What is Outsourcing?
Transferring of activities and decision rights to another entity by contract with specific performance measures, related rewards and penalties, exit clauses.
Reasons for Outsourcing?
- Improve company focus
- Gain access to world-class capabilities
- Accelerate re-engineering benefits
- Share risks
- Free resources for other purposes
- Make capital funds available
- Reduce and control operating costs
- Take advantage of resources not available internally
- Handle a function that is difficult to manage or out of control
Outsourcing is not just a quick fix, but should be an integral part of a long-term strategy. An organizations should analyze its core competencies and consider outsourcing everything else. With talent tough to come by, outsourcing may be the only way to obtain talented, limited resources. When people are overworked and overqualified, outsourcing may be a great way to retain employees by not requiring them to perform work for which they are overqualified. Outsourcing could be used to increase morale and thus productivity.
Outsourcing may make sense when customer requirements exceed the providers ability to meet and exceed those requirements. It could reduce the hassle of providing a non-core service. Or when an organization wants to minimize risk while still achieving its growth goals. Outsourcing may make sense as protection against natural disasters.
Before outsourcing the total cost of a service must be determined. This means all functions that are involved with performing activities that relate to a particular service. These activities include upfront purchasing , maintenance and operating, disaster recovery, research of new technologies, as well as disposal activities. According to the Executive Director of the outsourcing Institute, "it is not uncommon for a company to estimate the total cost of a function...for $10 million a year." only to have the outsourcer come back and say" you are doing it for $14 million”
Fixed price deals do not make sense. If certain events occur, (e.g. change in technology) the deal might be renegotiated. It is best to track performance monthly, as least in the beginning. The deal should consider hidden costs like long-distance calls, meetings with senior management, space issues, performance during the transition, monitoring the contract, sychronizing applications, and fees.
When considering transition issues, what factors broadly need to be considered?
In identifying the possible transition issues, it is advisable to concentrate on the factors of production and how the internal unit fits into the organization:
- Facilities (space and related services)
- Third-party contracts
- Processes, functions, and activities, processing inputs and producing outputs
What exactly is BPO?
BPO is a term that has evolved over the years, and each time it evolves further, its definition has changed. Some people have not kept up with its evolution and, therefore, refer from time to time to old definitions or descriptions of BPO. It is not simply another term for outsourcing. In BPO, strategic value through outsourcing (see an explanation for outsourcing in FAQ #1) is created by creatively examining the process and changing the way it is actually performed. It is more than just changing who is performing the process. In BPO, the supplier not only takes on the responsibility to take over the function or business process, but it also reengineers the way it is done. That will include either putting in new technology to accomplish the process, or applying the existing technology in a new way to improve the process. In BPO, something about the way the process is currently being done gets fundamentally changed. Often it involves taking into consideration how a particular process in the buyer's company affects and interacts with other departments and functions in the company. BPO often increases a company's shareholder value. There are some very good explanations and illustrations of BPO and how it differs from outsourcing in the Outsourcing Journal article at www.outsourcing-journal.com/issues/nov1999/bpo_1.html. You will find additional information and explanations of how BPO works at our www.outsourcing-bpo.com site.
How are typical outsource services priced?
The structure of the pricing for the outsourcing contract can be one of the following:
- Cost Plus. This approach pays the supplier for its actual costs, plus a predetermined profit percentage. This plan allow little or no flexibility when business objectives and technology change during the life of the contract, nor does it give any incentive for the supplier to perform more effectively.
- Unit Pricing. This is a set rate determined by the supplier for a particular level of service, and the client pays based on its usage. Paying for desktop maintenance based on the number of users is an example of this approach.
- Fixed Price. Some buyers think this is the best approach, because they know exactly what the supplier's price will be, even in the future. But the problem with this approach is that if the buyer does not adequately define the scope of the process and design effective metrics before signing the contract, too often the result will be that the supplier claims a particular service or service level is beyond the scope of the contract and then charges a premium for it.
- Variable Pricing. This plan involves use of a fixed price at the low end of the supplier's service, with variances based on higher service levels. Its effectiveness, again, depends on adequately defining scope of process and metrics.
- Incentive-based (or performance-based) pricing. Here, the buyer provides incentives to encourage the supplier to perform at peak level (or complete a one-time project ahead of time, for example) by offering a bonus reward if the supplier performs well. This same plan works in ensuring that the supplier must pay a penalty if it does not perform to at least the "satisfactory" service level designated in the agreement. This plan is the one to use to ensure the supplier's excellence in performance.
- Risk/reward sharing. Here, the buyer and supplier each have an amount of money at risk and each stand to gain a percentage of the profits if the supplier's performance is optimum and achieves the buyer's objectives.
The buyer will select a supplier using a pricing model that best fits the business objectives the buyer is trying to accomplish by outsourcing.
Will manufacturing in China save me money?
We always advise our client to analyze the Total Cost of production, being unit costs, management costs, cost of delayed shipments, cost of non-conforming units etc.
Some people delude themselves thinking that they are saving 50% buying in China, forgetting to account the cost and time they incur invest every time they have fly over to sort out some problem.
In general the quantity / dollar value has to be high enough to make it worth the extra management time and attention that is invariably required.
Would operating through a ‘Service Provider’ such as Catenate add to cost?
Yes. Service providers such as Catenate do add a small percentage to the cost, depending on volume. However, by us is that they working with the resources of a Service Provider, it should save on the Total Cost. When companies have the scale of MNC’s (Multi National Companies) they tend to either OFFSHORE, or set up their own sourcing centers, However companies of a slightly smaller stature will realize significant savings using the in country resource of a service provider as part of their overall outsource strategy.
For a far greater explanation of how outsourcing could be the correct strategy for your company to achieve higher performance, please log on to our outsourcing Blogsite.