Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity that is or could be done internally, and sometimes involves transferring employees and assets from one firm to another.
The term outsourcing, which came from the phrase outside resourcing, originated no later than 1981. The concept, which The Economist says “made its presence felt since the time of the Second World War”, often involves the contracting of a business process (e.g., payroll processing, claims processing), operational, and/or non-core functions, such as manufacturing, facility management, call center/call centre support).
The practice of handing over control of public services to private enterprises, even if on a short-term limited basis, may also be described as “outsourcing“.
Outsourcing includes both foreign and domestic contracting, and sometimes includes offshoring (relocating a business function to a distant country) or nearshoring (transferring a business process to a nearby country).
Offshoring and outsourcing are not mutually inclusive: there can be one without the other. They can be intertwined (Offshore outsourcing), and can be individually or jointly, partially or completely reversed, involving terms such as reshoring, inshoring, and insourcing.
- Offshoring is moving the work to a distant country. If the distant workplace is a foreign subsidiary/owned by the company, then the offshore operation is a captive, sometimes referred to as in-house offshore.
- Insourcing entails bringing processes handled by third-party firms in-house, and is sometimes accomplished via vertical integration.
- Offshore outsourcing is the practice of hiring an external organization to perform some business functions (“Outsourcing”) in a country other than the one where the products or services are actually performed, developed or manufactured (“Offshore”).
- Farmshoring refers to outsourcing to USA rural-located companies.
- Homeshoring (also known as Homesourcing) is a form of IT-enabled “transfer of service industry employment from offices to home-based … with appropriate telephone and Internet facilities.”. These telecommuting positions may be customer-facing or back-office, and the workers may be employees or independent contractors.
- An Intermediary is when a business provides a contract service to another organization while contracting out that same service.
How to Develop a Plan for Outsourcing?
A lot of discussions about outsourcing in the media make it appear complex, but it’s quite simple. Even in our homes, we “outsource” many tasks: Cooking, maintaining our lawns, and child care, just to name a few. When we don’t have the time, the focus, or the skills to do the work ourselves, we look for someone who can, and someone who will do the work for a price we can afford to pay. Corporations work the same way, even though their decisions may involve more factors and decision-makers.
- Development Process
But just as families make different decisions, corporations can come to startlingly different decisions about outsourcing. There is no template that works for all firms, but there is a process that all firms need to consider:
In the past, many corporations may not have even known what outsourcing was. Today, they know about outsourcing, but may not realize how many outsourcing (and outsourcing-like) programs they already operate: Copy centers, mailrooms, facility management, IT, and even parts of a corporate legal department. Outsourcing may not solve every problem, but learning about the previous generation of contracts will identify new projects and provide valuable insight.
- Goal Setting
To be successful in creating an outsourcing program, you need to define specific goals, such as reduce overall corporate costs by five percent, focus on efficiency for a single location, or only look at functions performed in one business unit. Goals don’t need tremendous detail. As your outsourcing experience increases, definitions will change.
You need participants from many areas of expertise to provide input to the plan, to verify assumptions and to provide expert judgment. When you move from a general plan to specific projects, you will repeat this process and create sub-groups with even more specific knowledge.
Now that you have goals and experts to identify and interpret information, it’s time to identify specific projects for your outsourcing program. Every firm develops different criteria and is driven by culture as much as by financial or operational analysis, but there are common criteria that you should look at:
- Previous decisions: Your firm probably made earlier decisions about using non-employees, such as temporary workers or service contracts. Work with Procurement and your PMO (Project Management Office) for details. See how they addressed the issues on this list, and compile lessons learned.
- Expertise: Are you performing functions or producing products without sufficient expertise, or are you having problems retaining managers? Does the current management have a plan to address these problems? If not, this could be a good outsourcing project.
- Quality: Even if a function has people with the right skills and experienced managers, you may not get the level of service you need. Does the manager conduct customer surveys? What are customers saying about products or services? A gap in quality or a lack of interest in customer service is another flag for outsourcing.
- Cost: An exceptionally high-quality service is not necessarily a good value. How do your costs compare to competitors? Does the function produce monthly reports: Unit costs, operating cost, multi-year cost trends? If this function cannot produce these reports, an outsourced service might provide greater transparency into your operations.
- Scale: When you examine your entire firm, you will make many unexpected discoveries. Stay focused! One big project is a better candidate for outsourcing than a number of smaller projects. That single big project will require far fewer administrative and management resources. Keep a comprehensive list, but only select candidates that provide a big impact on your first wave of projects.
- Security: You now have a good idea of potential projects. It’s time to filter them according to security standards. Security is a complex and controversial subject. Different standards apply to different industries, and some firms are more security conscious than their competitors. Understand internal and industry standards, and limit outsourcing projects accordingly. Include legal, IT, corporate security, compliance (if it applies), and any “risk” departments in your discussions.
- Prioritization: Each item above (and perhaps other characteristics) must be scored, and then each project should be assigned a total “outsourcing value.” Undoubtedly, there will be much debate over which characteristics are the most important, if their scores are accurate, and if other characteristics should be considered. Don’t be surprised if this process lasts for months or even years.
- Communication: By the time you’ve prioritized potential projects, you’ve held a lot of meetings and talked to a lot of people. Expect these discussions to be public information in the departments you’ve targeted for outsourcing. Always assume that these discussions will get to your employee population, often in real-time. Carefully thought-out corporate communications need to be prepared and ready. Never let rumors become a better source of information than facts.