What exactly is outsourcing? Is there a difference between outsourcing and business process outsourcing?

There are varied definitions of 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) The University of Illinois Management Information Technology Services defines outsourcing as “the transfer to third parties, the performance of functions once managed internally. Outsourcing is really two types of service: ITO (IT Outsourcing) , involves a third party that is contracted to manage a particular application, including all related servers, networks, and software updates BPO (Business Process Outsourcing), has a third party that manages the entire business process, such as accounting, procurement, or human Resources”.

BPO is not something new but what it sets out to offer is to implement new ways to better perform business functions and generate more value than the corporation can do on its own. BPO has spread to most of a corporation’s business processes from sales, marketing, customer service, human resources, logistics, finance and accounting, administration and manufacturing.

Today, where competition has become intense in the business world, more organizations are implementing strategic business methods to improve cost and time savings, efficiency, skilled expertise, and business focus that, at the end of the day , it would mean improving the bottom line and delivering value to customers and their shareholders.

Strategic and operational decisions about what to outsource

Which secondary functions to outsource can be a daunting task for an organization. The organization needs to do a thorough investigation of its non-core functions that are considered high on the potential list for outsourcing. Such high-potential functions for outsourcing are those that are based on transactions and volume or even repetitive processes. These are traditional functions that other organizations have embarked on outsourcing to third-party providers.

The guiding principle behind outsourcing is this: can I get better results for the same money or less by outsourcing this particular function that is currently performed in-house? If the answer is yes, then this is a good candidate for outsourcing.

There are various functions in an organization where BPO is applied, but they are definitely not limited to administrative operations; comprising human resources, accounting, finance and treasury, engineering, information technology, legal and compliance, auditing, and corporate communications/external affairs.

For example, hotels have also started to outsource some of their business functions and these functions are their call centers, internet portals, accounting, security, room division functions and human resources departments; outsourcing purchasing and supply chain management, cleaning and laundry are now outsourced.

Should you or shouldn’t you outsource?

Outsourcing now gives organizations an advantage in conducting, managing and structuring their core business by doing so they now gain a competitive advantage which in return will deliver huge benefits by saving enough money, time or energy to focus on their core competencies .

The reasons for outsourcing differ from one organization to another. The most common reasons cited are reduced and controlled operating expenses, improved corporate focus, internal resources freed up for other profits, shortage of skilled labor, access to world class solutions and expertise, improved competitiveness and better managed core functions, planned with greater flexibility.

Outsourcing is not a new concept, by outsourcing it will give the organization the flexibility to hire a specialized company to carry out a particular part of the operations where the organization is not the best to carry them out.

Do a thorough research before deciding to outsource. Outsourcing has its strategic and operational disadvantages, when the decision to outsource is made, management will lose control over the management of said function, which in turn will lead to the relinquishment of the valuable knowledge of qualified personnel. There will be more training costs to retrain those staff to perform other functions, there could be more cost increases when the external provider is unable to perform the outsourced function, therefore management should look for an alternative external provider. The quality in the services, products or goods that are associated with the organization does not meet expectations, resulting in customers being negatively affected. Failure to define the responsibilities of the parties could lead to a major dispute that is costly and detrimental to business. The operational disadvantages that may arise are the difficulties in the associated outsourcing contract and those derived from the affectation of human resources.

Contract Essentials

The nature of the contract and the relationship between the parties require careful consideration, as several important issues that arise during the pre-contract, the performance of the contract and the post-contract must be carefully addressed. Contract management is crucial to ensuring the success of any outsourcing effort.

Decide on outsourcing models that fit your business goals and the type of function to be outsourced. Carefully chosen models would provide the organization with operational and strategic advantages, continuous business improvement in business processes, and formulation of innovative business strategy. These models can be in the form of a joint venture, service contract, construction, operation, transfer, lease, franchise.

The following guidelines may be helpful in structuring outsourcing agreements:

(1) Determine the scope of the outsourcing service;

(2) Specify performance levels and targets; availability, reliability, stability and updating of the service. If applicable, use current performance as a starting point to measure improvement.

(3) Determine the measurement criteria, as well as the form and frequency of the information requirements. Consider using “customer satisfaction” based on survey results as a means of measuring performance.

(4) Integrate the business plan and the objectives of the organization. Make sure the agreement reflects your business plan and goals and is flexible enough to adapt to changes.

(5) Structure pay arrangements to reward performance, share savings, and provide incentives, but if appropriate and commercially effective establish damages for non-compliance.

(6) Anticipate increases and decreases in scope or costs, particularly on long-term contracts, structure prices to reflect changes in scope and cost.

(7) Actively manage the contract and the relationship. Do not abdicate responsibility. Have a continuous and active focus on performance levels, problem solving and improvement, as well as shared goals.

(8) Balance the desire to rapidly reduce costs with the need to clearly define the respective responsibilities of the parties.

(9) Anticipate and plan for the day the relationship will end and the services will be performed by someone else or “repossessed” back to the organization.

Management of the subcontracting relationship

Insist on open communications from both sides. You and your outsourcing partner must continually talk to understand what works and what doesn’t. Outsourcing partnerships will be successful if you manage the relationship diligently and realize that outsourcing clients also have an important responsibility to communicate directly and honestly to help outsourcing partners do their jobs effectively.