Outsourcing can be viewed at different views, for each definition can be defined by a party which chooses to outsource, an outsourcing company and by by business concepts. But to be concise about it, outsourcing is merely contracting a business function that was previously done in-house to an external service provider. In this sense, two or more companies may enter into an agreement involving exchange of services and payments. There can be types of outsourcing namely: offshore outsourcing, which is defined as the outsourcing of services to an outside nation or territory, while inshore outsourcing is merely outsourcing the services within a territory or country. The past few years have bought in some new terms in outsourcing like nearshoring, multisourcing or organizational and strategic sourcing.
Outsourcing is not limited to Information Technology, but can cover various business functionalities like human resources, accounting and finance, training, customer services and marketing. We have seen how these services evolve for the better and have seen certain innovative providers during the past few years.
But why outsource? It has been a fact that outsourcing can be mostly beneficial to a business, on a business point of view. Here are a few reasons:
a) Cost benefits – outsourcing can save lots of money in terms of paying internal employees’ salaries, benefits and training.
b) Focus on the core business – outsourcing can leave business owners and decision makers more time to think strategically or focus on their core business. For example, instead of a business owner worrying about his or her information technology or accounting, he can outsource one or both of these processes and worry about product development and marketing.
c) Quality – outsourcing companies employ experts in their fields, so results would be better instead of having them done in house by employees who need more training. Not only that, outsourcing companies employ strict service level agreements to ensure quality of outputs.
d) Protection – since outsourcing services are covered by a legally binding contract, it can impose or state penalties. This cannot be done on an internal approach.
e) Projected operational expense – since these services are covered by a fixed cost, it can be easy to project operational costs on a short to mid term basis. This can’t be true on an internal approach where unnecessary costs are often encountered.
f) Knowledge – there can be access to global standards which can be hard to address if done inhouse.
g) Change catalyst – since there can be accessed to global standards, changes based on these standards can be applied easily. The outsourcer now becomes a change catalyst.
h) Innovation – a company can use external outsourcing companies to innovate based on current global standards. These innovations may come in via product development, customer services, information technology and other business processes.
i) Risk management – risk is shared by both the outsourcer and the outsourcing company, therefore risk management is balanced, instead of having the outsourcer carry the risks himself.
j) Scalable – depending on the work load, each outsourced service can be adjusted even in the midst of an existing agreement.
k) Taxation benefits – since it is part of operations, all outsourcing expenses can be done on a tax credit. Much more if outsourcing is done via offshoring where certain economic zone benefits can apply.
Sounds like a bed of roses? We do not think so. Each processes have its own pros and cons, and it is up to both the outsourcer and the outsourcee to balance the disadvantages. But based on the facts stated above, the pros outweigh the cons.