ABSTRACT:

Outsourcing contracts having been part and parcel of human civilization since time immemorial. Today we frequently turn to professionals for major plumbing, air conditioner or car repairs, domestic chores, education for children, transport etc. While it has been practiced at family and social level for a long time, for business organizations too it is the one of long standing practices continuing till date.

Organizations today find themselves at major crossroads with the need to choose strategic long term decision with regard to choosing their outsourcing model for various business needs.

This article is a guide to the working managers to understand their outsourcing needs and also plan for the same.

INTRODUCTION:

Outsourcing is a contract between two persons or organizations where one provides and the other receives some product or service at a contracted price. Economists refer to this process of turning to those who can produce a product or service at a lower marginal cost as “comparative advantage,” and consider it a key ingredient to an efficient and productive economy.

There have been a number of attempts in the past to put a restraint on outsourcing in the name of fair labor practices, social justice and equity in India and also protecting jobs in most advanced countries, but, outsourcing has managed to survive all such attempts.

Today not only private but even governmental agencies and departments have almost completely outsourced their administrative activities such as cleaning, maintenance, transport, surveillance, security, legal services etc. with a view to eliminate unnecessary administrative cost in extending welfare measures and retaining focus on planning and rolling out schemes alone. Businesses have long understood the futility of getting itself tied to routine non value adding activities such as bookkeeping, payroll processing or janitorial services which does nothing but keep on adding flab which becomes difficult to shed. Outsourcing also helps business organizations to tide over difficult organizational challenges and also for extending timely response for increasing business commitments where their own resources fall short.

OUTSOURCING ENABLERS

For long organization have been outsourcing one of their key functions, sales and distribution to distributors/dealers/C&F agents, the same has not been considered as outsourcing, though that is what it essentially is. Organizations, in the past, have thought of outsourcing only for their non-core administrative functions but of late increasingly we come across examples where businesses have acquired operational leverage by successfully outsourcing even their core functions. This has led to a significant spurt in outsourcing contracts in our domestic business environment particularly in the services sector. The central philosophy which has been behind growth in outsourcing of core functions has been the realization that even core processes are made of large number of discrete subsystems, most of which are low value adding processes and hence can be outsourced to be executed at lowest possible cost without much value destruction.

Coupled with the above enabling factors is the ever growing need of the businesses to remain ahead of the competition and focus on their customer deliverable and relationships alone. As opposed to short term and medium term outsourcing perspective practiced earlier, today businesses and organization are known to take a long term view on outsourcing with a view to keep itself nimble & agile, and also, increase its focus on evolving product and service deliverable to maintain its lead over the competition.

MAPPING OUTSOURCING NEED

There are a number of reasons why an organization may need to outsource. For managers planning outsourcing of their business process it is very important to map out these needs otherwise there are chances that the outsourcing model the organization will adopt will be either sub-optimal or more than what is required.

Outsourcing needs can be grouped into following basic categories –

• Augmentation of Human Resource for cyclic fluctuations
• Cost and Efficiency Savings
• Capability building
• Need for agility and nimbleness

CHOOSING AN OUTSOURCING STRUCTURE

Three basic outsourcing structures are predominantly used by organizations to cut operational costs, maintain operational efficiency and enhance the quality of business deliverable. These are augmenting workforce, out-tasking, project-based outsourcing.

The decision to follow one or more of the above depends on the following two basic considerations –

Strategic needs: Each organization needs to know what is the strategic need of its individual processes and how much of it can be outsourced to strategic partners. There are instances where an organization is over secretive of its business processes and indicators and will not like to shareit with an outsourcing partner. For example in the cut-throat competition within the technology industry (gadgets, IT hardware, software etc.) even though most of the manufacturing process is outsourced the company exclusively handles most of the activities leading to development of new products and technologies as there is a distinct advantage in being the first to launch an new technology or a product.

Risk Tolerance: What is the risk involved in outsourcing decision and to what extent the same can be safely tolerated by the organization is another very important determinant of any outsourcing decision. Typically in an environment where an organization cannot afford any disruption in any of its basic processes outsourcing is avoided. The cost of disruption to the company is much higher cost than what one could gain as damages from the outsourced partner. For example a steel industry can today easily think of outsourcing its rolling and value adding processes downstream, but, planning for outsourcing its input on the upstream is much difficult due to strong linkages on account of 24×7 operations and difficulties inherent in controlling chemistry for desired metallic properties. Further the managing agency in this type of contract models are very costly which in competitive market can become prohibitive.

WORKFORCE AUGMENTATION

This is the most basic of all outsourcing models. One simply adds labor contracts to increase the job output while retaining full control on all resources. In addition to being the most basic setup, this has the least risk among all the outsourcing models. One may use this to expand current capacity to serve short term immediate business needs.

OUT TASKING

If one can identify skill or capability gaps within the company’s various processes, one may consider outtasking. This setup transfers jobs to the contractor to execute jobs that could be done in-house. In this type of outsourcing model the outsourced partner shares higher degree of responsibility for maintaining the job output and quality of service. The Examples of out-tasking contracts are software deployment and integration, transportation, Stock Keeping Units, value-adding process in steel industry etc.

PROJECT BASED OUTSOURCING

These types of contract models are adopted for turnkey projects where one cannot comprehensively define, design and execute the tasks. As such, the best solution for your company is to outsource the whole project. In this setup, the outsourced partner has all the necessary competencies and capabilities to complete a project. Mostly day to day monitoring may not necessitated but the focus of the contract is on handling over final deliverable once the contract project is over. This can be as short as a one-time engagement. Examples of this type of outsourcing models are small and big project contracts.

DEVELOPING AN OUTSOURCING PLAN

The goal of outsourcing is to provide the company with more profitable margins. One should first look at one’s cost structures; study the available outsourcing options, and decide which to apply based on one’s strategic priority and risk tolerance. It is very important to develop a comprehensive understanding of one’s comforts and areas of difficulties for deciding what to perform in house and what tasks, processes or projects to outsource. In case one is planning to outsource a task or process previously performed in house it is advisable to begin with staff augmentation and gradually move towards more complex outsourcing models to minimize the risk of major disruption in business deliverables. A major challenge in such situations is development of the competencies of outsourced manpower which is easier said than done. Further it is very important to work on the desired relationship with the outsourced partner and steer it towards the direction one is comfortable with. If one perceives them as a long term business partner, then it is more meaningful to enter into a mature outsourcing models giving them too a long term strategic focus. It is quite natural that the outsourcing partner will not like to make major investments unless assured of long term business. Business strategies change over a period of time as the company grows. It is therefore very important not to have outsourcing strategy for a very long period as it may impede rather than furthering the growth of business. One should always be on the lookout for a business process that is suited for present need and provide necessary cost and efficiency leverages for business development.

Bibliography

• Sustaining innovation when outsourcing components in multi-technology, multicomponent systems: Ian Mackenzie, CasimerDecusatis – Innovation: Management, Policy & Practice
• Organizational Commitment and Attrition among Business Process Outsourcing Employees in Chennai: K Devi, A Punitha – Journal of Social Welfare and Management
• An Empirical Analysis Of The Impact Of Information Capabilities Design On Business Process Outsourcing Performance: Deepa Mani &AniteshBarua – MIS Quarterly
• Internationalization as a determining factor of HRM outsourcing: EleannaGalanaki, Nancy Papalexandris – International Journal of Human Resource Management
• Organizational Change: Business Process Reengineering Or Outsourcing: MichelaPellicelli, Colombo Carlotta Meo& Andrea Cioffi – Annals of the University of Oradea, Economic Science Series

Article By,

Dr. Kunjan Pandey

Assistant Professor,

Department Of Commerce,

Institute Of Computer Science & Technology ( ICST ) – SHEPA