Outsourcing is the process of assigning
company’s business processes to an external
agency in lieu of enhancing service quality,
driving innovation or deriving benefits of lower
There are 5 types:
1. Contracting out the activities
2. Outsourcing the service
3. In sourcing
5. Benefit based relationship.
Identify functions to outsource
OUTSOURCING DECISION FRAMEWORK
Motivation of Outsourcing
3 major categories of motivations
for outsourcing: cost, strategy, and
• Cost driven outsourcing (pvt.
• Strategy-driven outsourcing (pvt.
• Politically-driven outsourcing.
Key Driving Factors
• Absence of specialists or experts
• Irregular demand for personnel
• High risk factor
• Emphasis on perfect processes
• Savings in management time
• Achieving and maintaining
Outsourcing Decision Matrix
The Outsourcing Decision Matrix, helps you consider two
important factors in outsourcing a task:
• How strategically important is the task to your business?
Strategically important tasks are sources of competitive
• What is the task's impact on your organization's operational
Tasks which have a high impact on operational performance.
Offshore or Home shore? The choice is yours!
• Small businesses are maturing to look at a variety of factors
before making the outsourcing decision. Tasks that require
presence in the same time zone and a cultural awareness
are being Home shored. Tasks that are not time sensitive or
heavily influenced by culture are being Offshore.
How to benefit from this trend:
• Evaluate if your outsourcing partners can train themselves
on some of the cultural aspects if they belong to a different
• Offshore only those tasks that are well defined. For tasks
that need your input several times a day, choose a provider
who can work in your own time zone.
Factors for Successful Outsourcing
• Understanding company goals and objectives
• Strategic vision and plan
• Selecting the right vendor
• Properly structured contract
• Open communication
• Senior Executive support and involvement
• Use of outside expertise.
• Technical Expertise
• Vendor's Expertise in Your
• Overall Business Strategy
• IBM was a vertically integrated company in the 1990s.
• Until 1995 IBM built 100% of its printed circuit boards PCBs. Now it
makes 10% of them.
• IBM used to make 85% of the memory chips used in its computers;
in 1999 its 15% .
• Keyboards and power supplies were built in house in the past now
• IBM used to assemble all its own computers now contract
manufacturers build most of them.
• Why outsourcing ?
Outside suppliers had the required technology
Suppliers providing at lower costs
• 1986-96, proportion of IBM’s revenue spent on outside
suppliers increased from 28% to 51%.
• The strategy adopted is “where we make a difference”
• Competitive advantage- they got the components at a
• HOW TO CHOOSE VENDOR ?
Control component sources by directing contract
manufacturers to specific sources, thereby reducing costs
by 65 million dollars
• ECONOMIC OUTCOME- reduction in costs by 20%
• Trends changing gradually.
• Traditional model of outsourcing is now replaced
with a global sourcing model.
• Not merely as a cost reduction solution but one of
co-creating future value.