What is Outsourcing?

Introduction Outsourcing is the process by which a company contracts another company to provide particular services. These services/ functions would be otherwise carried out in-house, by the companys own employees. Outsourcing is becoming more and more popular in todays business environment, and most companies outsource some work or other. Call centre services, payroll, maintenance etc are some of the kinds of work typically outsourced. Generally, companies outsource functions that are non-core to their business. The firms that outsource work are known by the terms client and buyer. The firms to which work is outsourced are known variously as vendors, third-party providers or service providers. Advantages of Outsourcing There could be several reasons why companies outsource work. But the foremost reason is the money it saves. Many service providers can offer to get the work done at lower costs, as they have fewer overhead expenses and perhaps operate in a different economical environment. In outsourcing, it is often narrow functions such as payroll, data entry etc that are given to specialist vendors. These specialist companies can therefore do the work more efficiently as they have specialized tools, facilities and personnel trained for that particular kind of work. When a company outsources peripheral work, it is able to concentrate on core business issues. The details are taken care of by specialists, and the companys own management professionals have more time and resources at hand for working on the most crucial issues within the company. Outsourcing is also an excellent option to a company that plans to expand geographically, as the company can start its operations in a different country more inexpensively through a local provider. Different Kinds of Outsourcing There are several different kinds of outsourcing, based on the nature of work outsourced. As we saw earlier, some companies tie up with service providers for narrow functions. However it is also common these days to outsource entire operations. This type of outsourcing can be placed in two broad categories, namely Information Technology Outsourcing (ITO) and Business Process Outsourcing (BPO). Business process outsourcing can again be sub divided into call centre outsourcing, human resources outsourcing (HRO), finance and accounting outsourcing and claims processing outsourcing. When entire operations are outsourced this way, the contract can run into millions and billions of dollars. It is common for the clients employees to be transferred to the vendor company. Companies like IBM, HP, EDS and Accenture are some of the leading service providers in the outsourcing business. The Process A company outsourcing work goes about the process in four stages. As the first step, it has to develop the strategy for outsourcing. This means that the company has to first of all identify its business case for outsourcing, and also have a clear idea of the role of outsourcing in its business. The next step is to evaluate potential service providers and decide on projects and locations. Contract development comes as the next step, where the buyer and vendor negotiate and settle on legal, pricing and service level agreement terms. The outsourcing contract is on from this stage, and in the fourth stage the buyer has to manage the outsourcing relationship. Successful Outsourcing Whatever the business case, the success of an outsourcing relationship depends on the following factors. The client organization should have set up proper executive-level support for the outsourcing project. It should also have ongoing communication with both the service provider and in-house departments and personnel involved. It is also important to manage the outsourcing relationship with the service provider along the right track. And last but not the least, both the client and vendor should allow for flexibility to accommodate changing business needs. Challenges and Problems A standard challenging situation in outsourcing is offshore outsourcing. Language, culture and time zone can all create problems.

With outsourcing, sometimes a company loses direct contact with its clients, thus preventing it from developing lasting customer relationships. Delayed communications or implementation is another potential trouble zone. These render the company in a situation of being in less control than desired. Also, sensitive information may become more vulnerable when third parties are brought into the picture. With both benefits and disadvantages in the picture, it is important that a company evaluates and assesses its needs and situation before joining the outsourcing bandwagon.

Tips for a Successful Outsourcing Project

Entrepreneurs and small business are always looking for creative ways to accomplish more of their business goals for less money. One strategy that can help you save time, money and frustration when you start and build your business is to outsource as much work as possible to skilled, but cost-effective, external service providers. Outsourcing success depends on how well you manage the process before and after the outsourcing contract is signed. Hope the following outsourcing tips will help you to achieve the results you desire. Clearly define the scope and schedule for your project Define your project requirements up front. Give vendors as much information as you can about what you need to be delivered and the way in which you need the work done. Also, be clear and realistic about your schedule requirements project schedules can have a huge impact on project costs. Evaluate a service provider like youd hire a full-time employee When youre evaluating proposals from service providers, dont be afraid to ask questions. Look for specific experience fit Ideally, the service provider you select should have specific experience with the type of project that youre undertaking. Dont choose a vendor based solely on price Never select a vendor based solely on price. Experienced buyers who have outsourced many projects and evaluated hundreds of proposals almost always recommend discarding the highest-priced and lowest-priced bid. Review portfolios and samples Examine the vendors previous work and make sure that their previous work meets your expectations for quality and style. Start small When engaging with a service provider for the first time, start with a project that is relatively small and simple in scope. This will give you a better idea of the providers style and capabilities before you entrust a mission critical project to them. Tie payment to clearly defined project milestones Just as you should be clear about project scope, make sure that you define a work plan for your outsourced project with clearly defined milestones. A good guideline for IT and software development projects is to pay no more than 20% to 30% of the total project price up front, with the rest of the payments based on the completion of 3 or 4 milestones. Negotiate ownership of work before For any type of outsourced project, make sure that you are clear about who owns the resulting work product and any important components of that product. Make sure the service provider understands how you intend to use the deliverables that they provide. Dont forget about support after the project is complete For technology projects, its a good idea to specify a warranty or support clause so that you are assured of some amount of continuing support from the vendor after the project is complete. Its much easier to negotiate a support clause before the service provider begins work, rather than after the completion of the project. Get it in writing Make sure that you clearly communicate any schedule, scope or payment changes to your service provider and get confirmation from them in writing that they understand and agree to the changes. Similarly, keep a record of any agreement changes requested by the service provider and whether you accept or reject those modifications. Save copies of any email exchanges that you have. Before you ramp up your outsourcing services, learn these outsourcing ABCs from Kevin Gregson, chief executive officer of Sherwood Solutions, a business advisory firm. Alignment: Is outsourcing the right move for your business? Business case: Have you taken all costs into consideration? Culture: Can you bridge the cultural difference between your company and the outsourcer? Delivery: How will you define success? It might take a bit of time to get right, but the benefits of outsourcing can be enormous.

When to Consider Development Outsourcing Development outsourcing is a viable option depending on the company's situation and the characteristics of its project. Whenever a company considers developing a new

system, a predicate question is whether to build the new system from scratch or buy an off-the-shelf solution. Building a system from scratch is accomplished using internal expertise or by hiring a development outsourcer, and is a good choice when the new system is strategic or unique. Purchasing a pre-built solution such as a software package or ASP offering is suitable for more generic systems. The build vs. buy decision is never black and white but encompasses a range of options based upon the level of customization needed, resource requirements and degree of difficulty and risk. For a company that chooses to develop a solution from scratch, there are many considerations as to when it makes sense to outsource all or part of the work. An IT organization should investigate using a development outsourcer if it: Lacks competence in developing the types of systems in question, Needs to accelerate development, Needs specialized expertise not available in-house, Needs one-time expertise, or Wants to save costs

The characteristics of the project will also help determine if it is a candidate for outsourcing. While there is no "ideal" development project suitable for outsourcing, a project that has one or more of these traits is worth considering. Highly specified - the more precise the project specifications, the more amenable the project is to outsourcing. The outsourcer knows exactly what it must do to perform its work -- the deliverables expected, the functionality needed, the timeframes required -- and expectations between the parties are tightly aligned. Ill defined, but feasible - a company may need to adopt or explore a new technology, but may lack the internal resources to define its requirements precisely. If the right outsourcer, using the appropriate development methodologies, is selected, it can help the company explore, define and refine system specifications by prototyping the new system. Highly innovative - cutting edge or breakthrough projects start out as amorphous, fuzzy concepts that require research, collaboration, exploration and experimentation to produce results. Outsourcers with experience in performing research and development or incubating new ideas are good sources of help to nurture these projects. Little reliance on functional experts - in general, the more defined the project, the fewer interactions required between the outsourcing staff and the company's functional experts. The more work that the outsourcer can perform on its own without guidance from company experts, the more efficient and productive the process. Generic functionality - generic projects are perfect outsourcing candidates. Outsourcing options are plentiful -- the pool of consultants familiar with the functionality is larger, solutions are well honed, and pre-built components are likely to abound.

Types of Development Outsourcing Available There are many flavors of development outsourcing. While clients and outsourcers are free to fashion whatever type of project they see fit, outsourcers will tend to stick to "tried and true" formulas that have been financially successful for them in the past. At a very high level, development engagements vary according to their duration, location and sources of help.

Duration - most development outsourcing arrangements are project-based. The outsourcer is hired to accomplish a specific task and leaves when the job is completed. Project outsourcing is finite, measured by months or years, and is typically broken down into milestones or interim deliverables. Location - development outsourcing work may take place at the client site or offsite. If the client has the physical space, and knowledge transfer is important, it can be cost-effective and productive to have the outsourcing staff co-located with the company's IT workers. Offsite projects are performed at either a local facility, at a near shore arm of the outsourcer or even at an offshore center. Sources of help -- development outsourcing help is available from a range of resources including: traditional IT consulting firms, topic experts, fast track project experts, innovation centers/R&D laboratories, near shore branches and offshore firms. Each category of firm has its own strengths. For example, fast track project experts can accelerate development efforts by specifying requirements concurrently with designing and developing the system, while offshore firms can provide critical mass at lower cost.

Selecting a Development Outsourcing Partner The fact that development projects are so focused makes choosing a development partner even easier. Because the characteristics of a development project are generally well understood, the universe of potential outsourcing partners can be narrowed significantly. Understanding why you are considering outsourcing (e.g. need to accelerate development, cost savings), the type of project you have (e.g. highly specified, innovative) and the types of development outsourcing help available let you zero in on the most suitable categories of development outsourcers. For example, if the project is ill defined yet strategic, it would not be wise to select a pure offshore development firm. If cost savings are the primary motivator, then a high-end IT consulting firm may be too expensive. Before selecting a development partner, perform your own due diligence. This activity will involve looking at, examining and reviewing: References Work processes (methodologies, quality controls, etc.) Certifications and qualifications (CMM, ISO 9000, etc.) Expertise (including depth and turnover) Project and program management capabilities Partnerships Support capabilities

Once a development partner is selected, negotiations will begin over the terms of the arrangement. With development projects, the parties generally short cycle the negotiation phase because the term of the contract is shorter, the dollars involved are lower and the enterprise is perceived as being less "at risk." In reality, a development project suffers from a high degree of risk. Many high-priced development projects end in disaster with a wake of litigation in their aftermath. Negotiating a fair and comprehensive development agreement can help reduce the risk of failure. Negotiation points include pricing, performance requirements, penalties and incentives, ownership of intellectual property, change processes, hand off/acceptance procedures, postcompletion support and exit conditions. Managing the Development Outsourcing Effort There are many facets to managing a development effort. Having the right management structure in place is a fundamental part of the project. For simple projects -- those that

last a few months or use a few resources -- an individual project manager can usually handle the job. For larger scale projects that involve changes to business processes, organizational structures and enterprise-wide systems, a collective, collaborative management structure like a Program Management Office (PMO) is essential. In a development context, the PMO is used to manage the design, implementation and rollout of a major system or application, and emphasizes meeting project milestones and deliverables at acceptable levels of quality and within budget tolerances. Managing the development project is fraught with challenges. The sheer number of variables involved in a project -- resources, technologies, budgets, dependencies, timing, quality, etc. -- means that something is bound to go awry and require correction. Common management challenges include: managing risk, specifying requirements, scoping the project, managing objectives and milestones, budgeting, evaluating and ensuring quality, transferring knowledge between the outsourcer and internal resources, documenting the system and supporting the completed application. Metrics programs are a useful tool for measuring and controlling the outsourcer's performance during the course of the development project, and evaluating things such as quality of deliverables, productivity and responsiveness. Although it operates under many guises, development outsourcing pervades the IT landscape. The trend is only going to grow, driven by increases in the complexity of technology and continuing business demands for faster implementation of new functionality. Given the many permutations of development outsourcing, and the wide range of providers offering those services, there is likely to be a perfect solution for almost every IT requirement.
Outsourcing is the process of contracting a business function to someone else.[1] It is sometimes confused with offshoring, though a function may be outsourced without offshoring or vice versa. The opposite of outsourcing is called vertical integration or insourcing. [edit]Overview Two organizations may enter into a contractual agreement involving an exchange of services and payments. Outsourcing thereby helps the firms to perform well in their core competencies and thus mitigating rise of skill or expertise shortage in the areas where they want to outsource.[2] Of recent concern is the ability of businesses to outsource to suppliers outside the nation, sometimes referred to as offshoring or offshore outsourcing. In addition, several related terms have emerged to grasp various aspects of the complex relationship between economic organizations or networks, such as nearshoring, multisourcing[3][4] and strategic outsourcing.[5] One of the biggest changes of recent years has come 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 outsourced contractors to deliver the work before repackaging it to deliver to the client. One common area where this business model thrives is in provided website creating, 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 vastly reduced end customer prices. [edit]Reasons Organizations that outsource are seeking to realize benefits or address the following issues:[6][7][8][9]

Cost savings The lowering of the overall cost of the service to the business. This will involve reducing the scope, defining quality levels, re-pricing, re-negotiation, and cost re-structuring. Access to lower cost economies through offshoring called "labor arbitrage" generated by the wage gap between industrialized and developing nations. [10] Focus on Core Business Resources (for example investment, people, infrastructure) are focused on developing the core business. For example often organizations outsource their IT support to specialised IT services companies. Cost restructuring Operating leverage is a measure that compares fixed costs to variable costs. Outsourcing changes the balance of this ratio by offering a move from fixed to variable cost and also by making variable costs more predictable.

Improve quality Achieve a steep change in quality through contracting out the service with a new service level agreement. Knowledge Access to intellectual property and wider experience and knowledge.[11] Contract Services will be provided to a legally binding contract with financial penalties and legal redress. This is not the case with internal services.[12] Operational expertise Access to operational best practice that would be too difficult or time consuming to develop inhouse. Access to talent Access to a larger talent pool and a sustainable source of skills, in particular in science and engineering.[13][14] Capacity management An improved method of capacity management of services and technology where the risk in providing the excess capacity is borne by the supplier. Catalyst for change An organization can use an outsourcing agreement as a catalyst for major step change that can not be achieved alone. The outsourcer becomes a Change agent in the process. Enhance capacity for innovation Companies increasingly use external knowledge service providers to supplement limited in-house capacity for product innovation.[14][15] Reduce time to market The acceleration of the development or production of a product through the additional capability brought by the supplier.[16] Commodification The trend of standardizing business processes, IT Services, and application services which enable to buy at the right price, allows businesses access to services which were only available to large corporations. Risk management An approach to risk management for some types of risks is to partner with an outsourcer who is better able to provide the mitigation.[17] Venture Capital Some countries match government funds venture capital with private venture capital for start-ups that start businesses in their country.[18] Tax Benefit Countries offer tax incentives to move manufacturing operations to counter high corporate taxes within another country. Scalability The outsourced company will usually be prepared to manage a temporary or permanent increase or decrease in production. Creating leisure time Individuals may wish to outsource their work in order to optimise their work-leisure balance.[19] Liability Organizations choose to transfer liabilities inherent to specific business processes or services that are outside of their core competencies. Revenue The classic outsourcing "mega-deal" tended to be the sale or spin out of a function and its associated capital [equipment, people, etc.] to an external vendor. The function was then rented back from the vendor over a series of years. The result was a short-run windfall.

[edit]Implications [edit]Management,

the corporation and consumers

[edit]Management processes 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. [edit]Quality of service Quality of service is best measured through customer satisfaction questionnaires which are designed to capture an unbiased view. [20] [edit]Language skills 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. [21] 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 present in face-to-faceencounters are missing in a telephone call and this also may lead to misunderstandings and difficulties.[22] [edit]Security 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.[citation needed] 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.[23] [edit]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 (351,537).[24][25] [edit]Diversification 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. [edit]"Insourcing" 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.[citation needed] 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[26] 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. [edit]Standpoint

of labor

From the standpoint of labor, outsourcing may represent a new threat, contributing to worker insecurity, and reflective of the general process of globalization.[27]

On June 26, 2009, Jeff Immelt, the CEO of General Electric, called for the United States to increase its manufacturing base employment to 20% of the workforce commenting that the U.S. has outsourced too much and can no longer rely on consumer spending to drive demand.[28] [edit]Standpoint

of government

Western governments may attempt to compensate workers affected by outsourcing through various forms of legislation. In Europe, the Acquired Rights Directive attempts to address the issue. The Directive is implemented differently in different nations. In the United States, the Trade Adjustment Assistance Act is meant to provide compensation for workers directly affected by international trade agreements. Whether or not these policies provide the security and fair compensation they promise is debatable. [edit]By

country
States

[edit]United

"Outsourcing" became a popular political issue in the United States, having been confounded with offshoring, during the 2004 U.S. presidential election. The political debate centered on outsourcing's consequences for the domestic U.S. workforce. Democratic U.S. presidential candidate John Kerry criticized U.S. firms that outsource jobs abroad or that incorporate overseas in tax havens to avoid paying their "fair share" of U.S. taxes during his 2004 campaign, calling such firms "Benedict Arnold corporations".[29] Criticism of outsourcing, from the perspective of U.S. citizens, generally revolves around the costs associated with transferring control of the labor process to an external entity in another country. AZogby International poll conducted in August 2004 found that 71% of American voters believed that outsourcing jobs overseas hurt the economy while another 62% believed that the U.S. government should impose some legislative action against companies that transfer domestic jobs overseas, possibly in the form of increased taxes on companies that outsource.[30] Union busting is one possible cause of outsourcing. As unions are disadvantaged by union busting legislation, workers lose bargaining power and it becomes easier for corporations to fire them and ship their job overseas. [31] Another given[by whom?] rationale is the high corporate income tax rate in the U.S. relative to other OECD nations,[32][33][34] and the practice of taxing revenues earned outside of U.S. jurisdiction, a very uncommon practice. However, outsourcing is not solely a U.S. phenomenon as corporations in various nations with low tax rates outsource as well, which means that high taxation can only partially, if at all, explain US outsourcing. For example, the amount of corporate outsourcing in 1950 would be considerably lower than today, yet the tax rate was actually higher in 1950.[35] It is argued[by whom?] that lowering the corporate income tax and ending the double-taxation of foreign-derived revenue (taxed once in the nation where the revenue was raised, and once from the U.S.) will alleviate corporate outsourcing and make the U.S. more attractive to foreign companies. However, while the US has a high official tax rate, the actual taxes paid by US corporations may be considerably lower due to the use of tax loopholes, tax havens, and attempts to "game the system".[36] Rather than avoiding taxes, outsourcing may be mostly driven by the desire to lower labor costs (see standpoint of labor above). Sarbanes-Oxley has also been cited as a factor for corporate flight from U.S. jurisdiction. [edit]European

Union

Where outsourcing involves the transfer of an undertaking, it is subject to Council Directive 77/187 of 14 February 1977, on the approximation of the laws of the Member States relating to the safeguarding of employees rights in the event of transfers of undertakings, businesses or parts of businesses (as amended by Directive 98/50/EC of 29 June 1998; consolidated in Directive 2001/23 of 12 March 2001).[37] Under that directive, rights acquired by employees with the former employer are to be safeguarded when they, together with the undertaking in which they are employed, are transferred to another employer, i.e. the contractor. An example of a case involving such contracting-out was the decision of the European Court of Justice in Christel Schmidt v. Spar- und Leihkasse der frheren mter Bordesholm, Kiel und Cronshagen, Case C-392/92 [1994]. Although subsequent decisions have disputed whether a particular contracting-out exercise constituted a transfer of an undertaking (see, for example, Ayse Szen v. Zehnacker Gebudereinigung GmbH Krankenhausservice, Case C-13/95 [1997]), in principle, employees of an enterprise outsourcing part of its activities in which they are employed may benefit from the protection offered by the directive.