Outsourcing

In business, outsourcing is the contracting out of a business process to a third-party. The term "outsourcing" became popular in the United States near the turn of the 21st century. Outsourcing sometimes involves transferring employees and assets from one firm to another, but not always.[1] Outsourcing is also used to describe the practice of handing over control of public services to for-profit corporations. [2] Outsourcing includes both foreign and domestic contracting,[3] and sometimes includes offshoring or relocating a business function to another country.[4] Financial savings from lower international labor rates is a big motivation for outsourcing/offshoring. The opposite of outsourcing is called insourcing, which entails bringing processes handled by third-party firms in-house, and is sometimes accomplished via vertical integration. However, a business can provide a contract service to another business without necessarily insourcing that business process.

Overview
Two organizations may enter into a contractual agreement involving an exchange of services and payments. Outsourcing is said to help firms to perform well in their core competencies and mitigate shortage of skill or expertise in the areas where they want to outsource.[5] In the early 21st century, businesses increasingly outsourced to suppliers outside their own country, sometimes referred to as offshoring or offshore outsourcing. Several related terms have emerged to refer to various aspects of the complex relationship between economic organizations or networks, such as nearshoring, crowdsourcing, multisourcing[6][7] and strategic outsourcing.[8] Outsourcing can offer greater budget flexibility and control. Outsourcing lets organizations pay for only the services they need, when they need them. It also reduces the need to hire and train specialized staff, brings in fresh engineering expertise, and reduces capital and operating expenses.[9] One of the biggest changes in the early 21st century came from the growth of groups of people using online technologies to use outsourcing as a way to build a viable service delivery business that can be run from virtually anywhere in the world. The preferential contract rates that can be obtained by temporarily employing experts in specific areas to deliver elements of a project purely online means that there is a growing number of small businesses that operate entirely online using offshore contractors to deliver the work before repackaging it to deliver to the end user. One common area where this business model thrives is in providing website creation, analysis and marketing services. All elements can be done remotely and delivered digitally, and service providers can leverage the scale and economy of outsourcing to deliver high-value services at reduced end-customer prices.

Reasons for outsourcing

Companies outsource to avoid certain types of costs. They outsource the non core activities. Among the reasons companies elect to outsource include the avoidance of regulations, high taxes, high energy costs, and costs associated with defined benefits in labor-union contracts and taxes for government-mandated benefits. Perceived or actual gross margin in the short run incentivizes a company to outsource. With reduced short-run costs, executive management sees the opportunity for short-run profits, while the income growth of the consumer base is strained.[3] This motivates companies to outsource for lower labor costs. However, the company may or may not incur unexpected costs to train these overseas workers.[10] Lower regulatory costs are an addition to companies saving money when outsourcing. On comparative costs, a U.S. employer typically incurs higher defined benefit costs associated with taxes to account for social security, Medicare, safety protection (OSHA regulations) and FICA taxes etc. than in other countries.[11] On comparative CEO pay, executive pay in the United States in 2007 was more than 400 times more than average workersa gap 20 times bigger than it was in 1965.[12] In 2011, twenty-six of the largest US corporations paid more to CEO's than they paid in federal taxes.[13] However, it appears companies do not outsource to reduce executive or managerial costs. Companies may seek internal savings to focus money and resources towards core business. A company may outsource its landscaping functions irrelevant to the core business.[14] Companies and public entities may outsource certain specialized functions, such as payroll, to ADP or Ceridian. Companies may find the same level of consumer satisfaction.[15][16] Import marketers may make short-run profits from cheaper overseas labor and currency mainly in wealth-consuming sectors at the long-run expense of an economy's wealth-producing sectors, thus straining the home country's tax base, income growth, and increasing the debt burden. When companies offshore products and services, those jobs may leave the home country for foreign countries, at the expense of the wealth-producing sectors.[3] Outsourcing may increase the risk of leakage and reduce confidentiality, as well as introduce additional privacy and security concerns.

Why do companies outsource?

Here are some common reasons: * Reduce and control operating costs * Improve company focus * Gain access to world class capabilities * Free internal resources for other purposes * A function is time consuming to manage or is out of control * Insufficient resources are available internally * Share risks with a partner company In the early days, cost or headcount reduction were the most common reasons to outsource. In todays world the drivers are often more strategic, and focus on carrying out core value-adding activities in-house where an organization can best utilize its own core competencies. Main factors influencing successful outsourcing The critical areas for a successful outsourcing program are: *Understanding company goals and objectives *A strategic vision and plan *Selecting the right vendor

* Ongoing management of the relationships * A properly structured contract * Open communications with affected individual/groups * Senior executive support and involvement * Careful attention to personnel issues * Short-term financial justification From this list open communications and executive support are of paramount importance in a successful outsourcing process. Additional consideration should be for a workable Service Level Agreement, which is openly available, to all staff involved.

Open Communication
Whatever the outcome of the outsourcing arrangement, managing change is fundamental to the success of the program. Assessing stakeholder requirements is the first part of this process, and having open channels of communications during this time are vital. Everyone concerned should be involved in the process.

Executive Support
Strategic objectives, such as outsourcing initiatives must come from the top echelons of a company. Senior management must articulate the goals and objectives of the outsourcing initiative and communicate how the process will benefit the organization Todays managers are looking ahead and recognizing that the responsibility for ensuring the success of their enterprises outsourcing initiatives does not stop when the ink has dried on the contract, Unfortunately, this has not always been the case. A combination of uncertainty combined with a lack of attention to critical details has created a present day scenario where, according to The Gartner Group, 25% of outsourcing contracts will be re-negotiated or canceled within three years. Ongoing management of the relationship is important. Senior management must stay involved during the implementation of the contract. Not only should there be a clearly defined escalation procedure, but senior management should meet at appropriate intervals to discuss the outsourcing relationship. Meetings should also be held at the operational level to address the working of the outsourcing contract in practice, to identify and resolve any problems that have been encountered, and to agree on changes to ensure continued satisfaction.

Globalization and Socio-Economic Implications

Outsourcing has contributed to further levelling of global inequalities as it has led to general trends of industrialization in the Global South and deindustrialization in the Global North. Even though outsourcing has promoted a movement of industrial sites from the Global North to Global South regions, it has not been the only reason for the concurrent deindustrialization and industrialization of the North and South respectively. Deindustrialization in more economically and technologically developed regions has also been affected by increased industrial productivity.[37]

The rise in industrial efficiency which characterized development in developed countries has occurred as a result of labour-saving technological improvements. Although these improvements do not directly reduce employment levels but rather increase output per unit of work, they can indirectly diminish the amount of labour required for fixed levels of output.[38] Likewise, a trending shift in demand towards non-tradable services such as those in the health-care or government sectors has further accelerated deindustrialization in the Global North. Since these tasks cannot be outsourced, the demand for them needs to be met domestically abiding by the local market price. Consequently, a shift in the labour force towards fulfilling these profitable services has mostly taken place at the expense of industry since the agricultural sector in the early industrializing Global North had already been maximizing its labour capacity.[37] Despite the variety of domestic and international factors affecting deindustrialization in the Global North, those concerning the external influence of the global market have been the most influential ones since 1994.[39] The recent industrialization process outsourcing has encouraged in the Global South has taken place at a much faster pace than it did during its beginnings in the North, given that the welldeveloped technology was already developed, and merely spread to further regions.

Five Signs That You Might Need to Outsource | Article

If youve been able to resist outsourcing while the world around you is doing it, thats great. However, it might be a good idea to start looking at the outsourcing option if youre seeing one or more of the following happening in your company. 1. You just cant find the right people. If you find that, despite spreading the word among friends, colleagues and acquaintances in person and on social networks, there are very few applicants for the open positions youre trying to fill, it means that theres a shortage of such skills in your side of the woods. Skills shortage is a cyclical phenomenon in the technology industry, as hot new technologies become the industrys darlings and only a select few experts are available for hire. The good news is that digitalization enables these hot technologies to spread quickly to all parts of the world, where tech-savvy people are quick to learn and adopt them. Oh, and its not always new skills that are in short supply; old technologies or legacy systems also have fewer hands working on them, as people jump on the latest technology bandwagon. A small knot of so called technocrats who are passionately devoted to these technologies carefully preserve and even nurture them. Youll find these people in pockets in the developing countries where technology has a vocabulary all of its own. Its ironic, but if you cant hire local, go global! 2. When customers start complaining about the quality of service.

This of course could be just an internal glitch that you can set right by an increased dose of training or hiring a few extra hands to attend to customer calls. Do a dispassionate analysis and invest in that training program for your people. However, if the complaints still persist, it could be a sign that you simply have too many customers to handle in-house. This is when you come to the crossroadsshould you hire a small army to mitigate customer woes or find someone else to do it? At this point, leave emotions aside and take the call thats best for your company in the long run. If you decide to go with an outsourcing partner, remember that you are using a shared resource and the cost for having that all-night line open may actually be very small compared to hiring a full-time person on your premises. 3. When you cant keep your employees excited about maintenance.

Its no secret: maintenance work is boring. Whether it is keeping track of the hundreds of pieces of hardware or making sure the thousands of software packages youve purchased are updated regularly, the job can get monotonous. Outsourcing service providers can do much of this monitoringif not all of itremotely these days. In addition to maintenance, they can do repairs remotely as well. If youre already in the technology business, your customers may need you to keep whatever you supply updated too. Rather than have your employees slacking off because of tedium, why not give it out to a specialist at a lower cost ? 4. When accounts give you the mother of all headaches.

If youve grown fast and want to continue having that thrill, nothing can give you a bigger headache than that ledger book, metaphorically speaking. At this point in your companys growth curve, you need to get your financial accounts really, really clean and in checkpun intended. Ambitious number crunchers who refused to be confined to jobs in the Big Five of the accounting world have created several specialist firms to do this for you. They run the latest financial packages and invest in the most up-to-date security systems. Several have both voice and data centers to address customer demands. Their working standards follow the latest US federal and state regulations. So go for the best, and dont settle for anything less. 5. When your local pizza supplier recognizes your voice on the phone.

Admit it. Instead of warm, home-baked plated meals, you and your team have been sustaining yourselves on pizzas or Chinese or Indian dinners that come out of boxes. Quite apart from the fact that this is not a healthy way to live, it shows that you just dont have the time for a life outside the office. Remember, all work and no play makes Jack a dull boy. Outsourcing is now a well-trodden path with support systems in place. Take a short walk before you decide to drive down it. Do you see any of these signs in your organization now?