Often outsourcing is interpreted with synonym of cost reduction. Besides achieving sustainable cost reduction advantages, outsourcing offers multi-dimensional sustainable advantages which yields direct and indirect benefits to organization for long term provided outsourcing is well planned, using suitable model for organization and selecting competent and experienced outsourcing partners. Let’s analyze predominant outsourcing benefits:
Suitable outsourcing strategy can achieve substantial benefits to organization. Outsourcing enables the outsourcing organization to benefit from supplier cost advantages such as economies of scale, experience and location. Suppliers may take on investment and development costs while sharing these risks among many customers and thereby reducing supplier costs for all customers. For example, in the financial services industry many banks have outsourced high-volume transaction processing functions such as electronic payments and processing of cheques to service providers with greater economies of scale in order to reduce the cost of each transaction (Lancellotti et al., 2003). Additionally, progressively outsourcing processes the customer can reduce risks by converting its fixed costs into variable costs. In times of adverse business conditions service providers will then have to deal with the problem of excess capacity. However, service providers should be better able to cope with demand fluctuations through economies of scale and have more scope for alternative sources for excess capacity.
It is proven fact that outsourcing organization often achieves inadequate level of performance in certain and niche processes than service providing vendor. The vendor performance advantage is based not only on reduced costs. Specialist suppliers can often provide higher levels of service quality than those of internal functions within the outsourcing organization. The performance improvements that service providers can deliver has given rise to terms such as transactional and transformational outsourcing (Linder, 2004).
Transactional outsourcing involves the service provider delivering process efficiencies and process improvement. Alternatively, transformational outsourcing involves the service provider delivering business and process transformation. The outsourced process shares inter-dependencies with other business processes, is complex and is strategically important to the customer organization henceforth performance is always most vital and sought-after factor in outsourcing. However performance improvement is most contentious and sensitive issue as every organization measures it and realizes performance improvement benefits distinctively.
Often organizations assume that by performing forward and backward integration in value chain will lead to substantial cost advantages besides controlling value chain resources and creating monopoly power in market. Organizations attempted to control the majority of business processes internally on the assumption that controlling supply eliminates the possibility of short-run service disruptions or demand imbalances in its customer markets. In the time of globalization it is not only difficult to maintain absolute monopoly in market it is also impossible to enjoy long term market control without building collaborative synergy with vendors, rivals, government and customers. Rigid in-house controlling strategy is impractical, inflexible and inherently fraught with risks. Owing to issues such as cost pressures, rapid changes in technology and increasingly sophisticated consumers expectations and demands, it is very difficult for organizations to control and excel at all the processes that create competitive advantage.
Flexibility is the mantra of the day. Outsourcing can provide an organization with greater flexibility, especially in the sourcing of rapidly developing new technologies or fashion goods. Specialist suppliers can provide greater responsiveness through new technologies than large vertically integrated organizations.
C K Prahalad’s term “Core Competency” has proven that companies can build and sustain competitive advantages when they focus on their core competencies and outsource allied and subsidiary services to external specialized services providing vendors.
Outsourcing can allow an organization to concentrate on areas of the business that drive competitive advantage and outsource peripheral processes enabling it to leverage the specialist skills of service providers. For example, Quinn (1999) argues that specialists in supply markets can develop greater knowledge depth, invest more in software and training systems, be more efficient and therefore offer higher salaries and attract more highly trained people than can the individual staff of all but a few integrated companies. These advantages can generate enough value to deliver a better service at a lower cost to the customer, whilst allowing the supplier to make a profit.
Specialization can also allow an organization to gain a competitive advantage in its industry (Mani et al., 2006). For example, companies such as UPS, Solectron and Hewitt Associates have transformed their core functions into entirely new industries. Also, specialization can have a positive impact upon career development opportunities for employees in specialist service providers. For example, in the case of employees in specialist functions such as information technology in large diverse organizations, the scope for career progression is normally limited to within a single function. However, there is evidence to show that when the same employees are transferred to a specialist organization, there are enhanced career and training opportunities. For example, Kessler et al. (1999) have found in a study of outsourcing in local government that employees were much more positive about career development opportunities after being transferred to the service provider.
However outsourcing organizations should review their core competencies and advantages achieved from specialized competent vendor in globalization as it is occasionally found that organization’s internal core competencies suddenly becomes outdated and their allied services outsourced to vendors is adding majorly to their profit margins. On the contrary sometimes vendor specialized services becomes irrelevant due to products / services breakthrough or organization core competencies unexpectedly achieve market limelight. Henceforth constant review and monitoring of outsourcing specialization primary benefits and residue benefits is mandatory.
Organizations assume and fear that outsourcing will reduce their capabilities for innovation in future. The validity of this statement is proven by numerous examples. It is true to some extent that organization may become victim of stereotype processes in long term if organization manpower does not actively collaborate with vendors and partners for continuous and breakthrough innovation from product manufacturing to customer services.
In many supply markets there exists significant opportunities to leverage the capabilities of service providers into the services of the customer organization. Rather than attempt to replicate the capabilities of service providers, it is much more prudent to use outsourcing to fully exploit the service providers’ investments, innovations and specialist capabilities. Tesco, in its efforts to offer retail telecommunications services has outsourced the entire operation to a number of service providers including Cable and Wireless for the telecommunications service, Servista for billing support and Vertex Customer Management for customer service (Nairn, 2003). Each of these service providers is specializing in its own area of expertise whilst Tesco is enhancing its brand as a retail service provider.
To sum up, organization should pragmatically decide about their actual intentions of outsourcing.
Whats your experience with outsourcing?