Outsourcing referrs to a company that contracts with another company to provide services that might

otherwise be performed by in-house employees. Many large companies now outsource jobs such as call
center services, e-mail services, and payroll. These jobs are handled by separate companies that specialize in
each service, and are often located overseas.

There are many reasons that companies outsource various jobs, but the most prominent advantage seems to
be the fact that it often saves money. Many of the companies that provide outsourcing services are able to do
the work for considerably less money, as they don't have to provide benefits to their workers, and have fewer
overhead expenses to worry about.

Outsourcing also allows companies to focus on other business issues while having the details taken care of
by outside experts. This means that a large amount of resources and attention, that might fall on the
shoulders of management professionals, can be used for more important, broader issues within the company.
The specialized company that handles the outsourced work is often streamlined and often has world-class
capabilities and access to new technology that a company couldn't afford to buy on their own. Plus, if a
company is looking to expand, outsourcing is a cost-effective way to start building foundations in other
countries.

There are some disadvantages to outsourcing as well. One of these is that outsourcing often eliminates direct
communication between a company and its clients. This prevents a company from building solid
relationships with their customers, and often leads to dissatisfaction on one or both sides. There is also the
danger of not being able to control some aspects of the company, as outsourcing may lead to delayed
communications and project implementation. Any sensitive information is more vulnerable, and a company
may become very dependent upon its outsource providers, which could lead to problems should the
outsource provider back out on their contract suddenly.

While outsourcing may prove highly beneficial for many companies, it also has many drawbacks. It is
important that each individual company accurately assess their needs to determine if outsourcing is a viable
option.

Outsourcing - What is Outsourcing?

So, what is outsourcing? Outsourcing is contracting with another company or person to do a particular function. Almost
every organization outsources in some way. Typically, the function being outsourced is considered non-core to the
business. An insurance company, for example, might outsource its janitorial and
landscaping operations to firms that specialize in those types of work since they are not
related to insurance or strategic to the business. The outside firms that are providing the outsourcing services are
third-party providers, or as they are more commonly called, service providers.

Although outsourcing has been around as long as work specialization has existed, in recent history, companies began
employing the outsourcing model to carry out narrow functions, such as payroll, billing and data entry. Those
processes could be done more efficiently, and therefore more cost-effectively, by other companies with specialized
tools and facilities and specially trained personnel.

Currently, outsourcing takes many forms. Organizations still hire service providers to handle distinct business
processes, such as benefits management. But some organizations outsource whole operations. The most common
forms are information technology outsourcing (ITO) and business process outsourcing (BPO).

Business process outsourcing encompasses call center outsourcing, human resources outsourcing (HRO), finance
and accounting outsourcing, and claims processing outsourcing. These outsourcing deals involve multi-year contracts
that can run into hundreds of millions of dollars. Frequently, the people performing the work internally for the client firm
are transferred and become employees for the service provider. Dominant outsourcing service providers in the
information technology outsourcing and business process outsourcing fields include IBM, EDS, CSC, HP, ACS,
Accenture and Capgemini.

Some nimble companies that are short on time and money, such as start-up software publishers, apply multisourcing --
using both internal and service provider staff -- in order to speed up the time to launch. They hire a multitude of
outsourcing service providers to handle almost all aspects of a new project, from product design, to software coding, to
testing, to localization, and even to marketing and sales.

The process of outsourcing generally encompasses four stages: 1) strategic thinking, to develop the organization's
philosophy about the role of outsourcing in its activities; 2) evaluation and selection, to decide on the appropriate
outsourcing projects and potential locations for the work to be done and service providers to do it; 3) contract
development, to work out the legal, pricing and service level agreement (SLA) terms; and 4) outsourcing management
or governance, to refine the ongoing working relationship between the client and outsourcing service providers.

In all cases, outsourcing success depends on three factors: executive-level support in the client organization for the
outsourcing mission; ample communication to affected employees; and the client's ability to manage its service
providers. The outsourcing professionals in charge of the work on both the client and provider sides need a
combination of skills in such areas as negotiation, communication, project management, the ability to understand the
terms and conditions of the contracts and service level agreements (SLAs), and, above all, the willingness to be
flexible as business needs change.

The challenges of outsourcing become especially acute when the work is being done in a different country (offshored),
since that involves language, cultural and time zone differences.

Overview

Outsourcing involves the transfer of the management and/or day-to-day execution of an entire business
function to an external service provider.[2] The client organization and the supplier enter into a contractual
agreement that defines the transferred services. Under the agreement the supplier acquires the means of
production in the form of a transfer of people, assets and other resources from the client. The client agrees to
procure the services from the supplier for the term of the contract. Business segments typically outsourced
include information technology, human resources, facilities and real estate management, and accounting.
Many companies also outsource customer support and call center functions like telemarketing, customer
services, market research, manufacturing and engineering.

Outsourcing and offshoring are used interchangeably in public discourse despite important technical
differences. Outsourcing involves contracting with a supplier, which may or may not involve some degree of
offshoring. Offshoring is the transfer of an organizational function to another country, regardless of whether
the work is outsourced or stays within the same corporation[3][4].

With increasing globalization of outsourcing companies, the distinction between outsourcing and offshoring
will become less clear over time. This is evident in the increasing presence of Indian outsourcing companies
in the US and UK. The globalization of outsourcing operating models has resulted in new terms such as
nearshoring and rightshoring that reflect the changing mix of locations. This is seen in the opening of offices
and operations centers by Indian companies in the U.S. and UK.[5].[6]

Multisourcing refers to large (predominantly IT) outsourcing agreements. [7] Multisourcing is a framework
to enable different parts of the client business to be sourced from different suppliers. This requires a
governance model that communicates strategy, clearly defines responsibility and has end-to-end integration.
[8]
[edit] Process of outsourcing
[edit] Deciding to outsource

The decision to outsource is taken at a strategic level and normally requires board approval. Outsourcing is
the divestiture of a business function involving the transfer of people and the sale of assets to the supplier.
The process begins with the client identifying what is to be outsourced and building a business case to justify
the decision. Only once a high level business case has been established for the scope of services will a search
begin to choose an outsourcing partner.

[edit] Supplier proposals

A Request for Proposal (RFP) is issued to the shortlist suppliers requesting a proposal and a price.

[edit] Supplier competition

A competition is held where the client marks and scores the supplier proposals. This may involve a number
of face-to-face meetings to clarify the client requirements and the supplier response. The suppliers will be
qualified out until only a few remain. This is known as down select in the industry. It is normal to go into the
due diligence stage with two suppliers to maintain the competition. Following due diligence the suppliers
submit a "best and final offer" (BAFO) for the client to make the final down select decision to one supplier.
It is not unusual for two suppliers to go into competitive negotiations.

[edit] Negotiations

The negotiations take the original RFP, the supplier proposals, BAFO submissions and convert these into the
contractual agreement between the client and the supplier. This stage finalizes the documentation and the
final pricing structure.

[edit] Contract finalization

At the heart of every outsourcing deal is a contractual agreement that defines how the client and the supplier
will work together. This is a legally binding document and is core to the governance of the relationship.
There are three significant dates that each party signs up to the contract signature date, the effective date
when the contract terms become active and a service commencement date when the supplier will take over
the services.

[edit] Transition

The transition will begin from the effective date and normally run until four months after service
commencement date. This is the process for the staff transfer and the take-on of services.

[edit] Transformation

The Transformation is the execution of a set of projects to implement the Service Level Agreement (SLA), to
reduce the Total Cost of Ownership (TCO) or to implement new Services. Emphasis is on 'standardisation'
and 'centralisation'.
[edit] Ongoing service delivery

This is the execution of the agreement and lasts for the term of the contract.

[edit] Termination or renewal

Near the end of the contract term a decision will be made to terminate or renew the contract. Termination
may involve taking back services (insourcing) or the transfer of services to another supplier.

[edit] Reasons for outsourcing

Organizations that outsource are seeking to realize benefits or address the following issues: [9][10][11]

 Cost savings. The lowering of the overall cost of the service to the business. This will involve
reducing the scope, defining quality levels, re-pricing, re-negotiation, cost re-structuring. Access to
lower cost economies through offshoring called "labor arbitrage" generated by the wage gap between
industrialized and developing nations.[12]
 Cost restructuring. Operating leverage is a measure that compares fixed costs to variable costs.
Outsourcing changes the balance of this ratio by offering a move from fixed to variable cost and also
by making variable costs more predictable.
 Improve quality. Achieve a step change in quality through contracting out the service with a new
Service Level Agreement.
 Knowledge. Access to intellectual property and wider experience and knowledge.[13]
 Contract. Services will be provided to a legally binding contract with financial penalties and legal
redress. This is not the case with internal services.[14]
 Operational expertise. Access to operational best practice that would be too difficult or time
consuming to develop in-house.
 Staffing issues. Access to a larger talent pool and a sustainable source of skills.
 Capacity management. An improved method of capacity management of services and technology
where the risk in providing the excess capacity is borne by the supplier.
 Catalyst for change. An organization can use an outsourcing agreement as a catalyst for major step
change that can not be achieved alone. The outsourcer becomes a Change agent in the process.
 Reduce time to market. The acceleration of the development or production of a product through the
additional capability brought by the supplier.
 Commodification. The trend of standardizing business processes, IT Services and application
services enabling businesses to intelligently buy at the right price. Allows a wide range of businesses
access to services previously only available to large corporations.
 Risk management. An approach to risk management for some types of risks is to partner with an
outsourcer who is better able to provide the mitigation.[15]
 Time zone. A sequential task can be done during normal day shift in different time zones - to make it
seamlessly available 24x7. Same/similar can be done on a longer term between earth's hemispheres
of summer/winter.
 Customer Pressure. Customers may see benefits in dealing with your company, but are not happy
with the performance of certain elements of the business, which they may not see a solution to except
through outsourcing.
[edit] Criticisms of outsourcing
[edit] Public opinion

There is strong public opinion regarding outsourcing (especially when combined with offshoring) that
outsourcing damages a local labor market. Outsourcing is the transfer of the delivery of services which
affects both jobs and individuals. It is difficult to dispute that outsourcing has a detrimental effect on
individuals who face job disruption and employment insecurity; however, its supporters believe that
outsourcing should bring down prices, providing greater economic benefit to all. There are legal protections
in the European Union regulations called the Transfer of Undertakings (Protection of Employment). Labor
laws in the United States are not as protective as those in the European Union. A study has attempted to
show that public controversies about outsourcing in the U.S. have much more to do with class and ethnic
tensions within the U.S. itself, than with actual impacts of outsourcing. [16]

[edit] Against shareholder views

For a publicly listed company it is the responsibility of the board to run the business for the shareholders.
This means taking into consideration the views of the shareholders. Shareholders may be interested in return
on investment and/or social responsibility. The board may decide that outsourcing is an appropriate strategy
for the business. Shareholders have a responsibility to make their views known to the board of directors if
they are against outsourcing.

[edit] Failure to realize business value

The main business criticism of outsourcing is that it fails to realize the business value that the outsourcer
promised the client.

[edit] Language skills

In the area of call centers end-user-experience is deemed to be of lower quality when a service is outsourced.
This is exacerbated when outsourcing is combined with off-shoring to regions where the first language and
culture are different. The questionable quality is particularly evident when call centers that service the public
are outsourced and offshored.

There are a number of the public who find the linguistics features such as accents, word use and phraseology
different which may make call center agents difficult to understand. The visual clues that are present in face-
to-face encounters are missing from the call center interactions and this also may lead to misunderstandings
and difficulties.[17]

[edit] Social responsibility

Some argue that the outsourcing of jobs (particularly off-shore) exploits the lower paid workers. A contrary
view is that more people are employed and benefit from paid work.

[edit] Quality of service

Quality of service is measured through a service level agreement (SLA) in the outsourcing contract. In
poorly defined contracts there is no measure of quality or SLA defined. Even when an SLA exists it may not
be to the same level as previously enjoyed. This may be due to the process of implementing proper objective
measurement and reporting which is being done for the first time. It may also be lower quality through
design to match the lower price.

There are a number of stakeholders who are affected and there is no single view of quality. The CEO may
view the lower quality acceptable to meet the business needs at the right price. The retained management
team may view quality as slipping compared to what they previously achieved. The end consumer of the
service may also receive a change in service that is within agreed SLAs but is still perceived as inadequate.
The supplier may view quality in purely meeting the defined SLAs regardless of perception or ability to do
better.

Quality in terms of end-user-experience is best measured through customer satisfaction questionnaires which
are professionally designed to capture an unbiased view of quality. Surveys can be one of research [18]. This
allows quality to be tracked over time and also for corrective action to be identified and taken.

[edit] Staff turnover

The staff turnover of employee who originally transferred to the outsourcer is a concern for many companies.
Turnover is higher under an outsourcer and key company skills may be lost with retention outside of the
control of the company.

In outsourcing offshore there is an issue of staff turnover in the outsourcer companies call centers. It is quite
normal for such companies to replace its entire workforce each year in a call center. [19] This inhibits the
build-up of customer knowledge and keeps quality at a low level.

[edit] Company knowledge

Outsourcing could lead to communication problems with transferred employees. For example before transfer
staff have access to broadcast company e-mail informing them of new products, procedures etc. Once in the
outsourcing organization the same access may not be available. Also to reduce costs, some outsource
employees may not have access to e-mail, but any information which is new is delivered in team meetings.

[edit] Qualifications of outsourcers

The outsourcer may replace staff with less qualified people or with people with different non-equivalent
qualifications.[20]

In the engineering discipline there has been a debate about the number of engineers being produced by the
major economies of the United States, India and China. The argument centers around the definition of an
engineering graduate and also disputed numbers. The closest comparable numbers of annual gradates of
four-year degrees are United States (137,437) India (112,000) and China (351,537). [21][22]

[edit] Work, labor, and economy

[edit] Net labor movements

[edit] Productivity

Offshore outsourcing for the purpose of saving cost can often have a negative influence on the real
productivity of a company. Rather than investing in technology to improve productivity, companies gain
non-real productivity by hiring fewer people locally and outsourcing work to less productive facilities
offshore that appear to be more productive simply because the workers are paid less. Sometimes, this can
lead to strange contradictions where workers in a third world country using hand tools can appear to be more
productive than a U.S. worker using advanced computer controlled machine tools, simply because their
salary appears to be less in terms of U.S. dollars.

In contrast, increases in real productivity are the result of more productive tools or methods of operating that
make it possible for a worker to do more work. Non-real productivity gains are the result of shifting work to
lower paid workers, often without regards to real productivity. The net result of choosing non-real over real
productivity gain is that the company falls behind and obsoletes itself overtime rather than making real
investments in productivity.

[edit] Standpoint of labor

From the standpoint of labor within countries on the negative end of outsourcing this may represent a new
threat, contributing to rampant worker insecurity, and reflective of the general process of globalization (see
Krugman, Paul (2006). "Feeling No Pain." New York Times, March 6, 2006). While the "outsourcing"
process may provide benefits to less developed countries or global society as a whole, in some form and to
some degree - include rising wages or increasing standards of living - these benefits are not secure. Further,
the term outsourcing is also used to describe a process by which an internal department, equipment as well as
personnel, is sold to a service provider, who may retain the workforce on worse conditions or discharge them
in the short term. The affected workers thus often feel they are being "sold down the river."

[edit] The U.S.

Outsourcing became a popular political issue in the United States during the 2004 U.S. presidential election.
The political debate centered on outsourcing's consequences for the domestic U.S. workforce. Democratic
U.S. presidential candidate John Kerry criticized U.S. firms that outsource jobs abroad or that incorporate
overseas in tax havens to avoid paying their fair share of U.S. taxes during his 2004 campaign, calling such
firms "Benedict Arnold corporations". Criticism of outsourcing, from the perspective of U.S. citizens, by-
and-large, revolves around the costs associated with transferring control of the labor process to an external
entity in another country. A Zogby International poll conducted in August 2004 found that 71% of American
voters believed that “outsourcing jobs overseas” hurt the economy while another 62% believed that the U.S.
government should impose some legislative action against companies that transfer domestic jobs overseas,
possibly in the form of increased taxes on companies that outsource. [23] One given rationale is the extremely
high corporate income tax rate in the U.S. relative to other OECD nations [24][25][26], and the peculiar practice
of taxing revenues earned outside of U.S. jurisdiction, a very uncommon practice. It is argued that lowering
the corporate income tax and ending the double-taxation of foreign-derived revenue (taxed once in the nation
where the revenue was raised, and once from the U.S.) will alleviate corporate outsourcing and make the
U.S. more attractive to foreign companies. Sarbanes-Oxley has also been cited as a factor for corporate flight
from U.S. jurisdiction.

Policy solutions to outsourcing are also criticized.

[edit] Security

Before outsourcing an organization is responsible for the actions of all their staff and liable for their actions.
When these same people are transferred to an outsourcer they may not change desk but their legal status has
changed. They no-longer are directly employed or responsible to the organization. This causes legal, security
and compliance issues that need to be addressed through the contract between the client and the suppliers.
This is one of the most complex areas of outsourcing and requires a specialist third party adviser.
[edit] Fraud

Fraud is a specific security issue that is criminal activity whether it is by employees or the supplier staff. It
can be argued that fraud is more likely when outsourcers are involved. In April 2005, a high-profile case
involving the theft of $350,000 from four Citibank customers occurred when call center workers, acquired
the passwords to customer accounts and transferred the money to their own accounts opened under fictitious
names. Citibank did not find out about the problem until the American customers noticed discrepancies with
their accounts and notified the bank.[27].

Outsourcing?
Also see nearshore outsourcing, onshore outsourcing, and offshore outsourcing.

Outsourcing is an arrangement in which one company provides services for another company that could also
be or usually have been provided in-house. Outsourcing is a trend that is becoming more common in
information technology and other industries for services that have usually been regarded as intrinsic to
managing a business. In some cases, the entire information management of a company is outsourced,
including planning and business analysis as well as the installation, management, and servicing of the
network and workstations. Outsourcing can range from the large contract in which a company like IBM
manages IT services for a company like Xerox to the practice of hiring contractors and temporary office
workers on an individual basis.

What is Outsourcing?
Outsourcing is the contracting out of a company's non-core, non-revenue-producing activities to specialists. It differs from
contracting in that outsourcing is a strategic management tool that involves the restructuring of an organization around what it does
best - its core competencies.

Two common types of outsourcing are Information Technology (IT) outsourcing and Business Process Outsourcing (BPO). BPO
includes outsourcing related to accounting, HR, benefits, payroll, and finance functions and activities.

Why Outsource?
The rules of business are changing and so are the questions businesses are asking. It isn't enough for a business to merely consider
how to improve what it’s doing. Rather the question is more fundamental; a business first needs to determine exactly what it
should be doing in the first place.

From the computer room floor to the CEO's office, business executives are attempting to answer this question by identifying their
core capabilities and strategic applications. And more often than not, they're finding that such burdensome administrative tasks as
payroll processing, payroll tax filing and benefits administration don't make the list.

If your organization is asking these same questions, ADP Canada has some answers. We offer a wide range of information
management solutions for payroll, human resources, time and labour management and recruitment. These solutions are designed to
allow you to alleviate administrative functions so you can focus on strategic areas of your business.

Benefits of Outsourcing with ADP:

  greater efficiency and economies of scale achieved with outside service providers
  greater focus on core business products and growth
  cost and time savings
less overhead investment or debt
   eases regulatory compliance burden

According to the results of a survey commissioned by Pricewaterhouse Coopers, 100 percent of Canadian executives surveyed
agree that Business Process Outsourcing allows their companies to focus on core competencies. And the study found that 89
percent identify Payroll as the best candidate for business process outsourcing.

So, as you look to outsourcing for solutions to relieve you of some of your administrative burdens and let you return to those
things that really matter to your business, ADP is here to help.

what is outsourcing - A Guide to outsourcing    

Outsourcing, in literal terms, means sourcing from outside. The term is increasingly used to
refer to sub-contracting of a set of functions or processes by one firm to another, or to a group
of individuals. The latter organisation is often in another physical location, or another country
altogether.

Outsourcing is being pursued as an active business strategy in the current economic scenario,
since it enables a firm to focus on core-competency areas. It also frees the firm from resource
and labour intensive functions, which are now performed by trained personnel at much lower
costs.
The processes or activities that are being outsourced could range from customer service and
telemarketing, to IT management, software development, market research and even financial portfolio
management.
 
Most of the outsourcing firms are based in the USA, some in the UK or Australia and fewer still in
Europe, while most of the outsourced workforce is Asian.
 
There have been loud protests against outsourcing in the USA, and more recently in Australia, since
some of the professionals might be dislocated; when processes are shifted, jobs are naturally shifted
too. However, this kind of dislocation is mostly temporary and there are very few highly-skilled
professionals who are actually losing jobs because of outsourcing. - Author Annie Zaidi.