Introduction to Outsourcing - Essay Example

Outsourcing is defined as a “strategic move by the organization to shift its major functions of the company to external service providers or outside resources which were traditionally handled by the internal employees”. It is a task or an operation that can be done by employees of the internal organization but is instead contracted to a service provider for a significant period. The service provider can be offsite or onsite but the most common method of outsourcing is off-shoring of activities to different developing countries like India or China. Many companies have always hired contractors to support them during peak seasons at different intervals in the year. There is a vast difference between sub contracting and outsourcing of a particular activity. The main variation is with restructuring of the organizational structure when the activity is being outsourced which includes hiring employees at different locations to do the same activity (1).

The idea of outsourcing began during the industrial revolution when companies took advantage of the economies of scale to increase their profits by expanding their corporate and manufacturing base. Most of the companies sub-contracted some of the ancillary functions to external service providers and this was regarded as the evolution of outsourcing.

Outsourcing was not categorized as a strategy by the companies until 1989 when Kodak Company headed by Eastman Kodak decided to outsource information technology as a part of their strategic decision. The companies slowly started focusing more on cost saving and value addition to the business which led to the outsourcing of even core activities which includes data processing, human resources, customer service, legal, logistics, medical transcription, information technology, and payroll to companies in different geographical locations to increase profits (1).

Although many areas and operations are outsourced, there are some very common outsourced areas:
- Information Technology,
- Accounts and finance,
- Data processing,
- Security,
- Network and Communication,
- Human Resources and Administration (3).

Outsourcing has become an integral part of any organization and has proved to be a boon to many companies. Many people are against outsourcing as it leads to unemployment in countries like the US and the UK but the advantages of outsourcing weighs out its disadvantages. Outsourcing proves to be a mutual benefit for both the outsourced and the outsourcing company in many different ways. There are many reasons why a company may choose to outsource an operation.

One of the main advantages of outsourcing different processes is better cost efficiency and reduced operational costs as the workers/employees are paid much lesser than the employees of the company outsourcing, for the same job performed. The Training and maintenance costs are also cheaper and inexpensive compared to developed countries. The outsourced partners also provide specialized and specific skill sets and knowledge which makes it more efficient than the one in developed countries. For the outsourced companies, it does not only mean better revenue and earnings but also having the time to focus on their actual business which would make them more competitive in the international market. Outsourcing work to developing nations helps in improving their infrastructure, employment rates and overall economic welfare. The economy of developing countries will benefit and promote immensely through outsourcing (2).

Some operations are seasonal in nature and outsourcing helps to bring in additional temporary resources when needed and released once the work is completed. An outsourcing contract provides flexibility to use the resources according to the demands of the market. The service provider will be able to stabilize and use the resources effectively during the peak and dull seasons. For example, more data entry processors will be recruited during the peak invoicing season. This helps the outsourced company process invoices more efficiently (3).

The outsourced company will have more time and this gives the managers the ability to concentrate on more important issues. Outsourcing peripheral activities allows more time to refocus on business requirements without affecting the quality of the services in the back office (3).

Why does an organization choose to outsource? The common reasons are:
- Reduction in operational costs, overheads and predictable expenditures.
- Improve the productivity of the employees.
- Value addition to the process/ company (1).

Some inherent problems cannot be avoided when it comes to outsourcing activities.

One of the main concerns is the cultural differences between the 2 countries, between the outsourcer and the service provider. This can be overcome by inducting training programs to understand the different cultures, traditions and customs. The general attitude towards outsourcing of the developed country. General misunderstandings can occur due to accents and differences in language (3).

There is also an inbuilt threat to the confidentiality of information and security if the company has decided to move core activities such as payroll and finance to outsourced service providers. There is always a risk of compromising confidentiality when sensitive information is being transmitted to the outsourcing company. The company should evaluate the trust worthiness of the service providers and make sure that the data being shared is protected and the contracts draw penalties and legal clauses in case of any incidence (3).

The service providers are also driven by profits. The outsourcing company will also reduce expenses to increase its earnings. There could also be some quality issues as the service providers provide similar services to different companies (3).

Global and IT outsourcing can turn into a win-win situation in the next decade. It is also very clear that the outsourcing of a particular activity or task should be resorted to only after serious consideration of both pros and cons. Some of the steps that top management needs to consider during outsourcing are:
- identifying the company risks involved with outsourcing,
- Identifying the right operations to be outsourced,
- Finding the best service provider,
- Setting up a good offshore team and structure (4).