Quick guide to outsourcing


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Outsourcing is not a new phenomenon, as many believe.Basically, outsourcing is simply the farming out of services to a
third party.

“There are as many definitions of outsourcing as there are ways to screw it up,” says Stephanie Overby, Senior Editor CIO Magazine.

Published in: Business, Economy & Finance
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Quick guide to outsourcing

  1. 1. IndustryReport Quick Guide To Outsourcing
  2. 2. © InterGlobe Technologies Ltd. 2011: www.igt.in Definition “There are as many definitions of outsourcing as there are ways to screw it up,” says Stephanie Overby, Senior Editor CIO Magazine. Basically, outsourcing is simply the farming out of services to a third party. The term outsourcing is often used interchangeably - and incorrectly - with offshoring but offshoring (or, more accurately, offshore outsourcing) is a small but important subset of outsourcing wherein a company outsources services to a third party in a country separated by several time zones and usually not on the same continent as the client company. Outsourcing is primarily used to take advantage of lower costs. Nearshoring is a relatively new term, meaning outsourcing services to a third party in a different country usually close in proximity and having a similar time zone to the client company. History of Outsourcing Outsourcing is not a new phenomenon, as many believe. Many thousands of years ago, our recorded history is filled with outsourcing examples. The great pyramids of Egypt, the temples of Central America, all shows signs of and efficient outsourcing model. In most outsourcing cases the outsourcer recognizes their inability to furnish the amount of laborers for a particular project or they may recognize a lack of skills to complete a project effectively, and within a predetermined cost budget. However, just before the Industrial Revolution, most companies preferred to handle all production activities within the complete control of the company. They rarely relied on outsourcing activities preferring to manage these functions internally. It is worthwhile to note that during the revolution a large number of companies utilized imported workers from foreign countries as their own labor pools were lacking the skills or quantity of laborers needed. This is similar to the current outsourcing model, with technology allowing the worker to remain in their respective countries. Development of offshore outsourcing: The 20th century experienced many political and economic changes combined with transportation developments, making distances somewhat irrelevant. As industrialized nations began seeking the manufacture of certain products in less developed countries, these developing nations welcomed this form of outsourcing as it stimulated their developing economies by increasing employment and the income levels of the countries workers. The impact of these financial gains is seen in the education and skill level improvements of these developing nations. As educational improvements increased, they have created additional opportunities for outsourcing. The birth of the global economy brought us the outsourcing industry. In the 1980s, many companies began to experiment with outsourcing non-essential activities. As outsourcing progressed and companies became more comfortable with their outsourcing partnerships, they began to outsource some core activities like data processing, human resources and accounting. By reducing the cost of core activities, companies enhanced their profits while freeing their intellectual resources to focus on product innovation and development, aiding in the further growth and development of their core business. Recent trends: Globalization has created a trend of forming strategic partnerships. This means that large companies are willing to outsource even their core activities to service providers if their relationship has reached a level of maturity and if it means greater profits. Outsourcing is now an indispensable part of any large organization. Despite the controversies surrounding outsourcing almost every activity – customer service, telemarketing, logistics, computer hardware, software, IT services, finance and accounting, medical transcription, research and development, legal, and human resource development - can be and is outsourced.
  3. 3. © InterGlobe Technologies Ltd. 2011: www.igt.in Reasons to Outsource The business case for outsourcing varies by situation, but reasons for outsourcing often include one or more of the following: • Ability to focus on core business activities while someone else handle your non-core activities • Access to world-class capabilities • Lower costs of operations ( due to lower labor rates, economies of scale, vendor specialization, etc.) • Mitigate risk • Tighter control over budget • Increase efficiency and productivity • Leverage cost and scalability of outsource service provider Steps of Outsourcing Warren S. Reid, in his article, “Outsourcing: The 20 Steps to Success” listed 20 steps of outsourcing which provides a roadmap for achieving greater benefits from any outsourcing deals. Step 1: Organize a top management steering committee This committee’s responsibility would be to oversee the whole outsourcing process - from the planning phase to the delivery phase. Step 2: Identify and engage an expert team The expert team will guide you and your organizations during the outsourcing decisions, selections, and contracting processes. The team should include a small group of independent experts with specialization in outsourcing. Step 3: Identify critical internal resources Identify critical internal resources, such as a Chief Information Officer (CIO) or an Outsourcing Manager, who will stay on your company’s staff internally to help manage and administer the relationship between the outsourcer and your company. Step 4: Identify what is good and bad about your current installation With respect to service, quality, capability, performance, uptime, costs, and user satisfaction, assess each strength and weakness. Step 5: Update the company’s strategic business plan The outsourcing engagement can run for anywhere between less than a year to 10 years. You must make sure that your strategic business plan is inline with your outsourcing project and vice versa. If not, updating and modification is absolute necessary. Step 6: Develop a strategic systematic plan It is absolutely necessary for a successful outsourcing engagement that it should be approached in a systematic manner. Develop a systematic plan that takes into consideration all the short-term and long-term needs of the company that fit together into the strategic business plan.
  4. 4. © InterGlobe Technologies Ltd. 2011: www.igt.in Step 7: Identify the software and hardware Identify the software and hardware needed to develop and support the new systems plan. Step 8: Understand your cost structure Understand your cost structure and determine/estimate future costs to create and support the projects outlines in the strategic systems plan developed in step 6 and 7 above. Step 9: Identify your current and anticipated usage i.e. normal operations, expanded operations over time, peak periods, off periods, off-site processing, storage, archive, integrations requirement, back up and disaster recovery requirements, etc. Step 10: Review the strengths and weakness of the outsourcing alternative Determine whether/how the outsourcing alternative will help your company achieve its long-term goals and why that alternative is better than staying in-house or partial outsourcing or working with outsourcer(s). Determine which applications and resources should be outsourced and which should continue with different approach. Step 11: Using your expert team, identify several outsourcing alternatives Obtain appropriate literature in a request for information from the team’s prospected short listed outsourcers. Beyond all of the technical and administrative things you need to know about your outsourcer, you will also need to know in-depth: corporate history; current, new and lost customers; financials; methodologies, etc. Step 12: Determine which areas of your company you would like to outsource General industry practice is to outsource only non-core activities while you concentrate on your core activities. But leading outsourcing experts Patrick Morrissey says “The best-understood and most well- defined process, no matter it’s a core or non-core activity, can only be driven to a certain level of efficiency before the results flatten out – or even diminish. That's where the promise of BPO comes in.” Step 13: Develop a rigorous Request For Proposal (RFP) Develop a rigorous Request For Proposal (RFP) with has a format that forces the responding outsourcer to answer questions in a way that will allow you to compare responses from multiple outsourcers. Ask outsourcers to simplify their answers to pricing so that you can really understand what services will be included and which will be extra. Step 14: Invite bidders to a bidders’ conference Invite bidders to a bidders’ conference at your site and take each bidder on its own tour of your site. Have the top management and the steering committee meet with the outsourcing representatives for at least 45 to 60 minutes during the tour to set the tone and to demonstrate the importance and visibility of the study and resulting relationship. Step 15: Evaluate proposals against your pre-established and fully documented criteria Identify different approaches recommended by the outsourcer and determine how they differ from your own research and preliminary conclusion. Be open to suggestions but analyze differences carefully.
  5. 5. © InterGlobe Technologies Ltd. 2011: www.igt.in Step 16: Rank proposals so that you can have a backup vendor This helps in case negotiations go sour with your preferred vendor. Identify absolutely necessary criteria early. No matter how well the outsourcer looks in other areas, if they don’t meet the minimum “must-haves” – they should be contacted for clarification or dropped from the list. Step 17: Checking references is a critical part of the evaluation and comparison of outsourcers If possible, visit other customers; review their contracts and the status reports on key projects. Don’t underestimate the experience of others with the outsourcers and/or assume your experience will be different. Step 18: Negotiate the contract Negotiate the contract using expert team and using pre-defined target clauses, criteria, and escalating alternative dispute resolution options to keep the outsourcing agreement and relationship on track Step 19: Monitor, manage, modify, and steer the outsourcer and the contract as required over time Give periodic report cards to management of the outsourcer. Update and change the contract over time to continue and assure that your needs and the mutual needs of the outsourcer continue to be met. Step 20: Be Lucky Warren S. Reid says the last step for successful outsourcing is just be lucky. After doing everything that is indicated above, he wishes best of luck in outsourcing. Outsourcing in today's world is seen as a strategic management option rather than just a way to cut costs. It can help companies achieve their business objectives and even provide an edge in the market place. Today most companies have one or more of their services outsourced. This provides and opportunity for the company to put more emphasis on its core competencies. But with outsourcing, whether overseas or locally, comes risks. Anil Singh, in his article “Managing the Risks When Outsourcing Offshore” lists five major risks of outsourcing: • Misunderstanding of requirements • Quality assurance • Concerns about intellectual property security • Differences in company processes • Communication/cultural barriers Please refer to our whitepaper “Top Risks of Outsourcing and How to Avoid Them” for a detail understanding of risks associated with Outsourcing and the remedies for avoiding them.
  6. 6. © InterGlobe Technologies Ltd. 2011: www.igt.in Benefits Outsourcing can offer definite benefits – but only if you do it right. Some of these benefits are as follows: Access to the latest and greatest in technology You may have noticed how rapidly software and hardware becomes obsolete. It is difficult for business to stay up to date with all of the changes. How can one person keep up to date with all the changes? By outsourcing to these world-class providers, companies can leverage on the strengths of the provider and get access to world-class resources. Cost savings Outsourcing your IT services provides financial benefits such as leaner overhead, bulk purchasing and leasing options for hardware and software, and software licenses, as well as potential compliance with government regulations. Increase in your business Outsourcing, if done in the right way, can lead to increased profits, productivity, level of quality improvements, business value, business performance, and much more. Outsourcing can help you see an increase in almost every aspect of your business. High quality of staff Outsource service providers (OSP) look to hire staff with specific qualifications and certifications. Outsourcing the same services for several companies allows the OSP to build core competency and specialized expertise in specific areas. The business outsourcing benefits from having faster access to skilled staff and not having to maintain the knowledge base for seldom used skills. Flexibility Vendors have multiple resources available to them, while internal staff may have limited resources and capabilities. Businesses that outsource reap the benefit of leveraging the outsourcers specialized skillsets without the cost of full time employees. Job security and burnout reduction for regular employees Using an outsourced company removes the "someone has to do it" syndrome that burdens your staff. You will establish a better relationship with your employees when you let them do what they do best and what they were hired to do. Increased efficiency While the service provider handles your outsourced business process efficiently, you are now free to carry on doing those job functions necessary to separate your business from that of your competitors. Increases in efficiency lead to increased profits. Faster deliveries to customer Outsourcing can speed up the customer delivery aspects of your business. The ability to apply scale and economy to your deliverables is best seen when outsourcing. Companies cannot typically add additional resources to projects for a short period of time, outsourcing provides all of the flexibility needed to meet strategic deadlines fast and efficiently without breaking your bank account.
  7. 7. © InterGlobe Technologies Ltd. 2011: www.igt.in Improved customer satisfaction With timely deliveries and high-quality services, you will impress your customers. Outsourcing can help you benefit from increased customer satisfaction and your customers will remain loyal to your organization. Competitive edge Strategic outsourcing can give your business a competitive edge over your competitors. Lower operational cost or delivery cost certainly positions your company to compete more effectively in aggressive markets with shrinking margins. Whether you outsource or not, your business can learn from the principles of outsourcing.
  8. 8. InterGlobe Technologies (IGT) is a leading BPO & IT Services provider committed to delivering innovation and business excellence across the entire spectrum of the travel, transportation and hospitality domain. Ranked amongst the World’s Top 3 Travel Technology Solutions providers, the company offers integrated Application Development and Maintenance, Call Center Services, Back Office Services, Consulting Services and Solution Frameworks to the travel industry worldwide. InterGlobe Technologies Pvt. Ltd. InfoTech Centre, 2nd Floor 14/2, Old Delhi-Gurgaon Road Dundahera, Gurgaon – 122016 Haryana, India T +91 (0)124 458 7000 F +91 (0)124 458 7198 www.igt.in © InterGlobe Technologies Ltd. 2011: www.igt.in