Moving non-core activities performed in-house to specialists outside the company helping the business to focus on core competencies and improve performance standards is the main premis of outsourcing. The growth and rewards of this practice can be quite high but the downsides are daunting.
So what are the pros and cons of outsourcing?
The potential from outsourcing and BPO related activities:
- Savings in terms of cost from labour arbitrage
- Productivity improvements from access to experienced and up-to-date skills
- The potential to focus on the core business without the distractions of a difficult function in-house
- Enhanced access to expertise (but at a cost)
- Operational cost control as the cost becomes very transparent and controlled
- Improved accountabilityas you know who is responsible for what service
- Flexibility to reallocate resources and meet company goals
- Improved Human Relations management in terms of career development potential for peripheral functions.
As for the downside of outsourcing the list would include the creation of a dependency mentality coupled with a lack of innovation and integration with the core business – along with a loss of competitive edge. Outsourcing can garner these ill-effects mainly when used as a short term technique to reduce costs. To avoid this Outsourcing has to be planned carefully going beyond mere cost control and with carefully thought-out strategies and logistics in place to ensure success. A productive nurturing culture is imperative, especially in the beginning, to set the backdrop for a successful relationship.
How to make the most of outsourcing
Apart from reducing the development time and the cost for example new services an outsourcing relationship can free up resources and orient them towards innovation that can really add value to the core business. It is this potential for the sources of innovation to be focused on the core business competitive needs that is at the heart of the aphorism ‘to focus on core competences’ – In fact it means to build the core. There must also be good communications and systematic tracking and measures in place to help understand how the service is evolving and how improvements can be made. This goes well beyond simplistic SLA types of measures and is in fact an example of proactive innovation. An outsourcing provider who is willing to learn and understand the business drivers of the client organisation and who can provide the right kind of expertise to a client at the right place can be a company sttrategic asset. The type of proactive innovation can make all the difference to an outsourcing partnership.
Tips for the Outsourcer
- Treat outsourcing as a strategic investment, clearly defining goals, strategies, objectives and time lines.
- Choose a firm that has goals you can identify with and a track record that you can use productively in your industry.
- Set up control processes to manage the interface between the two organisations – treat them as part of the business which is in fact what they become.
- Once you have outsourced a service trust the service provider to do the job – heavy handed control or excessive monitoring can get in the way of good service and can only add to costs.
- Build a contract that has concrete objectives performance measurement strategies and incentives in place – this will clarify things for the provider and provide sustained motivation.
Tips for the provider
- As with the outsourcer outsourcing is a strategic investment – define goals, strategies and objectives.
- Build a contract with the client that spells out performance measurements on the basis of concrete objectives – use it to streamline processes
- Develop an open rapport with the client build a relation that aligns the interests of the outsourcer, the vendor and customers.
- Build a measurement system to montitor progress and make sure robust management processes. are in place – use it to negotiate changes and upgrade performance responsibilities.
The paranoia surrounding outsourcing is slowly waning and being replaced by a grudging acceptance and recognition of how both sides can benefit. Reports are coming in that well crafted outsource deals restate the value of outsourcing – and add to the stability of the concept. According to a Global Insight study sponsored by the ITAA (Information Technology Association of America), the benefits of offshore IT outsourcing added $33.6 billion to real gross domestic product in the United States in 2003. During 2008, real GDP was expected to be $124.2 billion higher than it would be in an environment without IT software and services offshore outsourcing.
There is value to be achieved by Outsourcing what is needed is a well crafted management strategy to deliver the promise that Outsourcing offers.