Outsourcing

Outsourcing

 Outsourcing is defined as the contracting of

one or more of a company’s business
processes to an outside service provider to
help increase shareholder value, by primarily
reducing operating cost and focusing on core
competencies.

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Why Outsourcing

Focus on core competencies

Reduced Costs
Acquire new skills
Acquire better management
Assist a fast growth situation
Avoid labour problems
Focus on strategy
Avoid major investments
Handle overflow situations
Improve flexibility
Improve ratios
Enhance credibility
Maintain old functions
Improve performance
Begin a strategic initiative

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CURRENT VIEW ON OUTSOURCING
The numerously presented definitions of
outsourcing have been varied from what is
concerned with the transfer of goods and
services that have been carried out internally
to an external provider to the procurement
of products or services from external sources
of organisation.
 To describe the main features of outsourcing, the
transaction involved normally consists of two parts; the
transfer to a third party of the responsibility for the
operation and management of part of an organisation,
and the provision of services to the organisation by the
supplier, usually for a period of several years.

 Several studies have indicated that outsourcing

operations is the trend of the future, and those
organisations which already involved with outsourcing
are satisfied with the result. At present, the outsourcing
of selected organisational activities is an integral part of
corporate strategy.

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Benefits of Outsourcing
 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 off shoring called "labor arbitrage" generated by the
wage gap between industrialized and developing nations.

 Focus on Core Business — Resources (for example investment, people,

and infrastructure) are focused on developing the core business. For
example often organizations outsource their IT support to specialised IT
services companies.

 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.
 Benefits of Outsourcing
(Contd..)
 Improve quality — achieve a steep change in quality through contracting
out the service with a new service level agreement.

 Knowledge — Access to intellectual property and wider experience and

knowledge.

 Contract — Services will be provided to a legally binding contract with

financial penalties and legal redress. This is not the case with internal
services.

 Operational expertise — Access to operational best practice that would

be too difficult or time consuming to develop in-house.
 Benefits of Outsourcing
(Contd..)
 Access to talent — Access to a larger talent pool and a sustainable source
of skills, in particular in science and engineering.

 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 cannot be achieved alone. The
outsourcer becomes a Change agent in the process.

 Enhance capacity for innovation — Companies increasingly use external

knowledge service providers to supplement limited in-house capacity for
product innovation.
 Benefits of Outsourcing
(Contd..)
 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 which enable to buy at the right price,
allows businesses access to services which were 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.
 Benefits of Outsourcing
(Contd..)
 Venture Capital — Some countries match government funds venture
capital with private venture capital for start-ups that start businesses in
their country.

 Tax Benefit — Countries offer tax incentives to move manufacturing

operations to counter high corporate taxes within another country.

 Scalability — The outsourced company will usually be prepared to

manage a temporary or permanent increase or decrease in production.

 Creating leisure time — Individuals may wish to outsource their work in

order to optimise their work-leisure balance.
Challenges for Outsourcing
Loss of Expertise – Can lead to decrease or total loss of in-house
expertise
Loss of Control – Increases organization’s vulnerability as it
becomes partially or totally dependent on a service provider
Conflict
Need to modify policies/procedures or develop new
policies/procedures to coordinate with vendor
Uncertainty
Cost (perspective)
Staff Morale
 Risks of Outsourcing
 Coordination costs: When any logistics function is outsourced coordination
costs typically increase. It is important for the company to account for these and
decide how they are to be managed with the 3PL.
 Loss of internal logistics management capability: The knowledge and expertise
generated on the day to day operation will reside in the 3PL company's
management team. This becomes crucial as a company grows and makes
reorganizing decisions. A close relationship with the 3PL can help in this regard.
 Reduced contact with final customer: Outsourcing the distribution function
might force the company to lose direct contact with the end customer (at least
physically). This has a critical impact on customer service. It is hard for a
company to define customer service for a 3PL if it does not itself have direct
customer contact. This can also have an impact on the introduction of new
products and services.
Risks of Outsourcing
 Biased choices of service providers: If a 3PL is owned by a large trucking
company and it's managing the distribution function, there might be some
pressure by the parent company of the 3PL to give a portion of the business,
even when it's not competitive.

 Loss of voice in public policy issues: For example, if the distribution and
warehouse functions are outsourced, and there is a threat of some legislation
that will affect the warehousing and trucking industries, the company will not
be able to represent those interests, since they are performed by the 3PL.

 Leakage of sensitive data and information: 3PL companies normally have

access to a lot of information that might be valuable to competitors, leaving
the company vulnerable.