Origins of Outsourcing
Over the last 20 years, the business world has experienced unimaginable productivity gains thanks in most part to the explosion of information technology. This has directly resulted in companies spending billions of dollars to create IT infrastructure, systems and networks. Because information technology changes so rapidly, companies are forced to keep up by constantly evaluating, upgrading and replacing information technology. This dynamic has given rise to Outsourcing these highly specialized services. Furthermore, the cost of getting IT projects wrong is significant. For these reasons, the IT outsourcing industry was born almost overnight, employing millions of professionals worldwide.
"For these reasons, the IT outsourcing industry was born almost overnight, employing millions of professionals worldwide."
More than anything, Outsourcing comes down to a pure business decision taking several factors into account—most notably the cost-benefits relationship. But there are other more complex things to consider than simply answering - What is outsourcing. Here is a list of Outsourcing considerations every business should carefully review when questioning why outsource?
Reducing costs is by far the most prevalent reason companies consider Outsourcing. These cost savings can take many forms. The most obvious is payroll savings related to manpower. Additionally, less labor means less benefit costs, less training, less infrastructure investment, less turnover costs and less HR costs. Essentially, all the costs—both short-term and long-term—associated with hiring a new employee.
Long-Term vs Short-Term:
Another major consideration is for making Outsourcing decisions are related to the longevity of the project or process needed. For instance, if a short-term computer networking project requires intensive work from a large team over the course of 18 months, Outsourcing is the obvious solution. If a company seeks a permanent CRM center, the costs to manage this service in-house vs Outsourcing must be carefully weighed.
When services required are highly specialized such as legal or security services, companies will often turn to Outsourcing. This eliminates the need to train internal employees which can represent a significant investment. This allows a company to focus on its core business and immediately realize the benefits of outsourcing . In many cases, Outsourcing for this reason will be more costly.
Outsourcing services that directly affect the service levels provided to customers should be a major consideration of Outsourcing. I.e., Outsourcing customer service or support or technical support or other CRM functions can cause harm to a company’s reputation and customer loyalty.
Reducing exposure to liability and legal action is another serious concern to consider when asking why outsource? For instance, a railway company may choose to lease its train cars, effectively Outsourcing both the ownership and liabilities associated with its core business. Outsourcing of this reason is especially prevalent in industries that are naturally more dangerous.
Drivers for Outsourcing
Besides wondering what is outsourcing or why outsource at all - it is important to understand the drivers for Outsourcing. Outsourcing today, is a product of growing market and business pressures, as well as changes in technology, available resources and the economy. In the past, companies only turned to Outsourcing as a response to market and consumer pressures. For example, during the time of the Industrial Revolution, the production of goods rapidly increased, which led more managers to turn to Outsourcing. This was before IT outsourcing or other specialized Outsourcing services became commonplace. Outsourcing at this time was thus experimented with as a means of combating the growing demands. However, companies quickly learned that there are many benefits of outsourcing like the fact that Outsourcing significantly reduces production and operations costs. This is when companies started to embrace Outsourcing, especially IT outsourcing, as a business strategy. Since then, market and business pressures as well as changes in the global economy have driven companies to outsource for many more reasons than in the past. It is essential to breakdown these drivers of Outsourcing, which are leading to further Outsourcing growth in the world.
External Business Forces
In today's Outsourcing market, there are a considerable amount of main forces - or "drivers" that lead to further growth of Outsourcing such as drivers emerging from business forces. These Outsourcing drivers can be classified into two groups: drivers emerging from the business environment as well as more "internal" business drivers.
"These are business forces that are external to the company, which are usually impossible to control."
The first category of Outsourcing drivers emerges from the business environment. These are business forces that are external to the company, which are usually impossible to control. These changes occur regularly and range from shortening product life cycles to intensifying competition to business innovations. These changes are also especially regular in the context of information technology or IT outsourcing.
IT outsourcing is one of the most commonly outsourced functions today. But why outsource IT services you may be wondering? Almost every company today, no matter the industry, requires some level of IT work. Many companies for example, require software or machinery that gets either updated frequently, has short life cycles or requires a significant amount of maintenance and support. These are all external forces that drive businesses to increase IT outsourcing. Paying to store and maintain such software or machinery is too expensive today, not to mention technology-related innovations occur constantly. These innovations are also particularly the result of intense competition within the IT industry. More specifically, competition among specialized IT outsourcing units. As technology continues to rapidly grow and businesses continue to outsource IT functions, specialized IT outsourcing units are growing, becoming more competitive and developing new advances, not to mention managers are finding many benefits of outsourcing IT services. With these Outsourcing units becoming more advanced, businesses almost do not even have a choice any more about whether to outsource or not. Outsourcing and especially IT outsourcing, is becoming a must in order to survive the competitive market of today.
Internal Business Forces
The second category of drivers for Outsourcing that answers that - why outsource question, can be referred to as "internal" business forces. Specifically, many regard internal core competencies as a primary Outsourcing driver - a focus on Outsourcing in general and IT outsourcing in particular. Outsourcing certain functions allow managers and their team to focus on key priorities or even to re-focus the whole company strategically on the areas where business opportunities can best be achieved. As there are many benefits of outsourcing, Outsourcing such functions to an external company can also improve efficiency in a number of ways: first, a specialized unit that is more efficient in that particular area handles that specific function. Second: with better management of costs and improved handling of operations, overall efficiency also increases. With internal efficiency being increased as well as costs being reduced, Outsourcing continues to appear as a no-brainer business step.
Another internal Outsourcing driver is lack of available internal resources. More times than not, businesses, especially small to mid-size, have an inadequate number of people internally available to handle all business functions. Moreover, their level of competence to handle all functions, especially particular IT tasks may also be questionable. In such situations, managers have to make choices on whether to hire more people, pay to train current staff or to outsource that function to a specialized service provider. Choosing the former options however, takes time, which takes money and often leads managers to answer those "what is outsourcing" and "why outsource questions" and thus be driven to choose Outsourcing.
"Outsourcing makes a company more agile and flexible in responding to market changes and demands of competitive pressures."
Companies are also facing the ongoing challenge of remaining competitive and flexible in today's business market, which is another driver of Outsourcing. Today, there is a greater degree of specialization and increased focus on core activities. Outsourcing makes a company more agile and flexible in responding to market changes and demands of competitive pressures. As stated, there are many benefits of outsourcing, and many managers turn to Outsourcing because it can lead to an enhanced competitive edge. Managers can look for and find individuals or specialized units that are perfect or uniquely fitting for certain projects. With no long-term contracts, like those formed with internal employees, managers can continue to seek out and hire the best fits for specific projects or functions like a call center or an IT outsourcing software specialist.
Seeking global best practices is often regarded as another top Outsourcing driver for companies today. Outsourcing service providers usually operate across the globe and handle a wide variety of functions for different companies. This gives them an opportunity to learn and gain expertise in the best business practices used by the top companies of the world. Any company to adopt these global best practices can then leverage their knowledge and expertise.
As a manager, when digging for information on - why outsource or What is outsourcing, you may have also heard the term multisource. Many companies that are short on time and money, such as a start-up company, apply this term, multisourcing — using both internal staff and Outsourcing to an individual or specialized service unit— in order to speed up the time to launch. Such situations could involve hiring a multitude of Outsourcing service providers to handle almost all aspects of a new project. When talking IT outsourcing, a software startup for example could outsource any function from product design, to software coding, to testing, to localization, and even to marketing and sales. Having this option - to multisource, is another driver of Outsourcing today.
In the recent past, market demands, cost or headcount reductions were the most common drivers for Outsourcing. In today’s world, drivers of Outsourcing are often more strategic, and focus on carrying out core value-adding activities in-house where an organization can best use its own core competencies. All of the benefits of outsourcing are also drivers themselves as they are so appealing to managers today. Drivers for Outsourcing will continue to evolve as market and business pressures fluctuate and the global economy continues to change. In order to stay ahead in today's competitive business market, it is important to not only answer What is outsourcing and why outsource in the first place as well as understand these important drivers and Outsourcing trends.
The Benefits of Outsourcing
Wondering what the benefits of outsourcing are? There are many benefits of outsourcing today. This section offers a wide list of those benefits of outsourcing that business managers today are driven towards.
1. Focus on Your Core Business
Companies do not have unlimited resources. Every corporation has limited time and energy. Outsourcing can help businesses stay focused on its primary product or service and not get distracted by complex processes. In this sense, Outsourcing is used as a tactic of specialization, in which case it would certainly appear as a great benefit of Outsourcing.
2. Reduce Labor Costs
Cost reduction is one of the most widely known benefits of Outsourcing. One of the most significant costs for any business is labor or HR costs. Outsourcing directly reduces not just salary expenses, but also all the costs associated with benefits, payroll, taxes, overhead, turnover and infrastructure. Additionally, hiring and training employees is very expensive especially when dealing with the IT realm, IT outsourcing continues to be proven as a smart business decision. Also, many employees don't always work out as expected for any number of reasons. Outsourcing lets companies avoid these risks and allows them to focus human resources where they need them most.
3. Better Control of Costs
Outsourcing converts fixed IT costs into variable costs and allows companies to budget and plan effectively. In other words, through Outsourcing, companies only pay for what it uses when it needs it. This is therefore another one of the benefits of outsourcing, as in this sense, Outsourcing lowers long-term investments when only short-term resources are needed.
Outsourcing provides significant scalability, flexibility and responsiveness advantages to any organization, especially in IT outsourcing. Companies are able to meet fluctuations in demand and respond accordingly while still keeping its service levels high. Outsourcing provides flexible options related to specific service needs that might be outside its core expertise. Outsourcing ensures a firm can remain dynamic and flexible enough to respond to an evolving marketplace, which managers like to hear when answering - why outsource?
5. Increased Efficiency
Outsourcing results in increased productivity and efficiencies not only in the work or services being outsourced, but also in the work, projects, and services not outsourced. These employees are able to be more productive as well.
6. Pricing Advantages
All of the advantages of Outsourcing above—efficiency, cost savings, productivity—means that a company can offer lower prices to its customers as a result of lowering expenses and increase revenue.
7. Reduce Risk
Today, risk management is major business consideration. By Outsourcing, companies can share risks with a partner company or vendor especially for services that are inherently more dangerous. Because specialized companies have specific industry knowledge and capabilities, they generally are much better at deciding how to avoid risk in their specific areas of expertise. This is especially the case when dealing with IT outsourcing, as machinery today can require a significant amount of knowledge and experience. Thus, Outsourcing to specialized companies saves additional expenses associated with insurance and legal costs.
8. Competitive Advantage
Outsourcing can level the playing field for many smaller or mid-size companies competing with larger, more established corporations, which is another one of the benefits of outsourcing. While larger firms can afford to bring processes in house, most small businesses can't afford the in-house support services that larger companies maintain. Outsourcing and especially IT outsourcing, can assist small organizations by giving them access to the same technology and expertise that their larger competitors enjoy, which small business owners need to understand when learning What is outsourcing and Why outsource are important questions to ask.
9. Access Highly Skilled & Specialized Labor
Outsourcing gives companies quick access to world-class capabilities and thought leadership. This means organizations shorten development and implementation time and can get projects completed faster, products to market sooner and the results are usually better quality—all thanks to Outsourcing.
10. Quickly Implement New Technology
As there are many benefits of outsourcing that deal specifically with IT outsourcing, this benefit involves quickly implementing new technology. For companies specifically Outsourcing IT services, even major technology projects can be started immediately, as opposed to waiting months to hire and train internal employees, especially on technology related functions that many just implement IT outsourcing for. IT outsourcing provides access to available resources and expertise, saving valuable time and money.
11. Time Zone Advantage
Some global companies might desire to outsource services overseas for the specific reason of being able to provide more timely service or response time in a faraway part of the world, providing companies with the benefit of round-the-clock business operations. For companies Outsourcing offshore, however, this is often a major service issue.
12. Freeing Up Investment Capital
The money savings provided by Outsourcing and IT outsourcing especially can provide short-term investment capital to companies, allowing them to make infrastructure, equipment or capital investments.
The list of benefits of outsourcing is ongoing, and each year, as technology continues to advance and the global economy continues to fluctuate with different needs, more benefits of outsourcing will arise. But today however, it is important to understand the many benefits of outsourcing, which will in turn, help answer the question, ‘what is outsourcing?’ and 'why outsource at all?'
Outsourcing: Future Trends
For years, Outsourcing has been a hot topic within the business market – offshore, reshore, multi-source, and now nearshoring – have all grown to become very common business terms today. This is because Outsourcing has steadily and significantly increased since the early 90s. Today, more and more types of Outsourcing services are offered, there are also many more specialized organizations available throughout the globe to outsource to and with the growing number of Outsourcing benefits, managers have even started to call Outsourcing a must-do business step in order to survive against competition. But as technology continues to advance and the global economy continues to change, what will happen to Outsourcing? In this section, future trends and predictions of Outsourcing are discussed and weighed in order to help answer what is outsourcing and why outsource? As well as brace and plan for future business strategies involving Outsourcing.
"Managers have even started to call Outsourcing a must-do business step in order to survive against competition."
Nearshoring and Multi-sourcing
In the past, Outsourcing offshore to countries like China, Indonesia and India were very common business practices, today however, the process of nearshoring has become a rapidly growing trend with little signs of slowing down in the future. Studies have continued to show the slow movement of manufacturing away from countries like China, and into North and South America. In North and South America, companies look to engage local regions and take advantage of supply chains in closer proximity to production. This process is often referred to as nearshore Outsourcing. Nearshore Outsourcing (Nearshoring), or the technical definition - the process of moving business functions to a country geographically closer to a company’s home country, has been gaining popularity for the past year.
"Nearshoring continues to become more popular as there are many newly discovered benefits of outsourcing near shore."
Nearshoring continues to become more popular as there are many newly discovered benefits of outsourcing near shore. The U.S. has benefitted from this new trend of nearshore Outsourcing, however, it is clear Mexico has become a major beneficiary of nearshoring within this past year. This is because Mexico is becoming alive with progress and its industrial sector is buzzing. Mexico is the fourth largest exporter of light vehicles in the world; it supports a growing aerospace industry; and is a major supplier of “white goods” like refrigerators and washers, as well as electronics, pharmaceuticals, medical devices, power systems and a variety of other consumer products that are in high demand today.
A study conducted by Penske Logistics, in partnership with Northeastern University’s D’Amore-McKim school of business found that 78 percent of Asia-Pacific respondents said rising wage costs are the reason for shifting Outsourcing operations, while a great number of American companies have been moving Outsourcing operations from the Asia-Pacific to Mexico. It is interesting to note, that 87 percent of North American third-party logistics CEOs claimed to provide third-party logistics Outsourcing services in Mexico that generate 9.3 percent of revenue in their U.S. market. This figure is expected to increase over the next three years to 12.5 percent, cited Fleet Owner. This figure is most likely to increase, as there are many benefits of outsourcing nearshore, which are appealing to business managers trying to answer What is outsourcing, where can you outsource to and what are the benefits of outsourcing are such as: cost reduction and improved sectors. For example, lower costs, greater speed-to-market, ease of doing business, contact-center services with agents who speak English and Latin-American Spanish, as well as more familiar time zones and closer geographically are just a few of the benefits of outsourcing nearshore. Therefore, as shifts continue to occur among the global economy, nearshoring and especially U.S. companies nearshoring to South America, is predicted to rise throughout the upcoming years.
"A great number of American companies are moving from India and Asia-Pacific to nearshore solutions like Mexico."
Multi-sourcing is another currently popular term in Outsourcing business circles. Multi-sourcing, which can apply to any business area, but is most commonly used when referring to in-house IT services or IT outsourcing services. Multi-sourcing is the blending of business and IT services from the main set of internal and external providers in the pursuit of business goals. It is most frequently used by large enterprises, where IT operations and technology infrastructure are contracted to multiple vendors. Many believe this specific type of Outsourcing will continue to be the name of the Outsourcing game in the future as there appear to be many benefits of outsourcing and insourcing at one time. Many companies are starting to move to multi-sourcing largely in pursuit of the cost savings that come from the flexibility of tapping into a variety of labor pools. Also, this trend is predicted to grow because multi-sourcing also enables resources to be rapidly scaled in either direction to align with business growth, call volumes or seasonality.
IT/Specialized Outsourcing Services
It is predicted that technology will continue to advance. Therefore, IT services will continue to evolve, aiding in business operations and growth. Either way, IT outsourcing will still be necessary and relevant, but different types of IT services will certainly appear from advances in technology.
"So it's important for companies today to brace for technological changes and thus IT outsourcing changes very soon to occur. "
The sophistication of technology or even robots is not the only prediction being made and leading companies to more deeply evaluate why outsource at all? It is also predicted that customer contact center services will reach higher levels of sophistication in the near future. As the world continues to develop, it is believed it won’t be long before the world recognizes the evolution of “human-powered” customer service. When a customer becomes exhausted over self-service options like intelligent, web based, CSR robots or interactive voice response, and needs or just wants a real person, the customer will likely need to speak to a highly skilled agent trained to handle the complex problems of the future in more than one language and through multiple communication channels. Therefore, these customer service representatives will need to be able to respond and effectively communicate with customers over the phone, through web chat windows, by email, through social media, and even through mobile applications. When technology advances and becomes more sophisticated, so too does the customer service representative who is outsourced for call center services. These changes in the IT outsourcing world are likely to occur, so it's important for companies today to brace for technological changes and thus IT outsourcing changes very soon to occur.