What is Outsourcing?
Outsourcing refers to the practice of contracting out an organisation’s non-core and/or non-revenue generating activities to other organisations that specialise in performing those activities. The top management of organisations usually consider outsourcing as a strategic tool that makes the organisation concentrate on its core competencies, i.e., activities that it performs best.
At most times, outsourcing can be done at two levels:
- Outsourcing products/services
- Outsourcing process
Organisations consider outsourcing as a strategic rather than a tactical decision to take advantage of opportunities that exist in the organisation’s business environment such as low-cost labour in countries like China, India or Mexico.
Some of the important benefits of outsourcing are as follows:
- Eliminating the non-core functions leading to improved company focus
- Gaining access to world-class capabilities and technologies that the outsourcee company had developed by investing in technology, methodologies and human resources
- Sharing of risk with the outsource company
- Saving money by ensuring that the outsourcer organisation redirects its resources to core competency areas
- Ensuring gains as a result of low cost structure of outsourcee company and economies of scale that results due to specialisation Gaining access to resources that might not be available to organisation readily
- Eliminating labour related issues
- Decreasing the turnaround time of resources
- Improving the overall economic health of organisation
- Saving on infrastructure
In case of global sourcing, organisations frequently outsource one or more of their logistics functions and this is called as Third Party Logistics or 3 PL Some of the most commonly used 3PL services include the following:
- Shipping and receiving: 3PLs lay emphasis on the management of the shipping process right from start to finish. Third party logistics incorporated Transportation Management System (TMS) or integrated freight management services to bring efficacy in the shipping process.
- Freight bill payment and audit: 3PLs minimise the time required for billing of transportation of an organisation by offering bill payment service. When such services are provided by third party logistics, the client organisation can concentrate of core areas of their work.
- Transportation: 3PLs have onus for the actual transport of goods or services across various locations. 3PLs also mange product return between a company and the buyer. When a customer wants to replace a product, 3PLs picks up a product from customer’s address and the handovers it to manufacturer. Later on, customer gets the replacement or the product re-orders from manufacturer through 3PLs.
- Warehousing: 3PLs offer warehousing and transportation services as well. 3PLs specialise in the storing and distribution of goods and services. Many 3PLs offer customised material handling, storage, distribution, and product transportation services.
- Packaging: 3PLs will work in collaboration the client organisation during the initial setup process to determine ideal way to pack the product to ensure the organisation’s products are secure, presentable, and packed in the most cost effective way possible.
The 3PL provides services on three levels i.e. basic service providers, value added service providers and logistics integrators. The basic service providers render services related to warehousing, distribution and transportation.
The value added service providers render value added services like specialised pick and pack operations. The logistics integrators take on the entire responsibility of managing all the important daily supply chain operations, i.e., end to end solutions.
Potential of Outsourcing
Globalisation has decreased the distances in the world and brought countries closer. Now, organisations all over the world outsource their processes and products in India to stay ahead of the competition. In the last few decades, India has emerged as the most lucrative outsourcing destination for technical and other business processes. Outsourcing is emerging as an excellent alternative to save costs and gain other benefits.
The following points explain the potential of India as an outsourcing destination:
Achieve more with less
Organisations usually want to increase their productivity and earn maximum revenues using their existing staff. When an organisation outsources to India, the organisation can use their own staff for managing the outsourced team and projects. This helps in increasing the productivity of each employee. Different organisations of the world have shown a significant increase in productivity by outsourcing to India.
Access to qualified professionals having the required skills
India has a large pool of highly educated and skilled professionals who hold degrees from the most prestigious universities around the world. Usually, language and cultural differences exist between the outsourcer and outsourcee organisations that may lead to various issues. However, Indian professionals are quite adept at reading, writing and speaking English as against other outsourcing destinations.
Maintain focus on core competencies
When an organisation reaches the growth phase in its life cycle, it is usually focussed on increasing its customer base, conducting extensive research and introducing and testing new products to maintain their growth journey. With the same staff, it is quite difficult for organisations to manage all its activities internally.
However, if organisations outsource all their non-critical or non-core activities, they will be able to focus on their core business functions. India, as an outsourcing destination, has various organisations that can provide services for different types of business processes and activities such as customer support, research, and marketing.
Become more scalable
Businesses are exposed to risks and each business experiences peaks and lows. It is quite possible that an organisation may not have a required number of employees with the required skill set to manage the current amount or nature of work. However, outsourcing can help an outsourcer organisation to handle unanticipated business conditions by giving access to skilled professionals.
Better pricing flexibility
Due to high cost of living in most outsourcing countries, the cost of labour in such countries is quite expensive when compared to the cost of labour in star outsourcing destinations such as India, China, and Philippines. Apart from the salary, the outsourcing organisations also have to bear expenses related to taxes, computers, health insurance, liability insurance, etc. When outsourcing is done to India, outsourcing organisations can save costs of labour due to lower labour costs.
Outsourcing to India can help outsourcing organisations in lowering their expenses on salary and related benefits offered to employees. India also provides pricing flexibility which helps the outsourcing organisations in managing their salary expenses.
Determine the appropriate staff levels
Outsourcing organisations may not be able to maintain an appropriate staff level for their business. For instance, in case an organisation has less than the required staff, it may not be able to perform its operations when the business experiences increased levels of business activity.
Similarly, in case an organisation has more than the required staff, there are chances that quality people may get bored due to lack of challenging and meaningful work. However, when an organisation outsources its processes or functions to India, it can gain flexibility in determining the appropriate staff level.
When business activities increase as a result of seasonal fluctuations, the outsourcing organisations can increase outsourcing to India. At the same time, the outsourcing organisation can maintain a stable utilisation rate.
Outsourcing to India is easy
It is quite easy to outsource to India due to availability of experienced Indian service providers. Outsourcing organisations need to enter into an outsourcing contract with outsourcee organisations. However, outsourcing organisations must ensure that they outsource only what they can handle.
Before making the outsourcing decision, the outsourcing organisation needs to take care of the following aspects:
- Keep in mind the different business goals
- Evaluate the outsourcing needs
- Start outsourcing with simple projects
- Invest in IT communication and conferencing tools such as GoToMeeting and Webex
- Clearly define the deliverables and deadlines and conduct meetings with vendors
Global Sourcing vs Outsourcing
With rise in internationalisation and globalisation, various new trends have also emerged. These include global sourcing, outsourcing and offshoring. However, many people use these terms alternatively, but these are not entirely different and similar. These types of sourcing methods have some differences as well as similarities.
It must be remembered that global sourcing and outsourcing are different. Today, we are witnessing an increasingly interconnected world and most developed economies are focussing on sourcing from emerging economies and exporting products and services. The term global sourcing has become extremely common place. Global sourcing is defined as the sourcing of manufactured goods and raw materials from across borders. Global sourcing aims at deriving advantage from lower cost material.
On the other hand, outsourcing refers to the practice of hiring a third party who will perform certain functions for the outsourcing organisations. Organisations outsource using methods such as Business Process Outsourcing (BPO), Managed Service Programs (MSP), and Recruitment Process Outsourcing (RPO). The aim of outsourcing usually relates to taking advantage of lower labour cost.