OUTSOURCING

Outsourcing is the process of assigning a company’s business processes to an external agency in lieu of enhancing service quality, driving innovation or deriving benefits of lower labour costs. It is a practice used by different companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally. According to Barrett (1995, p.124-125), ‘outsourcing’ denotes one type of contracting-out; namely, the process by which a user employs a separate company (the supplier), under a contract, to perform a function, which had previously been carried out in-house; and transfer to that supplier assets, including people and management responsibility. Some of the simpler definitions of outsourcing include:

• Having an outside vendor provide a service that could have been perform in-house (Laabs, 1997).
• The transfer of routine and repetitive tasks to an outside service vendor (Gibson, 1996).
• Paying other firms to perform all or part of the work (Strctural Cypernetics, 1996).
• Refers to a full transfer of the facility management functions to an outside firm. The corporation manages the outsourcing contract rather than the entire

When outsourced to organisations located in other countries or to foreign subsidiaries, outsourcing often takes the form of offshoring, also known as offshore outsourcing.

Common outsourced areas

Outsourcing is an effective cost-saving strategy when used properly. It is sometimes more affordable to purchase a good from companies with comparative advantages than it is to produce the good internally. An example of a manufacturing company outsourcing would be Dell buying some of its computer components from another manufacturer in order to save on production costs. Alternatively, businesses may decide to outsource book-keeping duties to independent accounting firms, as it may be cheaper than retaining an in-house accountant. Although many areas and functions are outsourced, here are some of the frequently outsourced areas: information technology functions; network and telecommunications; human resources and insurance administration; accounting; marketing; security; etcetera.

Effects of outsourcing

The effects of outsourcing are subjective to the industry and the purpose for which the same was undertaken. However across industries outsourcing is primarily undertaken to enable companies to generate better revenue recognition and to provide them an added competitive differentiator. While done with the best of intentions, outsourcing has a telling effect on quality of products and services delivered as a consequence of this, either enhancing or lowering quality. While there could either be an increase or decrease in the turnaround time while outsourcing, it could also result in improved or decried customer service. Outsourcing, primarily undertaken to provide companies the competitive edge, can also result in easier management and better productivity based on how effectively the process in managed.

The pros and cons of outsourcing

Outsourcing is often undertaken to provide enterprises a competitive advantage by delegating business process to external agencies and realising the benefits of low labour, better quality and improved innovation. While this provides a good picture of the fair side of the coin, most managers however need to grope with the possible shortcoming of the process and the corresponding impact on the company’s core processes. To best analyse the opportunities presented it is essential to reflect upon the advantages vis-à-vis the disadvantages of outsourcing.

Pure outsourcing

Pure outsourcing is generally understood as a situation where the whole or a part of the business unit is transferred to an outside organisation. The outside organisation takes the responsibility of the human resources and financial issues of the outsourced units. The original owner then takes the role of a customer and starts to manage the old personnel with a contract. In reality, the original organisation continues, at least in some ways, but the responsibility of the completed work is the responsibility of the service provider (Tuomela & Puhto 2001, p.22).

Out-tasking

This is when an enterprise contracts with outside enterprise to provide a process, function or capability without transfer of resource. When service providers take on responsibility for a specific task in a project, the sourcing model is called ‘out-tasking’; it is an outsourcing business model that refers to a supplier performing tactical or project-oriented tasks or processes. Under this arrangement, the client keeps overall control, management and oversight in-house while asking service providers to perform some identified functions that have been assigned to them. Out-tasking does not assign project ownership to service providers, as it involves only task-based responsibilities. Out-tasking includes contracting and licensing engagements, which are less complex than business process outsourcing (BPO) engagements. It requires little to no integration of training processes across functional areas of training. These engagements are more commonly used for project or technology-oriented sourcing agreements.

The significant differences between ‘outsourcing’ and ‘out-tasking are:

• Operational differences: Out-tasking involves the hiring of a service provider to deliver a particular task with a relatively short deadline. Out-tasking requires service recipients to negotiate appropriate service agreements and to manage the service delivery from start to end. Such management skills involve project planning and implementation, with appropriate “project management office” oversight of the project before completion and to implement integration of the delivered project.
• Risk-related differences: The challenges of out-tasking do not resemble those of outsourcing. Most often, the service recipient assigning a task is responsible for identifying the elements required for performance and supervising, verifying and testing how the work product is delivered. Most often, out-tasking involves specified deliverables upon completion, with intermediate milestones to verify appropriate progress is being made in the interim before completion.
• Relationship-related differences: Out-tasking does not involve the long-term commitments between organisations found in an outsourcing relationship. When difficulties are encountered, it is easier for an out-tasker to terminate the relationship and find a replacement. Switching costs and risks are higher in outsourcing than in out-tasking. Cultural fit is not as important in out-tasking compared to the long-term relationship of an outsourcing.

In short, out-tasking requires a much lower level of organizational commitment and intertwining of organisational links between the service recipient and the service provider. Nonetheless, the outsourcing relationship can begin with a series of out-tasked projects, such as in the development and maintenance of software or staff augmentation for business process delivery.

References

Barrett, P.S., Ed. (1995). Facilities management –towards best practice. London: Blackwell Science Ltd.

Gibson, V.M. (1996). Outsourcing can save money and increase efficiency”. Benefits Administration, March, p. 19.

Laabs, J. (1993). Why HR is turning to outsourcing. Personnel Journal, Vol. 72 No. 9, pp. 92-101

Structural Cybernetics (1996). How to build healthy organisations, pp. 1‐5;Outsourcing Via the Internet: www.ndma.com/products.out.html, p. 1

Tuomela, A. & Puhto, J. (2001). Service provision trends of facility management in Northern Europe. Helsinki University of Technology Construction Economics and Management Publications 199, 2001. p.104.