“Outsourcing,” describes the transference of tasks and processes to external resources (service providers), independent of their location.
Outsourcing (derived from “Outside Resource Using”) is not a modern age invention: in the 18th century, Adam Smith had already introduced the principles of the division of labour and of specialization, in order to increase the productivity of a company. In the 60s, the term “Outsourcing” was defined for the first time.
According to Smith, workers should only be assigned to areas in which they were specialized. The best-known example for this is the production volume of a pin factory in one day. While one worker alone could produce a maximum of 20 pins, 10 workers produced 48,000 pins in the same time frame due to division of labour.
While at first, Outsourcing was reduced to the production industry, nowadays Outsourcing is practiced throughout all domains on a global and digital level. Specialized services, like tasks and processes of the IT domain are the particular focus of Outsourcing strategies. Especially as a business founder one can profit from the advantages of Outsourcing and safe significant costs.
Different kinds of Outsourcing are for example:
- Business Process Outsourcing (BPO)
BPO is a form of Outsourcing and describes the transference of entire business processes to external service providers. This transference is not confined to the area of IT but is principally possible for all imaginable business processes.
The market of BPO has grown rapidly over recent years. The market research institution Evalueservice predicted a yearly growth of 26 % for the years 2003 through 2010. The result is an expected market size of 40 billion Dollars in BPO from services in 2010.
- Knowledge Process Outsourcing (KPO)
In KPO, too, whole processes are outsourced. They are, however, more complex and demand specific know-how and experience from employees, in order to be processed successfully. One such a process is research or data analysis. We speak of KPO if these processes are outsourced to an external company.
Outtasking is fundamentally different from BPO and KPO. Instead of processes, individual functions (not processes) or technological performances are outsourced. Outtasking is often a company’s first step towards Outsourcing. The reason is often the lack of know-how. Nonetheless, Outtasking is often more expensive than an in-house job and often the service provider does not know the procedural connections.
Possibilities and Risks of Outsourcing
Before a company chooses the business strategy of Outsourcing, it has to evaluate whether its own employees can still provide a service or if it is more sensible to outsource the assignment to a specialist. The strategy of the company as well as the target planning needs to be considered before making the decision. Furthermore, a comparison of the pros and cons of Outsourcing would be reasonable in order to be able to assess the situation.
An important pro of Outsourcing is the transparency of costs and the reduction of costs. Furthermore, due to the specific know-how of the service provider, the transferred tasks are usually fulfilled more efficiently and to a higher standard. Thereby, the company can profit from a performance optimization. Due to the use of external competencies, the personnel flexibility of a company can be increased and the freed capacities can be used for other important tasks. This facilitates a concentration on core competencies and competitive advantages, while it relieves the management through a ‘thinning’ of the business organization.
But there are also risks involved in the process of Outsourcing: particularly the dependence on an external service provider can become risky for a company. The longer an Outsourcing partnership, the more difficult it is for the enterprise to reintegrate the outsourced know-how through “Insourcing”. This can lead to a permanent dependence. Therefore, the core competencies of a business should never be outsourced.
Security, too, should not be disregarded. Due to the relaying of company know-how, as well as internal information to a service provider, there is a risk of this information, reaching competitors.
Outsourcing does not necessarily bring about a performance and quality advantage. In order to gain bulk advantages and save costs, many service providers deliver their service in a standardized form. This can result in deficiencies in quality and performance. Many deficits are the result of a lack of communication between client and service provider. When a process is transferred abroad (Offshoring), these deficits can be traced back to language barriers, cultural differences and time differences with increasing distance between customer and service provider. A further risk that is often underestimated is the pending transaction costs. When it comes to Outsourcing, companies often only see the low production costs without paying attention to the initiation and bargaining costs of the transaction, which arise with the selection of a suitable service provider.
Possibilities and Risks of Outsourcing in Detail
• Transparency of costs
• Reduction of personnel costs
Increase of costs
• Particularly on level of transaction costs
Performance and quality optimization
• Increase of flexibility
• Increase of efficiency
• Gain of new know-how due to competence of service provider
Performance and quality deficits
• Loss due to standardization
• Lack of communication
Concentration on core business
• Focus on core competencies
• Relieve of management
• Dependence on service provider
• Loss of know-how
• Security issues
In order to outsource successfully, one has to weigh pros and cons carefully. It is virtually impossible to realize all advantages and avoid all risks. Nevertheless, to implement Outsourcing according to the goals of one’s company, one can deduct many requirements by analyzing them. A precise definition of contracts (in order to avoid misunderstandings), agreements regarding accountability and damage regulations, prudence regarding the choice of service providers, as well as supervision of the chosen provider, combined with regular communication between the contractual partners are part of this.
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