Outsourcing is the use of external providers for service, typically handled internally, on a regular or permanent basis. This form of subcontracting adds value to a task that could be accomplished internally, but for various strategic reasons, it is "jobbed out". As outsourcing has become more prevalent, it is apparent that carefully managing the process is very important.
Outsourcing can fulfill many functions for a company, some of the services commonly available include: database management, network operations, help desk, disaster recovery, development and maintenance of applications, and data and video communications. One of the most commonly outsourced services is payroll. According to a CFO study, payroll and retirement benefits is the second most outsourced function in organizations.
Companies that vary in size and industry have experienced many benefits of outsourcing. Cutting costs is one of the main reasons that companies look to outsourcing as an option. American Express claims to have cut costs by 25 percent by outsourcing. Although one of the most positive attributes of outsourcing is cost reductions, it is difficult to quantify exactly how much a company saves.
Outsourcing contracts have been described as moving targets. By comparing outsourcing costs to huge capital expenditures, it appears more affordable at first glance. But outsourcing may result in the identification of new opportunities that would not have been considered previously and may require more dollars spent overall. These additional costs are often offset by increased profits generated by new projects. Most importantly, by outsourcing companies save costs, are able to make decisions more flexibly, and are able to focus on their core business, which is often described as market agility.
As mentioned earlier, outsourcing provides flexible decision-making. This has the greatest impact on the human element of a company. Staff can be reallocated to tackle other projects when outsourcing is utilized. Also, headcount fluctuations can be avoided, which leads to significant cost savings. Benefit packages needed when firing employees and training expenditures when hiring workers can be extremely costly and inefficient to companies.
Similarly, outsourcing can fill temporary staff shortages without having to grow the company too quickly. Due to increased demand of technology-proficient employees, companies have relied upon outsourcing as a way to quickly locate capable people to handle specific tasks. Outsourcing can provide flexibility to change service or support offerings for different marketing campaigns or promotions as well as quickly move customer service data to other departments. Interestingly, the effect of outsourcing on human resources is no longer just about headcount reduction, as seen in the past, but rather finding ways to meet the company and employees needs.
Maximizing employee development can be achieved by outsourcing less interesting or end-of-life work. Employees will provide more value to a firm if they feel that their efforts are focused on important initiatives and that their contribution is worthwhile. Also, it is important for employees to feel that they are continually learning and improving themselves, rather than being stifled by mundane tasks. For these reasons, using relatively less expensive employees or sharing costs with other corporations for routine work makes outsourcing attractive to companies.
Another advantage of outsourcing is having an additional source of advice in making significant strategic decisions. If a good relationship is formed between the client and vendor, a company benefits from having another pool of resources from which to seek advice and expertise.
Closing the communication gap between the wants and needs of various business management levels and the vendor who is responsible for incorporating the information technology into a company is important. Outsourcing its non-core functions enables a company to focus on its core competencies and helps management reach a consensus. Ideally, companies would like to find an outsourcer that serves as a one-stop shopping environment for technological, strategic, and operational assistance.
Outsourcing often helps a company focus more on innovation. Having fewer day-to-day management issues to worry about enables a company to think beyond its short-term goals. In particular, outsourcing can serve as an organizational lever for an IT department to ensure that their areas are functioning properly. Weak areas are ideal candidates for outsourcing and outsourcing aids in the development of supply chain integration. A well-operating company that recognizes the benefits of outsourcing can pass efficiencies down to the customer and be more competitive by decreasing time to market.
Often, client companies think that outsourcing results in the conversion of fixed costs into variable costs, which leads to increased financial flexibility. This is not always the case. As mentioned earlier, it is difficult to come up with a total amount in savings that outsourcing provides a company. Most vendors require long-term contracts that provide them with stable revenues over time. These contracts do not always result in flexibility for the company and must be considered carefully when negotiating with a vendor.
Many companies may perceive outsourcing as an opportunity to move surplus employees to other jobs serving other companies. From a public relations perspective, companies may think of outsourcing as an alternative to laying off employees. In reality, employees are very keen about the job market and would consider changing jobs regardless of whether a company outsources. In general, outsourcing does not affect employment issues for a company as traditionally assumed in the past.
Another misconception is that a company will be relieved of managing a staff function through outsourcing. Contrary to this assumption, managing an outsourcing vendor may not be any easier that managing internal staff. The involvement of contracts and legal interpretations may prohibit management from giving advice or feedback. In fact, management may spend more, not less time, focusing on an outsourcing relationship.
Finally, many companies may perceive outsourcing as a way to pass the headaches of a dysfunctional department to a vendor rather than trying to solve the problems facing the company. The reality of trying to escape problems only sets the company back to further in learning from its business strategy.