The economist, Adam Smith, says in his treatise The Wealth of Nations, “If a foreign country can supply us with a commodity cheaper than we ourselves can make it, it is better to buy it of them.” Outsourcing is merely a progression of an idea that has existed since early days of trade where people would travel far east or west for food and art that was available in plenty in these locations. It initially started with physical goods and now we have progressed that to include services (luckily in this internet age we don’t have to travel to that specific place to buy these things.
As companies grow, it becomes increasingly clear that their focus has to be redirected to their core activities while the non-core functions can be ‘sent out’ or ‘outsourced’ to vendors specialized in that particular function. If there is anything that can be done more economically, effectively and efficiently by the other party than the organisation itself, then it is classified as non-core
Based on years of experience with outsourcing and advisory firms, we have identified some key reasons for which companies around the world prefer to outsource work. Following image gives an overview of that.
Focus on core functions
Companies that outsource certain routine functions to offshore experts can focus on their core competency. Before outsourcing caught on in such a big way, healthcare practices had to deal with functions like transcription, medical billing and claims processing which consumed a lot of their time and resources. However, now by outsourcing these processes to external locations these practices can focus on their primary concern – ‘patient care’.
Conversion from fixed to variable costs
Companies that decide to outsource find that expensive infrastructure requirements are cut back drastically as some of the functions move to external locations. Cutting edge IT systems, state-of-the-art customer service call centres and technical support entail heavy investments to companies. By outsourcing these functions to external vendors, companies can convert these from very high fixed costs to manageable variable/flexible costs which can go up and down based on their requirements
Ability to scale ( overcome talent shortages )
One of the key reasons why outsourcing has become a necessity is the shortage of talent in developed nations. As the previous generation of workers approach retirement, there are precious few newcomers coming in to fill the skills pipeline. The obvious outcome of this acute talent shortage is an increased demand for skills wherever they may be available. Industries are also subjected to seasonal fluctuations in work and lack of workers during holidays and off-seasons. One of the advantages of outsourcing such processes to countries like India and Philippines is that companies can deal with peak workloads and poor staff strength during vacations and holidays.
Access to best talent, technology & methodology
Apart from the financial benefits associated, another reason why companies outsource work is to have processes delivered by teams that have operational expertise in the outsourced process. As outsourcing has picked up over the years, several nations have built up incredible skills sets and capabilities in specific work categories. As these jobs are highly valued in these countries, some of the best people come and work in this line of business. Hence outsourcing gives companies access to world-class capabilities and infrastructure in the outsourced function.
Incredible value for money – helps reduce cost and operational performance
One of the most talked about advantages of outsourcing to locations like India is the cheap labour costs in these countries. Processes outsourced to these locations are done at much cheaper rates and same quality levels as in the donor location. This translates into major cost savings for companies. They also save on operational costs such as payroll, administrative costs, HR, power, rentals and utilities as processes move to other locations. Companies outsource to vendors who have domain expertise in the outsourced process. Their experience in the field translates into greater operational efficiencies for the outsourcing company. Their skilled expertise will produce better results within a faster turnaround time and thereby increase your turnaround time to your customer. On time deliveries result in happier customers.
Overall its not very hard to see why outsourcing is so popular and why more and more companies are choosing to outsource. Industry watchers predict that outsourcing as a business practice is on a growth mode. More and more companies are drawing up plans to outsource work to offshore locations. The trend is clearly in favour of outsourcing larger volumes of work. Vendors are moving up the value chain to include in their service offering a range of additional services that require greater skills, research support and expertise. As offshore vendors become more streamlined and improvise on the offshore outsourcing model, it is not difficult to see why outsourcing is here to stay
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