Outsourcing: Definition
Outsourcing is a business practice of passing individual tasks, subareas, or business processes over to a third-party and thereby receiving the results from outside of your own company. Activities or deliverables that your company was responsible for fulfilling will now be provided by a specialised service provider. These tasks are often a business’s secondary functions: tasks that must be fulfilled in order for a company to deliver on its central activity. With outsourcing, one or more tasks or processes are usually given to an external partner. Under certain circumstances, however, some tasks are performed internally (in-house outsourcing). For example, if you have given a task to a different area of your company, or to a department which specialises in it, this is commonly known as internal outsourcing. In contrast, a task given in its entirety to an outside company is known as external outsourcing. The external company may be based regionally or may be a foreign contractor.
What are the reasons for outsourcing?
In addition to the hoped-for cost savings of outsourcing, there are other reasons for handing over certain tasks:
- Lack of know-how: New processes and operations in companies are often necessary, but the employees often lack the know-how and implementation skills required. Outsourcing is an alternative to hiring skilled workers for this.
- Quicker response: You are more responsive to change because you can pass these tasks on to specialised third-party companies.
- Optimal scalability: Outsourcing increases the availability of labour. As a result, maximum output can be achieved and production guaranteed – even in the event of seasonal or non-operational capacity fluctuations.
- Increased efficiency: Companies can concentrate on their core competencies and work more efficiently.
- Save costs: External companies have a high degree of specialisation with regard to their services. They can work much more cost-efficiently and therefore offer discounted rates.
- Quality improvement: Outsourcing often brings quality improvements. For instance, in manufacturing a good factory or workshop can improve the quality of products.
Different forms of outsourcing
There are different distinguished forms of outsourcing:
BUSINESS PROCESS OUTSOURCING (BPO)
In business process outsourcing, entire company processes are outsourced. An example of this may be partnering with an external service provider to carry out your businesses’ monthly payroll processes.
KNOWLEDGE PROCESS OUTSOURCING (KPO)
Complex tasks, such as conducting financial due diligence for an entity that a company is considering for acquisition, is usually outsourced to a third party. The respective third party usually has trained experts with a high degree of specialisation.
OUT-TASKING
Often, individually defined and time consuming or administrative processes (such as archiving or emails or data backup) are handed over to another company.
However, the responsibility for this remains with the company, as the whole business area continues to be managed independently
SELECTIVE OUTSOURCING
Selective outsourcing mixes business process outsourcing and out-tasking. Distinct sub-areas are outsourced which are more extensive than individual tasks, but nevertheless do not correspond to a complete process.
Outsourcing: Examples of Outsourcing Tasks
FINANCE SERVICES
A company relinquishes the task of finance services by outsourcing several finance and accounting functions. This usually includes back-office tasks like: Financial analysis. Managing accounts payable and accounts receivable.
MARKETING
A company outsources the support of social media channels to an external service provider (e.g. an agency).
ANNUAL FINANCIAL STATEMENTS
Companies are able to seamlessly obtain high quality strategic and financial support from experienced parttime and interim FDs, CFOs and other finance experts including qualified CAs. Services include, compilation and annual preparation of financial statements.
These are just a few typical examples of outsourcing. In practice, a company today can outsource every step of its operations, whether in the production of goods or the provision of services, to an external service provider such as Sapientis Advisory. Thanks to the networked world, it no longer matters whether your company is located in the neighbouring village or on the other side of the world.
What is the correct approach?
Outsourcing Challenges
Outsourcing is a complex process, which is why there can be mistakes in its implementation. Even comprehensive planning cannot guarantee a smooth process. Here we look at some of the most common mistakes so that you avoid them:
Outsourcing: Advantages and Disadvantages
The decision to give certain functions to an outside service provider should never be taken lightly. With that in mind it is important that we provide you with an unbiased view of both the advantages and disadvantages of outsourcing. Once the tasks have been outsourced, reintegrating them back into a company can be anything but easy. You should always first check that the benefits outweigh the disadvantages for your company before opting for outsourcing.
Advantages
Disadvantages
It is not advisable to outsource the key technologies and competencies of your company to third-party companies as these differentiate you from other companies and competitors. If you select a suitable outsourcing partner such as Sapientis Advisory that has been in the professional services environment for over a decade, you can mitigate a lot of the disadvantages of outsourcing. So choose wisely.
Outsourcing is gaining importance
Many companies resort to outsourcing strategies in order to purchase services cost-effectively and to be able to focus more on their own competencies. We cannot ignore the huge impact the pandemic has had on businesses and their outsourcing decisions. According to Deloitte’s, the agility with which organisations respond and adapt to the “new normal” will determine who will fall behind and who will thrive in the post-pandemic world. Outsourcing decisions will play a significantly more strategic role in short-term resilience and long-term growth. The impact has been greater on business process outsourcing (BPO) than on information technology outsourcing (ITO). This is largely due to the regulatory limitations on the extent of virtual workforce’s, rendering BPO firms under-prepared. The pandemic has banished the idea that physical co-location of resources is necessary to develop a trusting relationship in the workplace. The nature of workplace relationships as we know them today is changing drastically. Organisations are becoming increasingly comfortable with hiring through virtual interview meetings, signing new contracts without a formal handshake. A remote work culture is being ingrained gradually within companies, and this will help them access global talent from the most cost-effective locations. With the global economy expected to contract, firms are “looking at ways to preserve cash.” All these developments suggest that the needle will be tilting more towards outsourcing. Outsourcing remains an essential tool for client organisations to support their strategic goals. As always, benefiting relies on a client’s preparedness to invest being met by the service provider’s willingness to embrace flexibility.
References Website: https://www.cio.com/article/2439495/outsourcing-outsourcing-definition-and-solutions.html
Website: https://www2.deloitte.com/us/en/pages/operations/articles/global-outsourcing-survey.html
Website: https://www.ionos.com/startupguide/grow-your-business/outsourcing/