History of Outsourcing - Many organizations today are making the decision to outsource. In today’s global marketplace outsourcing has made itself accessible to many organizations on a national and international level. Outsourcing refers to getting things done from out - house instead of getting them done in - house. History of outsourcing is as old as the history of mankind. Since the individual started to form groups, small communities, and societies, the outsourcing began. The decision to outsource is often made in the interest of lowering firm costs, redirecting or conserving energy directed at the competencies of a particular business, or to make more efficient use of worldwide labor, capital, technology and resources. Fundamentally outsourcing is a term relative to the organization of labor within and between societies.
Outsourcing - Outsourcing involves transferring or sharing management control and / or decision - making of a business function to an outside supplier, which involves a degree of two - way information exchange, coordination and trust between the outsourcer and its client. Such a relationship between economic entities is qualitatively different from traditional relationships between buyer and seller of services in that the economic entities involved in an "outsourcing" relationship dynamically integrate and share management control of the labor process rather than enter in contracting relationships where both entities remain separate in the coordination of the production of goods and services. Business segments typically outsourced include information technology, human resources, facilities and real estate management, and accounting. Many companies also outsource customer support and call center functions.
Benefits of Outsourcing – Outsourcing, as the term is typically used in economics, is not necessarily a job destroyer but rather a process of job relocation and may not impact the net number of jobs in a nation or in the global economy. Outsourcing is also successful in increasing product quality and / or substantially lowering firm and consumer costs (e.g., increases the quality to cost ratio). Because outsourcing allows for lower costs, even if quality reduces slightly, this is sometimes the case, productivity increases, which benefits the economy in the aggregate. Two of the major advantages that today’s organizations can expect to obtain through outsourcing include the ability to purchase intellectual capital and to lower costs. Overall outsourcing is viewed for its
Quality of Service
Distribution of Workload
Cost Effective / Cheap labor
Overall outsourcing is viewed by many organizations as a strong business tactic that ultimately is a superior economical approach to developing products and services or rather a process of job relocation with a basic need of improving the bottom line of the concern company. Outsourcing can also present advantages to "Developing" countries and benefits from the patronage of companies that outsource to them - in terms of increased wages, job prestige, education and quality of life. Outsourcing is a form of international trade.
The most common reasons why companies decide to outsource include cost reduction and cost savings, the ability to focus its core business, access to more knowledge, talent and experience, and increased profits.
Many companies decide to outsource because it cut costs such as labor costs, regulatory costs, and training costs. Foreign countries tend to have workers who will complete the same amount of work as in the United States, but for less than half the salary that an American employee will make . This motivates companies to outsource overseas to find foreign workers who are willing to work for these lower wages. The company can spend up to half the usual cost to train these workers to become experts in a different country . Lower regulatory costs are an addition to companies saving money when outsourcing. Comparing the costs to employing a worker in the United States to a worker in China, it is noticed that an employer in the U.S. has to pay higher taxes (social security, Medicare, safety protection (OSHA regulations) and also FICA (taxes)).
Companies are able to focus their money and resources more towards improving the core aspects of its business when outsourced. For example an insurance company may outsource its landscaping functions to a service provider that specializes in landscaping since it is irrelevant to the core operations of insurance. The landscaping is performed by an expert outsourced organization and the insurance company can focus on doing what it specializes in. This allows the outsourcing company to build onto its core functions that keep the business running smoothly. Another example is that companies and public entities such as a public school district that outsources functions, such as their payroll offices to companies like ADP or Ceridian, which specialize in payroll functions.
In the case of outsourcing, firms may find that workers in other countries can provide better customer support than their domestic counterparts. For example, an online coffee shop owner who moved his calling center to the Philippines found that his customers received better customer support from workers in this country.
Revenue and profit plays a large role in the reason for a company outsourcing. Since the costs are cheaper in different countries for a corporation to run it, as well as to train the employees, this saves the company a large sum of money. More profit comes in when the vendors are able to purchase products at a less expensive rate and continue to sell them at a reasonable price for consumers. The prices are reduced for services as well as products when purchased at a cheaper price.
When companies offshore services, even though it may not be the core parts of the business, those jobs leave the home country for foreign countries. . Risk of leakage, reduced confidentiality, privacy and security concerns are other risks of outsourcing.
Companies are able to provide services and products to consumers at a cheaper price while still having a large margin for profit. This profit margin benefits both the company as well as the consumer. The cheaper prices lead to an increase a company’s economy. Although losing jobs hurts the economy because more citizens become unemployed, the cheaper prices allows customers to purchase more products and services which helps to rebuild an economy.
Management, the corporation and consumers
Greater physical distance between higher management and the production floor employees often requires a change in management methodologies, as inspection and feedback may not be as direct and frequent as in internal processes. This often requires the assimilation of new communication methods such as Voice over ip, Instant messaging, and Issue Tracking Systems, new Time management methods such as Time Tracking Software, and new cost and schedule assessment tools such as Cost Estimation Software.
Quality of service
Quality of service is best measured through customer satisfaction questionnaires which are designed to capture an unbiased view.
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.
Foreign Call center agents may speak with different linguistic features such as accents, word use and phraseology, which may impede comprehension. The visual clues that are missing in a telephone call may lead to misunderstandings and difficulties
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 are no longer 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.
Qualifications of outsourcers
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
Companies looking to outsource their engineering activities should evaluate the capabilities of the providers. There are many bench marking reports by independent research and consulting firms which analyze the vendors capabilities.
The early trend in outsourcing was manifest in a financial construct where a function's associated capital and personnel were sold to a vendor and then rented back over a series of years. Early benefits were a boost in expertise and efficiency as outsource vendors had more focus and capability in their specialization. As time progressed, the year 0 benefit was off the books, customer needs evolved and contracts generally aged poorly. Rigid contracts hampered the ability of customers to respond to emerging business drivers, and simultaneously tied the hands of the vendor's team who was focused on increased efficiencies for static problems. The result tended to be additional "project" contracts for incremental changes in a monopoly environment. Many deals became contentious, and many customers have become very uncomfortable surrendering so much power to a single vendor. As the contract aged, it became increasingly difficult to even negotiate with vendors with confidence, because the customer began to lack any real knowledge of the cost structure of the function, or the competitive situation of the vendor.
Industry leaders turned to each other, trade journals and management consultants to try to regain control of the situation, and the next answer that grabbed hold of the industry was labor cost arbitration; leveraging cheap, offshore resources to replace or pressure increasingly expensive legacy outsource vendors. Pressure led incumbent vendors to move resources offshore, or to be replaced wholesale. As this renegotiation was under way, many customers seized the opportunity to restructure to gain more control, transparency and negotiating power. The end result has been fragmentation of outsource contracts and a decline in mega-deals. Many companies are now relying on several vendors who each offer specialization and / or lowest cost.
As mentioned above, outsourcing has gone through many iterations and reinventions. Some outsourcing deals have been partially or fully reversed citing an inability to execute strategy, lost transparency & control, onerous contractual models, a lack of competition, recurring costs, hidden costs, etc... Many companies are now moving to more tailored models where along with outsource vendor diversification, key parts of what was previously outsourced has been insourced. Insourcing has been identified as a means to ensure control, compliance and to gain competitive differentiation through vertical integration or the development of shared services [commonly called a 'center of excellence']. Insourcing at some level also tends to be leveraged to enable organizations to undergo significant transformational change.
Further, the label outsourcing has been found to be used for too many different kinds of exchange in confusing ways. For example, global software development, which often involves people working in different countries, it cannot simply be called outsourcing. The outsourcing-based market model fails to explain why these development projects are jointly developed, and not simply bought and sold in the marketplace. Recently, a study has identified an additional system of governance, termed algocracy, that appears to govern global software projects along side bureaucratic and market-based mechanisms. The study distinguishes code-based governance system from bureaucracy and the market and underscores the prominent features of each organizational form in terms of its ruling mechanism: bureaucracy (legal-rational), the market (price), and algocracy (programming or algorithm). So, global software development projects, though not insourced, are not outsourced either; rather, they are developed together where a common software platform allows different teams around the world to work on the same project together.