In recent decades, outsourcing has emerged as a major trend in human resources all over the world. It has become the practice in where certain job functions are sent outside of a company instead of performing them in house. Day by day, more and more companies are focusing on outsourcing as an easy way to grow as well as reducing overhead and payroll costs.
In the simplest terms outsourcing can be described as farming out of different services to third parties. For example in case of information technology, outsourcing includes any task such as outsourcing all kinds of management of IT to HP or IBM, or even outsourcing a very easy and small task, such as data storage, data editing, disaster recovery or, and any task in between. No precise definition of outsourcing can be found. The term is often used in an inconsistent way.
Outsourcing is often involved contracting out of business activities to an external provider. Outsourcing is any job, task, process or operation, which could be done by the internal employees of an organisation, but instead of doing so; such companies contract a third party to perform the task. In addition, the tasks which are done by the third party may be done off-site or on-site. In recent years one of the major changes has occurred from the growth of individuals outsourcing as a way to develop a feasible service providing business that can be operated virtually from anywhere in the world using internet and online technologies. Some common areas of this business are marketing services, website creating, analysis and etc. All elements can be performed remotely and delivered through internet.
Reasons for Outsourcing
Global competition is growing fierce and companies are looking for ways to increase their competitive edge without jeopardizing their profit margins. Companies are also realizing that staying current with technologies requires a great deal of effort, risk and expense, this is why outsourcing is being thought as an attractive alternative.
Some of the main reasons why a company may want to outsource are stated below;
- Organisational Driven Reasons
- Improvement Driven Reasons
- Cost Driven Reasons
- Revenue Driven Reasons
- Employee Driven Reasons
Organisational Driven Reasons
The contact a company or organisation takes with the outsourcing firm determines the amount of the risk the company faces. For eg, looking at it from a CIO’s perspective, in a fixed price contract, the amount of risk the outsourcer faces is more than the time and material contract. Regardless of the type of contract, the CIO will be sharing the responsibility for the future direction of the technology within his/ her company with the outsourcer. The CIO responsibility is to ensure the technology integration with business processes within the company, the outsourcer will assist by introducing the new technology with proper skills to implement.
Outsourcing in this aspect enhances effectiveness by allowing the outsourcer focus on what he/ she knows how to do best. Increase product and services value customer satisfaction and share holder value to transform the organisation.
Improvement Driven Reasons
One of the strategic initiatives of an outsourcing firm is to stay current with new technologies and system. With the help of the outsourcing firm a company is able to stay current. The outsourcer is in a position to provide experienced personnel and to access the value of the new application. The company will spend less time, effort and risk because the outsourcing firm is familiar with the new technology. Most times a company will embrace the “centre of expertise” concept, just to have highly specialised personnel work on the new technology and provide support for the existing systems.
This helps solve issues and facilitate the knowledge transferred to the organisation/ company development. In this aspect outsourcing helps the company to;
- Acquire initiatives ideas
- Improve in the operating performance
- Improve credibility and image by associating with superior providers
Cost Driven Reasons
In this aspect there are many reasons why a company will want to save cost; some of these reasons are stated below;
- The size of the staff in the company
- The company size at a whole
- Hardware and software maintenance agreement, etc.
- Strategic direction of the company
One of the primary reasons why a company will want to save is the ability to take advantage of economies of scale. Outsourcing firms are able to consolidate data centre operations, which provides lower overhead cost on a per-customer basis. Outsourcing firms acts as aggregator for telecommunication networking and cost reduction. The outsourcing firm also helps in re-engineering and maintaining application for the company. Cash can be generated by reducing investment in assets and free up the resources for other purposes; turning fixed cost into variable cost.
Revenue Driven Reasons
Through outsourcing, a company gain market access and business opportunities through the provider’s network. Provides flexibility needed to stabilize the various demands needed by the company. The sales and production capacity are expanded during period when such expansions could not be financed in the company. Outsourcing accelerates expansion by tapping into the provider’s developed capacity, process and systems. It gives rooms for exploiting the skills commercially. All this leads to the improvement of the company.
Employee Driven Reasons
Outsourcing give employees a stronger career path, they get to know what they are good in and then with the knowledge that they know what they can do, makes them to be committed and energy in non-core area.
It provides the ability for an employee core to focus on the core business, most necessary and peripheral operations are outsourced and this gives the employees an ability to concentrate instead of getting disturbed by minor issues
Importance of Outsourcing in Modern Businesses
Outsourcing has brought a significant change in the organisational structure. Many organisations prefer works to be done through outsourcing at a lower cost. Such organisation reduces the size of its formal structure and focus on outsourcing. In the past, it was considered that an organisation must have some physical structures. But in modern age there are some organisation purely based on virtual structure. In response to these changes resulting from globalization, business organisations are changing their structure and the way of operation. Organisations which are exposed to global forces of demand, supply and increased international competition, are not any more protected by local business environment. These companies are now focusing on adopting global forces. Companies which cannot cope with the global forces have to struggle for survival. Companies which can adjust their strategy and actions with response to the changes brought by globalization can certainly be successful to achieve their goal in this globally competitive market. In the perspective of business world and the global economy, outsourcing can be considered very important in terms of cost savings, emphasizing on core activities, controlling operation, continuity of operation, reducing investment in internal infrastructure, staffing flexibility, and access to innovation.
Outsourcing enables organisations reducing costs and overheads required to perform its back office activities. As a result they can provide goods and services at a low cost. In today’s business world organisations have to expand its back office activities. Such expansion may consume resources at the expense of the main activities of the company. Outsourcing, through doing back office activities, helps the companies to refocus on the main business activities. Operations or activities whose costs are going out of control must to be considered for outsourcing. Departments which are running in uncontrolled and poorly managed condition over time are motivators for outsourcing. In addition, outsourcing can bring improved management skills for organisations.
In the periods of high employee turnover operations of business may become uncertain. In such condition of uncertainty, outsourcing can provide a significant level of continuity of operations of the company. Through outsourcing, companies can transfer a significant portion of its work to third parties. As a result it requires less number of internal employees. Thus it requires less investment in internal infrastructure. Businesses that have seasonal or cyclical demands to increase activities can think of outsourcing. Outsourcing brings flexibility in employment system. Outsourcing allows companies to gather innovative business ideas and planning from widely diversified sources.
Disadvantages of Outsourcing
When a company outsources HR activities such as Training and Development, Payroll and Recruitment services, there is a significant level of risk if confidential company information is exposed to a third-party. If wrong party is selected for work, it may result a low quality output or inappropriate timing. It is easier to control quality inside the organisation rather than with an outsourced party. In case of outsourcing it is very difficult to ensure specific customer focus. An outsourced vendor may work on task of many companies at a time. It results ales customer focus. There may have some hidden costs in case of outsourcing. Outsourcing requires international contract. Additionally it may require some legal fees.