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Outsourcing involves the use of external providers to perform non-core business activities.
A business may wish to focus on its main activity and will organise for another business to provide a support service such as transport, security, supply chain management, logistics, maintenance and servicing of equipment etc
By outsourcing the business is able to free up resources to invest in the core business activity.
Outsourcing can include:
Operations (e.g. manufacturing, design, distribution) e.g. Apple and Foxconn
Human resources (e.g. employee renumeration, training, counselling)
Administrative work (e.g. data entry, back office work)
Information Technology (e.g. network outsourcing via remotely hosted software applications)
Finance and accounting (preparation of financial accounts, taxation etc)
Knowledge process outsourcing (e.g. outsourcing marketing, public relations)
Legal process outsourcing (e.g. Legal advice, drafting contracts, patents and trademarks etc)
Captive
Captive
is when a business uses a wholly owned subsidiary to carry out a business process/function (the advantage of this being control over the process and the delivery of the process/function). Can be on-shore or off-shore e.g. Dell in Penang serves Dell globally
Non-Captive
Non-Captive
is when a company uses a third party to outsource to. Can be on-shore or off-shore. e.g. British Airways(UK) uses WNS Global Services for ticketing who also provides ticketing for 26 other airlines including Virgin Atlantic.
What you need to consider
What you need to consider
•Is outsourcing CHEAPER and MORE EFFICIENT?
•Which geographical locations are preferred?
•Which vendors should be used?
•How will the outsourcing contract be managed? What will be the length of the contract? The KPIs? Service levels required.
Watch these clips on outsourcing
a) create a table and write down the advantages and disadvantages of outsourcing
Why Outsourcing is Bad for Business.mp4Advantages
Advantages
•Simplification: this arises from reducing the number of activities performed within the business.
•Efficiency and cost savings: access to cheaper labour, regulatory differences and skilled labour in offshore locations..
•Increased process capability: this comes from access to improved technologies and highly skilled labour. Improved process capability means products are produced and delivered to the market with improved levels of service.
•Increased accountability: through the use of service level agreements (SLAs), which contractually bind the vendor to pre-determined targets on KPIs
•Access to skills/resources lacking within the business: a business outsourcing to a nation such as India or Vietnam, may well find that there is access to highly skilled and disciplined labour at low cost.
•Capacity to focus on core business or key competencies: the use of outsourcing enables a business to focus on that which it cannot outsource: its vision, purpose, sustainable advantage through innovation and so on.
•Improvements to in-house performance: a business using outsourcing and therefore focusing on core competencies can improve in-house performance as it can focus on making internal changes that reduce cost and improve profitability.
Disadvantages
Disadvantages
•Payback periods and cost: this refers to how long it takes to repay the cost of organising outsourcing and make the required organisational changes. Over time businesses will experience cost savings; however, it could take two or three years.
•Communication and language: When negotiating to outsource, the business might focus too much on the decision to outsource rather than consider the ongoing relationship with the vendor. As outsourcing often occurs across two or more regions, there can be cultural differences, language differences and differences in the way business issues and problems are managed.
•Loss of control of standards and information security: when a business opts to outsource, it can feel a loss of control over standards and also over how information is used. Australian banks have found privacy within outsourced operations in India may not be as secure as it is was when the functions were performed in-house.
•Hierarchies: a business using outsourcing may be aiming to eliminate costs associated with hierarchies, yet managing complex outsourcing agreements can create its own hierarchies, thereby maintaining business inefficiency.
•Organisational change and redesign: outsourcing may be accompanied by a high level of business change and organisational redesign. There may be downsizing, causing the loss of domestic employment.
•Loss of corporate memory and vulnerability: Key knowledge of processes and solutions may be lost with the transfer of business processes to outside parties
•Information technology: As the use of outsourcing grows so too does the need for supporting information technology (IT). The cost and time can significantly reduce any financial advantages accruing in the short term with the use of outsourcing.
Strategic benefits
Strategic benefits
There are four important aspects to this.
1.Using outsourcing to get around trade barriers.
2.Using a vendor that outsources for others within the same industry can bring the benefit of expertise gained from outsourcing to competitors.
3.Trading in different time zones: International processing of work allows businesses in Australia to conduct operations during the day and have processing work done overnight by the outsourcing vendor.
4.Strong partnerships between the business and the outsourcing vendor can lead to the vendor suggesting innovative solutions that may increase the business efficiency and productivity.
Case Study
Case Study
•Discuss the impact of outsourcing on IKEA’s operations. Use examples
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