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What exactly is outsourcing? Is there a difference between outsourcing and business process outsourcing?
There are varied definitions on outsourcing. Here are some of the definitions of outsourcing and BPO:
(1) Webster’s dictionary defines outsourcing as “the practice of subcontracting manufacturing work to outside and especially foreign or nonunion companies”
(2) Administrative Information Technology Services of University of Illinois defines outsourcing as “the transference to third-parties, the performance of functions once administered in-house. Outsourcing is really two types of service: ITO (IT Outsourcing), involves a third party who is contracted to manage a particular application, including all related servers, networks, and software upgrades. BPO (Business Process Outsourcing), features a third party who manages the entire business process, such as accounting, procurement, or human resources.”
BPO is not something new but what it proposes to offer is to implement new ways to perform business functions better and generate value more than the corporation can do by itself. BPO has stretched to most part of the business processes of a corporation from sales, marketing, customer service, human resource, logistics, finance and accounting, administration and manufacturing.
Nowadays, where competition has become intense in the business world more organisations are implementing strategic business methods on improving cost and time savings, efficiency, skilled expertise and business focus which at the end of the day would mean improving the bottom line and delivering value to the customers and its shareholders.
Strategic And Operational Decisions On What To Outsource
Which non-core functions to outsource may be a daunting task to an organisation. The organisation has to make a comprehensive research of their non-core functions that are considered high on the potential list for outsourcing. Such high potential functions for outsourcing are those that are transactional and volume based or even repetitive process. These are the traditional functions where other organisations have embarked on outsourcing them to external providers.
The guiding principle in outsourcing is this: can I gain better results for the same or less money, through outsourcing this particular function that is currently being done in-house? If the answer is yes, then this is a good candidate for outsourcing.
There are several functions in an organisation where BPO is applicable but most definitely are not limited to back-office operations; comprising of human resource, accounting, finance and treasury, engineering, information technology, legal and compliance, auditing and corporate communications/external affairs.
For example, hotels have also begun outsourcing part of their business functions and these functions are its call centres, internet portals, accounting, security, room division functions and human resource departments; outsourcing procurement and supply chain management, housekeeping and laundry are now being outsourced.
Should I or Shouldn’t I Outsource
Outsourcing is now giving organisations an edge in conducting, managing and structuring its core business by doing so they are now gaining competitive advantage which in return will give huge benefits in saving enough money, time or energy to focus of their core competencies.
Reasons to outsource differ from one organisation to another. The most common reasons cited are operating expenses reduced and controlled, improve corporation focus, internal resources are freed for other gain, shortage of skilled labour, access to world-class solutions and expertise, competitiveness is enhanced and core functions better managed, planned with greater flexibility.
Outsourcing is not a new concept, by outsourcing it will give the organisation the flexibility to engage specialized company to carry out a particular portion of the operations where the organisation is not best at performing them.
Conduct comprehensive research before deciding on outsourcing. Outsourcing does have its strategic and operational disadvantages, when the decision to outsource is made the management will lose its control over managing the said function which in turn the skilled personnel valuable know-how will be relinquished. Further training cost will occur to retrain those personnel to perform other functions, there could be further cost increases when the external provider is unable to perform the outsourced function therefore the management has to seek alternate external provider. Quality in services, products or goods that are associated with the organisation does not meet the expectations which results in the customers being adversely affected. The failure in defining the parties’ responsibilities could result in major dispute that is costly and disruptive to the business. The operational disadvantages that may arise are difficulties in the related outsourcing contract and those arising from the effect on human resources.
The nature of the contract and the relationship between parties requires careful consideration as various important issues that are arises during pre-contract, contract execution and post-contract have to be attended attentively. Contract management is crucial to ensure success in any outsourcing effort.
Decide on the outsourcing models that fit your business objectives and the type of function that will be outsourced. Carefully chosen models would provide the organisation operational and strategic advantages, continuous business improvement in business processes and formulation of innovative business strategy. Those models can be in the form of a joint venture, services contract, build operate transfer, lease, franchising.
The following guidelines may be helpful in structuring outsourcing agreements:
(1) Determine scope of outsourcing service;
(2) Specify performance levels and targets; service availability, reliability, stability and upgrade. If appropriate, use current performance as a baseline from which to measure improvement.
(3) Determine the measurement criteria, as well as the form and frequency of reporting requirements. Consider using “customer satisfaction” based on survey results as one means of measuring performance.
(4) Integrate the organisation’s business plan and objectives. Make sure the agreement reflects your business plan and objectives and is flexible enough to accommodate change.
(5) Structure payment provisions to reward performance, share savings, and provide incentives, but if applicable and commercially effective set liquidated damages for non-performance.
(6) Anticipate increases and decreases in scope or costs particularly in long-term contracts, structure pricing to reflect changes in scope and cost.
(7) Actively manage the contract and relationship. Don’t abdicate responsibility. Have a continuous and active focus on performance levels, solving problems and making improvements, as well as shared objectives.
(8) Balance the desire to quickly cut costs against the need to clearly define the respective responsibilities of the parties.
(9) Anticipate and plan for the day that the relationship will end and that the services will be performed by someone else or “recapture” back to the organisation.
Managing Outsourcing Relationship
Insist on open communications from both sides. You and your outsourcing partner should talk continuously to understand what is working and what is not working. Outsourcing partnerships will succeed if you manage the relationship diligently and realize that outsourcing clients also have an important responsibility to communicate in a straightforward and honest way to help outsourcing partners do their jobs effectively.