Outsourcing in Modern Era: Over-Hyped or a Must-Have?
Long is the time when globalization became local and outsourcing became a trend in the United States. Gradually, the developed countries started outsourcing work to the developing economies. It has also been seen as a long-term competitive strategy by many. Such is the modern business landscape today that the major focus of firms is on leveraging external capacities, capabilities, competencies, knowledge, and skills – why do it yourself, if another provider can do it faster, better, cheaper? However, despite outsourcing being such an old concept, a major chunk of organizations still struggle with the question of ‘why outsource’ and ‘what to outsource’?
What Is Outsourcing?
Before getting into the question of why outsource, let’s understand outsourcing well.
With Outsourcing, companies delegate their business process/ tasks to third-party agencies, usually external to them, to save time, draw expertise, focus energies into core activities, and leverage on a plethora of other benefits depending on the case. Outsourcing itself is of many kinds:
In this mode, IT assignments and projects are delegated to agencies outside the client’s country of residence. This involves collaborating with an external organization and is usually done to achieve cost savings due to lower labor costs or tax savings generated in the outsourced country.
Offshore Development Center
An offshore development center helps an organization expand its workforce without hiring talent. It also provides access to expert resources at reasonable prices, without having to hire them and incurring recruitment costs.
With custom engagement models, organizations have the flexibility to delegate work to offshore centers or hire resources from dedicated offshore development centers. This helps clients seek benefits on a case-to-case basis at times.
Why Outsourcing is still popular?
Of late, outsourcing has made it to the global news for all reasons- both positive and negative. Despite controversies, outsourcing as a business practice is on a growth spree, with every increase in volume and scope of work. This includes external agencies pushing their way up in the value curve to cover broader and enhanced skills, research support, and expertise. With offshore development and other models getting more streamlined with days passing, it is apparent that outsourcing is here to stay.
The Big Question: Why Outsource?
The primary reason for organizations to outsource are broadly twofold: (i) Lower operational cost and (ii) cheap and skilled labor. However, the core to outsourcing lies in doing away with the mundane time-consuming non-critical tasks and concentrating on the core business. This frees up internal resources, making them available for other useful purposes, and at the same time gives you access to skilled labor in areas where you do not have in-depth expertise. If utilized to the core, outsourcing benefits can add value to a company’s revenue stream, bring the best of both worlds, and garner growth with a lean structure in the long run. This is where long-term fruitful relationships with vendors come in handy.
In order to ensure that you outsource only invalid situations, ask the following five questions:
How effectively are you utilizing your internal resources particular to that activity?
Can you support new initiatives with your existing resources in that domain?
What is the scope of improvement and how fast can you adapt to the changes?
Has your team achieved operational excellence in that area?
What is the cost you spend on that domain and how does it compare with the optimum spend in that area?
Once you have an answer to all these five questions, you will be pretty clear on what to outsource and what not. As companies grow in size and operations, they increasingly start focusing on core business activities while the non-core activities are ‘outsourced’ to vendors specialized in that particular function. However, reasons why organizations undertake outsourcing and offshoring vary depending on cases and the outsourcing organization’s vision and purpose of the exercise.
What to outsource?
This looks like a tough question, but it is really not. Consider what the economist, Adam Smith, said in his treatise The Wealth of Nations- “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, it is better to buy it of them.” You outsource what is non-critical to you or where you want to weave cost benefits or grow or both.
So before deciding what to outsource, one should understand the following:
What are your goals?
What problem will outsourcing help you solve?
How will you ensure outsourcing will meet your goals?
Who should you partner with to solve this problem?
Once you have answered these questions, make sure you perform due diligence to make sure that your chosen partner is fit for your needs.
Benefits of Outsourcing
Now that we know that outsourcing is essential, let’s have a look at the benefits of outsourcing.
Focus on core areas and increase productivity
Outsourcing brings along the advantage of focusing on core functions while letting the support functions be in safe hands. For example, transportation, procurement, etc. can be outsourced in the banking services industry in order to focus on customer experience and revenue. Similarly, areas like transcription, medical billing, and claims processing can be outsourced by healthcare companies, focusing on their core area- ‘patient care. At the same time, this ensures that internal resources are freed up for more mission-critical activities.
Enhance risk management
With outsourcing, the outsourcing partner powers the operations of the outsourcing company with redundancies and backup mechanisms, providing risk mitigation services in the event of any natural calamities, accidents, market fluctuations, or technical crises within a short TAT
Lower infrastructure investments
With outsourcing, companies get access to cutting-edge IT systems, state-of-the-art customer service call centers, and technical support without having to make heavy upfront investments. Companies pay a very small part of it, only for the services they avail, keeping investments low and company financials healthy.
Access to world-class capabilities
Apart from the financial benefits associated, another reason why companies outsource work is to have processes delivered by teams that have operational expertise in the outsourced process. Outsourcing gives companies access to world-class capabilities and infrastructure in the outsourced function.
Control operating costs
One of the most talked-about advantages of outsourcing to locations like India is the cheap labor costs in these countries. Processes outsourced to these locations are done at much cheaper rates and the same quality levels as in the donor location. This translates into major cost savings for companies. They also save on operational costs such as payroll, administrative costs, HR, power, rentals, and utilities as processes move to other locations.
Accelerate migration to new technology
Outsourcing makes it easier for companies to move to new technologies, thereby, helping them boost productivity and efficiency.
Improve operational performance
Outsourcing service providers bring skilled expertise and experience to the table, thereby, yielding better results within a faster turnaround time. This leads to an enhanced customer experience and improved customer stickiness.
Access to talent- No shortage
With outsourcing, you have a plethora of skills and skilled manpower at your disposal. You can choose from amongst the best talent pool without having to incur the pain and cost of recruitment, nor invest in training and development. Plus, you get access to talent from a global pool making it even better- both skill-wise and cost-wise.
Coping up with seasonal demand
With outsourcing, companies, typically in the west, can easily address peak workloads and poor staff strength during vacations and holidays. Outsourcing ensures manpower supply 24×7 round the year.
Achieve more with less.
With outsourcing, existing staff can manage outsourced projects thereby, improving productivity. Outsourcing leverages several factors, including your staff’s experience and productivity per individual. Moreover, you can scale easily by increasing your manpower with outsourcing. If chosen properly, complementary time zones can ensure that work is performed 24×7 – making it highly productive and faster.
Not just infrastructural costs, the operational expenses can also be brought down with outsourcing. Access to cheap labor in developing countries adds cherry to the cake.
With such immense benefits, we see that outsourcing can deliver unmatched value. Indeed true, organizations have been reaping these benefits already. The point to note here is that it is critical to have the right outsourcing services provider who can help you scale, grow and support you in all your needs.
At Aalpha, we have been delivering cutting-edge outsourcing services to clients from across the globe. We offer years of domain expertise and experience in working on projects across multiple industries like retail, healthcare, eCommerce, logistics, etc. With our highly qualified professionals on board, you will be guaranteed peace of mind and unmatched value.
Contact us for more information.
Also check: Outsourcing or In-house Development | Outsourcing Web Development Checklist
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About The Author
My name is Stuti Dhruv & I am senior consultant at Aalpha, primarily working on pre sales, consulting with clients on latest technology trends.