human resources management is also developing successfully. When the business is outsourced, the term offshore outsourcing is used. Reference: “Effective management of organizations”, https://www.businesspad.org/effective-management-of-organizations/

The index analyzes 50 countries using three separate indicators:

1. financial attractiveness – includes indicators such as average salary, rental prices, electricity, telephony, tax burden, corruption, currency stability, etc .;

2. qualification and availability of the necessary labor force;

3. business environment – reflects the general macroeconomic and political situation of the country.

For 2006, the most preferred outsourcing destinations are India and China – first and second respectively.

Outsourcing Index 2006

1st place India
2nd place China
3rd place Malaysia
4th place Thailand
5th place Brazil
6th place Indonesia
7th place Chile
8th place the Philippines
9th place Bulgaria
10th place Mexico

Source: report of the consulting company “A.T. Kearney” (the table shows the first 10 countries out of a total of 50 included in the index)

One of the main reasons why certain countries are the preferred outsourcing partner is because the cost of production per unit of output is lower than other alternative destinations for outsourcing this type of activity.

However, this indicator should not be seen as an isolated determinant of a country’s attractiveness. In recent years, Bulgaria has participated in various types of rankings of global organizations, monitoring and analyzing the environment for doing business in different countries around the world.

According to its methodology, the outsourcing index does not differ significantly from other similar studies. Examining it at the level of individual composite indicators, it is seen that the highest weights in the index are given to the so-called. financial attractiveness, followed by the qualification of the workforce and ending with the general business environment. In Bulgaria, for example, although at a slower pace, the outsourcing of activities and processes in the field of management of organizations and human resources is successfully developing.

Highly developed outsourcing industries:

  • Information and communication technologies
  • Customer support/call & support centers
  • Marketing and PR (public relations)

Outsourcing is a strategy

Outsourcing is a strategy that companies use to contract their non-essential and secondary activities to highly efficient partners who specialize in that activity. Outsourcing is an effective business solution for four indisputable reasons: expertise and skills in the field being outsourced, economies of scale, faster market access, and lower costs.

By transferring secondary functions, a company could better serve its customers with the same or reduced resources, while being able to concentrate on its core business.

Once a company is established in a particular business area, it is not necessarily an expert in all related activities, in modern approaches to customer service, and ensuring the maintenance of long-term and loyal relationships. That is why many companies turn to an external partner in some areas of their activity.

Operational customer service is best when performed by a specialized company with long-term experience in this field. Thus, the company that transfers the activity concentrates its efforts on its growth and the improvement of its services and products.

In addition, the outsourcing partner could reduce the costs of carrying out the transferred activity through improved organization and economies of scale, with the difference in costs being particularly noticeable when the activity is transferred to a country with a lower labor cost.

An example is a bank that has specific expertise and experience in the field of financial services. At the same time, the bank calls a significant number of customers who want purely technical or routine information, such as the status of their account, terms of consumer loans, etc.

To meet these calls, the bank should invest significant resources in support technologies, software, contact center facilities, hiring and training additional staff, etc.

Instead, the bank may choose to hire an outsourcing provider to perform these activities and so on. to use its technical, human, and operational resources cost-effectively.

Reasons for practicing outsourcing

The most common reasons for outsourcing are:

  • cost reduction (it is cheaper to do it by someone else than to organize and prepare its internal implementation);
  • lack of resources in the company;
  • opportunities for faster reaction in changing business conditions;
  • greater ability to control the budget by fixing expenditures;
  • access to innovation;
  • achieving efficiency in carrying out the planned activities;
  • reduction of current investments in internal infrastructure;
  • seeking an opportunity to focus on key aspects of the overall business process by outsourcing peripheral activities; Reference: “Business process reengineering”, https://mstsnl.net/business-process-reengineering/
  • the activity is not core for the company, does not lead directly to profit generation;
  • the activity is routine and could lose valuable time and energy of the specialists and experts in the company;
  • the task occurs once, temporarily, or cyclically;
  • the activity can be carried out within the organization, but it takes resources (people, technology, resources) that can be used more efficiently in other ways;
  • the skills required are so specific that it is practically unreasonable to hire special staff for this task.

In short, the purpose of outsourcing is to: 1) save the company money; 2) increase work efficiency; 3) free up company resources for other activities.

To achieve the main goals of the outsourcing partnership it is necessary to build an effective relationship between the outsourcing partner and the client.

The right outsourcing partner

The right outsourcing partner bears some or all of the burden of a project and works with the company’s or organization’s team to achieve the intended goals. To understand the essence of the problem and offer the best solution, the hired company must have the necessary resources and know-how.

An important aspect is the positive image of the outsourcing partner, which could strengthen and strengthen the company’s position among customers, partners, shareholders, or, more generally, stakeholders.

Main steps for implementation of the life cycle of the strategic outsourcing partnership:

  • Problem analysis and preparation of recommendations or action plan taking into account all micro and macro factors;
  • Forming a suitable team depending on the scale and parameters of the project; Reference: “Forming and building teams”, https://medfd.org/forming-and-building-teams/
  • Providing a management team to control the project and the quality of the processes;
  • Development and coordination of a pilot project;
    Project implementation;
  • Project activity and risk management

Main differences between outsourcing models ITO, BPO, KPO

Business process outsourcing (BPO) is a concept based on specific business tasks, such as issuing payrolls. BPO is often divided into two categories: outsourcing of internal services (back office outsourcing), which includes in-house business functions such as invoicing and purchasing goods, and outsourcing of external services (front office outsourcing), including customer service and marketing, marketing concept, or technical support. Information technology outsourcing (ITO) is a subtype of BPO.

While most BPOs involve the implementation of standardized processes for the company itself, the outsourcing of business process outsourcing (KPO) processes implements those processes that require in-depth research and analytical skills. Not as complex as VRO, KRO activities include adequate research and development, as well as data collection. KRO practices are gaining more and more adherents in corporate America.

IT outsourcing falls within the scope of activities of IT managers (CIOs), who often participate and control the efforts for the implementation of BPO and KRO. They are useful not only with their outsourcing skills but also because the activities of VRO and KRO involve the participation of IT systems and support.

Statistics show that successful outsourcing is not easy. According to various studies, the share of failed projects is between 40 and 70%. At the heart of the problem is the innate conflict of interest in any outsourcing agreement.

The client strives to provide better services compared to his capabilities, often at a lower cost. The supplier is motivated by the potential profit. This voltage can be managed to ensure a successful outcome for the customer and the supplier.

Another circumstance in which the strategy for outsourcing IT activities may fail is the pursuit of rapid implementation in the absence of good business conditions. Outsourcing is used primarily by organizations that seek to reduce costs in the short term, rather than long-term investments that would improve the company’s business capabilities, increase turnover and profitability, and provide a better level of competitiveness.

A recent study by CIO magazine and the Center for Information Systems Research at MIT (USA) found that some outsourcing agreements are easier to implement than others. Transactional outsourcing transactions, in which the company assigns orders for individual processes, characterized by clearly defined rules, have a 90% success rate.

When creating alliances between customers and suppliers for project management (in the development of applications or maintenance activities), a success rate of 63% is achieved.

In established strategic partnerships, in which a single provider assumes the assignment of a large volume of IT services – 50%. Reference: “Strategic modeling for organizations”, https://www.mmrls.org/strategic-modeling-for-organizations/ In general, the risks increase with the blurring of the boundary between the defined areas of competence of the customer and the supplier and with the expansion of the scope of responsibilities of each of them.

Regardless of the type of outsourcing, the relationship between the customer and the supplier can be successful if both achieve the expected level of profitability.

Outsourcing, like any activity, has its positive and negative features. Before deciding on its implementation, the following indicators must be considered:

  • Will the organization gain flexibility?
  • Will productivity increase in the organization?
  • Will the economic efficiency of the company increase?
  • What will be the impact of outsourcing on the company culture?
  • How will this affect employees afterward?
  • Won’t the areas of the main activities and the functional connections between them be torn apart?
  • Will the results in terms of competitiveness and trade positions be positive? Read more: “Management forms for company management”, https://newia.info/management-forms-for-company-management/

The conditions imposed by the outsourcing of the management can be listed from the experience of many foreign companies as follows:

  • Reducing costs should not become a strategy.
  • The requirements for outsourcing must be unambiguously formulated.
  • Determining the state and capabilities of the organization.

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