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. 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:
Operating Expenses
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
Longevity of a project is another factor to consider when making an Outsourcing decision. 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.
Specialized Needs
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.
Service Considerations
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.
Risk Mitigation
Reducing exposure to liability and legal action is another 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. 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. Companies are also facing the ongoing challenge of remaining competitive and flexible in today's business mark