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Outsourcing

Outsourcing is subcontracting a process, such as customer services, call centers, Data Management & Analysis. product design etc to an external party or company. The basic reason for outsourcing or hiring an external agent is to lower cost and make better use of time and energy costs, redirecting or conserving energy directed at the competencies of a particular business, or to make more efficient use of land, labor, capital, (information) technology and resources. This concept was evolved in 1980s and since then is has been the corner stone of the business community. This also turned out to be the blessing for the third world countries like India, Pakistan, Bangladesh etc.

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Overview

Outsourcing involves the transfer of the management and/or day-to-day execution of an entire business function to an external service provider. The client organization and the supplier enter into a contractual agreement that defines the transferred services. Under the agreement the supplier acquires the means of production in the form of a transfer of people, assets and other resources from the client. The client agrees to procure the services from the supplier for the term of the contract. Business segments typically outsourced include information technology, human resources, facilities, Marketing management, advertising and accounting. Many companies also outsource customer support and call center functions like telemarketing, CAD drafting, customer service, market research, manufacturing, designing, web development, content writing, ghostwriting and engineering.

Reasons for outsourcing

Organizations that outsource are seeking to realize benefits or address the following issues:

Cost savings.

The lowering of the overall cost of the service to the business. This will involve reducing the scope, defining quality levels, re-pricing, re-negotiation, cost re-structuring. Access to lower cost economies through offshoring called "labor arbitrage" generated by the wage gap between industrialized and developing nations.

Focus on Core Business.

Resources (for example investment, people, and infrastructure) are focused on developing the core business. For example often organizations outsource their IT support to specialized IT services companies.

Cost restructuring.

Operating leverage is a measure that compares fixed costs to variable costs. Outsourcing changes the balance of this ratio by offering a move from fixed to variable cost and also by making variable costs more predictable.

Improve quality.

Achieve a step change in quality through contracting out the service with a new service level agreement.

Knowledge.

Access to intellectual property and wider experience and knowledge

Contract.

Services will be provided to a legally binding contract with financial penalties and legal redress. This is not the case with internal services

Operational expertise

Access to operational best practice that would be too difficult or time consuming to develop in-house.

Access to talent

Access to a larger talent pool and a sustainable source of skills, in particular in science and engineering.

Capacity management

An improved method of capacity management of services and technology where the risk in providing the excess capacity is borne by the supplier.

Catalyst for change

An organization can use an outsourcing agreement as a catalyst for major step change that cannot be achieved alone. The outsourcer becomes a Change agent in the process.

Enhance capacity for innovation

Companies increasingly use external knowledge service providers to supplement limited in-house capacity for product innovation.

Reduce time to market

The acceleration of the development or production of a product through the additional capability brought by the supplier.

Commoditization

The trend of standardizing business processes, IT Services and application services enabling businesses to intelligently buy at the right price. Allows a wide range of businesses access to services previously only available to large corporations.

Risk management

An approach to risk management for some types of risks is to partner with an outsourcer who is better able to provide the mitigation.

Venture Capital

Some countries match government funds venture capital with private venture capital for startups that start businesses in their country.

Tax Benefit

Countries offer tax incentives to move manufacturing operations to counter high corporate taxes within another country.

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Source: http://www.globeium.com/page.php?id=3

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