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Outsourcing Concept

Outsourcing is hitherto another trend that is fundamentally reshaping business. It refers to a long-term contract generally, the non-core. Recently, even some of the core activities are outsourced to a third party specialists with a view to benefit from their experience, speciality, efficiency and, also investment, this phenomenon has undoubtedly become global.

Types of Outsourcing Provided


Outsourcing involves Contracting Out: Factually, outsourcing means to source from outside what had been taking place in-house. For instance, most companies have so far appointed sanitation staff under Sanitation and Housekeeping department for maintaining cleanliness and overall housekeeping of their premises. But now the scenario has changed with many companies by having outsourced these activities, by entrusting outside agencies to carry out these activities on contractual basis for their organizations.

Outsourcing of Non-core Business Activities: The non core functions of most organizations are Sanitation and housekeeping but, depending upon what business a company is in, there will be certain activities that are classified as core and non core functions based on its business purpose. Non core activities are considered as secondary or incidental. For example, in a school, the management functions of the school are considered as core activities and running a cafeteria or a computer training programme is considered as noncore function which is generally outsourced to outsiders which serves as an added advantage to students.


Processes that can be Outsourced to a Captive Unit or a Third Party: When we think of a large multinational company that deals in diverse products and exports them to a large number of countries, many processes such as recruitment, selection, training, record and payroll (Human Resources), management, accounting and finance, customer support, grievance handling are some common activities outsourced to its subsidiaries operating in different countries. If the task of performing some activity internally is large, it can be beneficial for the organisation to have a captive service provider, i.e., a service provider who will provide services of a given kind to only one organisation. General Electric (GE) is, for example, the biggest captive BPO unit in India provides certain kinds of services to the parent company in the United States and also to its subsidiaries in other countries. Besides, these processes may be outsourced to third party service providers who function independently and provide services to other organisations too. The above Figure shows a synoptical view of outsource by a company to the captive and third party service providers. The hired party service providers are the persons/firms who specialize in some processes like Human Resource Management (HRM). These service providers are known as ‘horizontals’ in the outsourcing terminology. They may also specialize in one or two industries and carry out a number of processes ranging from non-core to core. These are known as ‘verticals.’ On maturity of service providers, they become simultaneously horizontal and vertical. Outsourcing the non core activities allows the organisation to limit their investment and focus on the core processes. The increased acceptance from the organizations that outsource, qualifies outsourcing as an emerging mode of business.

Scope of Outsourcing: Outsourcing underlines four key segments viz., contract manufacturing, contract research, contract sales and informatics. This term outsourcing has popularly come to be related to IT -enabled services or Business Process Outsourcing (BPO). Actually, even more popular term is ‘call centres’ that provides customer-oriented voice based services activities 24 hrs × 7 days handling in-bound queries and grievances, and out-bound surveys, payment follow-up and telemarketing. Approximately, 70 per cent of the BPO industry’s proceeds originate from call-centers, 20 per cent from high-volume, low-value data jobs and the remaining 10 per cent is from higher value information work.

Need for Outsourcing: We can recollect the saying "Necessity is the mother of all inventions", which is true even in case of outsourcing. With the global competitive pressures for high quality products at lower costs, ever demanding customers, and evolution of newer technologies are the three major causes for re-look at business processes. Generally, outsourcing is being resorted to not out of compulsion, but also out of choice. Some of the major reasons for outsourcing are explained below.

Focusing of Attention: Business firms are realising the fact and usefulness of focusing on the core functions and outsourcing the rest of the activities to their outsourcing partners. An organisation needs to define or redefine themselves, they need to consider as to whether they would like to be called after their core function or the noncore function. This process of delimiting the scope of business enables them to focus their attention on the core functions that results in a quest for excellence, better efficiency and effectiveness

Anatomy of Outsourcing

Cost Reduction: Global competitiveness enhances not only global quality, but also global competitive pricing. When the prices turn southwards because of competitive pressures, the only solution to survival and profitability is cost reduction. Division of labour and specialisation, besides improving quality, reduces cost in a big way. This happens when the economies of large scale accruing to the outsourcing partners when they deliver the same service to a number of organisations. Differences in prices of factors of production to other countries are also a factor contributing to cost reduction. For instance, India is a favoured destination for global outsourcing of Research and Development (R&D), Manufacturing, Software Development and Information Technology Enabled services (ITES) due to large scale availability of manpower at lower costs.

Growth through Alliance: When there is a possibility to avail the services of others, the investment requirements slash down. Even if you want to have a stake in the business of your outsourcing partners, you receive gains from not only the low-cost and better quality services provided by them, but also, by virtue of a share in the gains from the overall business carried out. Hence, one can expand rapidly with the same amount of capital funds and result in creation of a large number of businesses. Other than the financial returns, outsourcing provides inter-organizational knowledge, sharing and collaborative learning. This explains the reasons why today there is outsourcing,

Concerns Over Outsourcing: It is good to be aware of some of the concerns that outsourcing is besieged with.

Confidentiality: Outsourcing depends on sharing a important information and knowledge. When the outsourcing partner fails to preserve the confidentiality, and, for instance, passes it on to competitors, it can prove hazardous to the party that outsources its processes. If the activities are completely outsourced there is a further risk of the outsourcing partner setting up a competitive business.

Ethical Concerns: In order to cut costs, a company outsources manufacturing to a developing country where they children and women are exploited in factories. This shows ethical concerns.
Resentment in the Home Countries: Outsourcing job to other countries may lead to resentment back in the home country, especially, if the home country suffers from unemployment.

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