Outsourcing

Learning Objectives
• Explain the important of outsourcing in business
• Identify the needs of outsourcing
• Apply the decision making strategic before
outsourcing

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 INTRODUCTION
INTRODUCTION
A Working Definition of Outsourcing

Services
COMPANY OUTSOURCER

Organization Service
Level Level
Agreement Agreement

Outsourcing denotes the continuous

procurement of services from a third party,
making use of highly integrated processes,
organization models and information systems.
 INTRODUCTION
A Working Definition of What is Outsourcing?
Outsourcing

Outsourcing -
“the strategic use of outside resources to perform activities
traditionally handled by internal staff and resources” Dave
Griffiths

Why Outsource?
Provide services that are scalable, secure, and efficient,
while improving overall service and reducing costs
Why do Companies Outsource?
 Key areas of outsourcing ?

•Information Technology/IT solutions

•Call Centers

•Finance & Accounting Outsourcing

•Procurement Outsourcing

•Textiles

•Manufacturing

• Human resource Management

outsourcing
 Advantages of outsourcing

Cost Skilled Time zone

Effective Expertise difference

Increased
Focus on core Distribution of
productivity and
competencies risk
Efficiency

Improving
Better people
customer Access to world-
management class solutions
service
 Disadvantages of outsourcing

Loss Of Threat to Security

Managerial Hidden Costs and
Confidentiality
Control

Tied to the
Quality Bad Publicity
Financial Well-
Problems Being of Another and Ill-Will
Company

Lack of lose talent

Linguistic
customer inside within
barriers
focus your company
 Problems with outsourcing

• Loss of Control
• Increased cash outflow
• Confidentiality and security
• Selection of supplier
• Too dependent on service provider
• Loss of staff or moral problems
• Time consuming
• Provider may not understand business environment
• Provider slow to react to changes in strategy
 Types of outsourcing

• Business process outsourcing (BPO)

BPO is a subset of outsourcing that involves the contracting of

the operations and responsibilities of specific business functions
or processes to a third-party service provider.
Different types of BPO Services
 Types of outsourcing

• Knowledge process outsourcing (KPO)

KPO describes the outsourcing of core business activities, which often are
competitively important or form an integral part of a company's value
chain. Therefore KPO requires advanced analytical and technical skills as
well as a high degree of proprietary domain expertise

Knowledge Process Outsourcing or KPO is a subset of BPO. KPO involves outsourcing of core functions which may or may not give
cost benefit to the parent company but surely helps in value addition. The processes which are outsourced to KPOs are usually more
specialized and knowledge based as compared to BPOs. Services included in KPO are related to R&D, Capital and insurance
market services, legal services, biotechnology, animation and design, etc. are the usual activities that are outsourced to KPOs
 Types of outsourcing

• Legal process outsourcing (LPO)

LPO refers to the practice of a law firm or corporation obtaining legal

support services from an outside law firm or legal support services
company. This process has been marked by the practice of outsourcing
any activity except those where personal presence or contact is
required.
 Types of outsourcing

• Recruitment process outsourcing (RPO)

Recruitment Process Outsourcing is a form of business

process outsourcing (BPO) where an employer outsources or
transfers all or part of its recruitment activities to an
external service provider.
 Types of outsourcing

• Engineering process outsourcing( EPO)

EPO offers global consulting and outsourcing services

providing end-to-end services in the areas of Engineering and
Technical Process Outsourcing.
• In group, identify 5 areas that outsourcing
activities can be implemented.
• Choose one of the following
1. Distribution
2. Transportation
3. Finance
4. IT operation
5. Procurement
The concept of Outsourcing
• A process rather than simply an event

Source: Handley, S.M., The Evaluation Analysis and Management of the Business
Outsourcing process, Unpublished Dissertation, The Ohio State University, 2008
Elements of Strategic Outsourcing

1. STRATEGIC EVALUATION
• Outsourcing is the act of reversing a previous decision to
“make” or perform a particular function internally.

• The first step is to understand the strategic importance

(value) of the activity or system.

• Standardized processes, commoditized products, etc.: extremely

low strategic value.

• Buying firms must make decisions as part of a

comprehensive sourcing strategy.

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Elements of Strategic Outsourcing

2.FINANCIAL EVALUATION

• Outsourcing decisions are required to make short and long-

term financial sense.

• However outsourcing benefits are not mutually exclusive

and independent constructs, but rather significantly
interrelated.

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Elements of Strategic Outsourcing
3. SUPPLIER SELECTION AND CONTRACT DEVELOPMENT
• Supplier Selection
• Supplier profiles
• Key management contacts, a company overview
• SWOT analysis, (Porter’s five key financial figures - Supplier
Power, Buyer Power, Competitive Rivalry, Threat of Substitution,
Threat of New Entry)
• Information on current contracts, “owners” of the relationship
within the firm, and an organizational chart.
• Functional evaluation of the content

• Establish expectations, scope of work, pricing

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Supplier Selection and
Contract Development
• Contract Development
• a minimum for an enforceable contract include:

1. A clearly defined scope of work and elements of the

processes to be supplied
2. An agreed upon approximate price for each aspect of
what is being supplied.
3. An understanding of an acceptable level of operating
flexibility as circumstances and requirements change.
4. Consider a short term contract with provisions for
extensions and renegotiations
5. Ground rules that encourage relationship and alliance
maintenance
6. Determination of a means for measuring performance for
each aspect of the agreement.

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Element of Outsourcing
4. TRANSITION TO EXTERNAL SOURCING MODEL

Begins with the contract execution to the transfer of the

agreed upon activities and resources
• The buying and selling organizations must both follow the
specific roles outlined in the contract
• The buying organization must also appoint a relationship
manager
• The relationship manager and the supplier must merge their
independent plans into one consensus plan

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Elements of Outsourcing
TRANSITION TO EXTERNAL SOURCING MODEL (continued)

• Consensus transition plan must include at a minimum

• Communication Criteria
• Personnel Criteria
• Transition Criteria

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Elements of Outsourcing
TRANSITION TO EXTERNAL SOURCING MODEL (continued)
• Communication Criteria
• About the process of communicating external initiatives to
the affected and unaffected employees

• The following actions should included in the process

• Announce that the contract has been signed and awarded to the
supplying firm
• Discuss how severance packages will be offered to affected
employees
• Conduct extensive question and answer session

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Elements of Outsourcing
TRANSITION TO EXTERNAL SOURCING MODEL (continued)
• Personnel Criteria
• About the overall message itself that will be
communicated to the affected and non-affected
employees
• Create the perception of procedural and interpersonal
justice
1. Communicate early and clearly why the decision was made
2. All stakeholders need to feel as though their interests were
represented
3. Retained employees need to be trained to enhance their “lateral”
skills such as relationship management, negotiation and consensus
building.

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Elements of Outsourcing
TRANSITION TO EXTERNAL SOURCING MODEL (continued)
Transition Criteria
1. The schedule involving the transfer of activities and
resources to the supplying organization
2. The list of activities to implement outlined in the project
management schedule should include:
• An organization meeting for employees being transferred to the
supplier’s organization.
• A meeting with the buying firm’s manager whose activities are being
outsourced conducted on-site at the new location.
• A creation of a plan to address the issues involved in transferring
significant physical assets
• a specific third-party agreement in the contract

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Relationship Management
• In order to effectively cultivate the relationship, the
buying firm must actively monitor and evaluate
performance. The buying firm must also solve
outsourcing related problems.

• The original contract establishes

• the performance measures
• deliverables, due dates
• the expected supplier requirements

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Relationship Management
1. Performance measurement is the cornerstone of the buyer-
supplier relationship.
• It establishes control which provides the ability to manage
the relationship

2. The buyer and supplier relationship managers should

develop and execute the reporting system established in the
contract.
• A performance report is also needed.
• The performance report should be designed to compare the
actual performance to the contractual standards

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Reason Failure in Outsourcing
• Failing to specify in sufficient and measurable
detail the nature and scope of the activity
outsourced.
• Poor terms and conditions being negotiated by
the buyer.
• Assumptions about cost reductions not being
delivered by the supplier..
• Relationship breakdown.
• Clash of personalities in the respective
organisations
• Inflexibility

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Success factor in Outsourcing
• Ensure that a proper and full business case is made
before considering any of the options.
• Prepare a detailed specification for the service
involving those who will be directly in receipt of it.
• Conduct a thorough risk assessment of the process.
• Cost the present system carefully based on what is
actually achieved.
• Calculate the payback period.
• Establish a contract management system
• Make sure that a contingency plan exists.

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• Reason for entering India
• Challenges faced
• Recommendation to ensure success of the
outsourcing

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