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What Is The Definition Of Outsourcing?

October 19, 2023
Bill Kimball

Company C is a car manufacturer facing increasing raw material and labor costs. Therefore, the profit margin on its manufactured goods is steadily decreasing as costs increase. The company can outsource part of its production process, e.g., the manufacturing and installing of windows in their cars. Assembling time and costs can be saved by outsourcing an expensive production process to an external company that can do it at a cheaper cost.

operations outsourcing

Contract-management teams require people with deep knowledge of the hired providers, the users, and the contracts. Many managers think that because no one in the company has enough technical expertise to assess new technologies, they should hand the job over to an outsider.

Select Your Team

But, in some cases, bringing IT back in house is the best option, and in those cases it must be handled with care. The total amount of an outsourcing contract does not accurately represent the amount of money and other resources a company will spend when it sends IT services out to a third party. Depending on what is outsourced and to whom, studies show that an organization will end up spending at least 10 percent above that figure to set up the deal and manage it over the long haul. Some roles typically offshored include software development, application support and management, maintenance, testing, help desk/technical support, database development or management, and infrastructure support. Estimates of jobs displaced or jobs created due to offshoring tend to vary widely due to lack of reliable data, which makes it challenging to assess the net effect on IT jobs.

Nearshore and offshore outsourcing have traditionally been pursued to save costs. By outsourcing, companies could free up resources (i.e., cash, personnel, facilities) that can be redirected to existing tasks or new projects that deliver higher yields for the company than the functions that had been outsourced.

For many companies, outsourcing in operations management gives them a stronger operations team, which allows them to stay competitive in a fast-changing business climate. Few of the companies we studied staffed their teams sufficiently; some had only one person. In addition, many companies underestimated the importance of contract management.

operations outsourcing

Strong SLAs alone will not guarantee success when outsourcing IT services. Sometimes insourcing involves hiring new employees, either on a permanent or temporary basis, to execute the tasks being insourced. Companies might need to invest in new equipment, hardware and software when insourcing, and they might need toreengineer business processesas well. Most notably, some have criticized the practice for its impact on workers.

Outsourcing Benefits And Costs

On the downside, communication between the company and outside providers can be hard, and security threats can amp up when multiple parties can access sensitive data. Some investment managers may view middle-office operations as a cost center, or worse yet as a necessary evil. The Senior Operations Manager and the Operations Manager allocate units or processes within the business. Often the Senior Operations Manager plays a training and mentoring role to the more junior staff. The Assistant Operations Manager offers specialized administrative and data processing support to this team. Operations teams are typically highly specialized and differ according to the needs of the organization. They streamline processes, identify issues and opportunities for improvement and respond to very particular business needs.

Some industry experts point out that increased automation and robotic capabilities may actually eliminate more IT jobs than offshore outsourcing. The cloud can help improve an app’s performance and cost, but businesses need to plan for success. Additionally, companies might encounter difficulties in getting their own employees to communicate and collaborate effectively with those working for third-party providers — a scenario that’s more common if the third-party operates overseas. If the company was American, and chooses to “offshore” that work, they may hire a development firm in India or England, for example. If they chose to “nearshore” the work, they may develop a relationship with a Canadian or Mexican third party. If they “onshore” the project, they would likely communicate with a business close by or hire independent contractors.

The best systems integrators are typically middle managers from the IT function who have broad knowledge of IT and the organization. The process of outsourcing the personal computers and consolidating the data centers went smoothly. One lesson that Energen learned was that technical people accustomed to running an internal IT operation could not necessarily make the leap to managing an outsourcing contract. When the task force turned to the telecommunications network, it discovered that there were now qualified providers. Energen awarded a four-year contract for its network to a respected manufacturer of midsize computers that had acquired expertise running its own world-class private telecommunications network. The task force transferred all the employees that had supported Energen’s network to the supplier except for two experts, whom it retained to manage the contract.

Could The Internal It Department Provide This System More Efficiently Than An Outside Provider Could?

These services are increasingly offered not only by traditional outsourcing providers but by global and niche software vendors or even industrial companies offering technology-enabled services. Companies also could realize that they lose control over aspects of the outsourced tasks or services. Outsourcing is the business practice of hiring a party outside a company to perform services or create goods that were traditionally performed in-house by the company’s own employees and staff. Outsourcing is a practice usually undertaken by companies as a cost-cutting measure.

  • Many companies do not and probably cannot assess the breadth of a supplier’s capabilities, especially its ability to cope with new technology.
  • As a result, outsourcing governance is the single most important factor in determining the success of an outsourcing deal.
  • Outsourcing can involve large third-party providers such as IBM for IT services or simply hiring temporary office workers or independent contractors.
  • The advantage of this is that operations experts specialize in process analysis and optimization.
  • Follow our journey from the very beginning to becoming the premier Managed Operations provider in the Philippines.

Once a company has decided which services or systems to outsource and has negotiated contracts, it needs another team to serve as contract administrators and service or systems integrators. Some members of this team make sure that suppliers provide the services they are obligated to provide and that all the user’s reasonable needs are satisfied. They challenge suppliers when they seem not to be meeting the terms of the contract, deal with disputes over the contract’s interpretation, and assess penalties. This team also decides when users are asking too much or too little of suppliers.

To Outsource Or Not To Outsource

But even companies that spell out every imaginable detail in a contract have often been frustrated by the unimaginable. We found that most systems that managers consider strategic actually are not.

As some of those initial deals lost their shine, clients and vendors moved to shorter contracts. Often, a customer can charge a vendor a penalty fee if certain SLAs are not met. Used judiciously, that’s an effective way to keep a vendor on the straight and narrow. But no CIO wants to be in the business of penalty-charging and collecting. Bad service from an outsourcing vendor, even at a deep discount, is still bad service, and can lead to greater problems. It’s best to expend energy on finding out why the SLAs are being missed in the first place and working to remedy the situation.

As such, it can affect a wide range of jobs, ranging from customer support to manufacturing to the back office. The advantage of this is that operations experts specialize in process analysis and optimization. They keep on top of developments in the industry and can make recommendations when new processes and procedures come online. You can manage your outsourced operations team directly (i.e. retain direct oversight of your operations team), or you can opt to have your offshore operations fully managed by MicroSourcing. Protecting confidential documents and ensuring the proper internal controls are in place can be challenging and costly to a company. With an outsourced financial team, the client automatically receives the protection from the outsourced team’s internal IT department at no extra charge to the client. The client also is able to use the secure file sharing software licensed by the internal IT department, so that the company can file share outside of the secure server.

Part Three: Operational Outsourcing

A company also may benefit from outsourcing by avoiding government regulations or mandates, such as environmental regulations or safety regulations and requirements. No matter the size — whether it’s a small and growing entrepreneurial venture or an established business facing changes or significant growth — companies are finding they have options in developing an accounting structure that works for them.

Outsourced functions can be performed by the third party either onsite or offsite of the business. Essentially it’s back-office support without the fixed costs of maintaining a full-service in-house accounting staff.

Offshore Staffing

These days, CIOs have embraced the multi-vendor approach, incorporating services from several best-of-breed vendors to meet IT demands. Most major IT services players have done their best to adjust to this trend. In fact, some leading CIOs not only work with a cadre of competing outsourcers, but expect them to meet joint deliverables. The appropriate model for an IT service is typically determined by the type of service provided. Traditionally, most outsourcing contracts have been billed on a time and materials or fixed price basis. In today’s cloud-enabled world, however, IT outsourcing can also include relationships with providers of software-, infrastructure-, and platforms-as-a-service. In fact, cloud services account for as much as one third of the outsourcing market, a share that is destined to grow.

Often the bridge between onshore and offshore employees, the workflow planning specialist makes sure everyone is on the same page and that work has been received, assigned, tracked, completed and evaluated. You have full visibility and control, without having to worry about facilities, operations and regulations. Its low living costs and first-class education system are just the beginning. A negotiating team should include the top IT executive and a variety of specialists—but not the CEO. Just because an IT activity is business-critical doesn’t mean that all its elements have to be kept in-house.

Why Outsource Operations To The Philippines?

To create such a framework, we studied sourcing decisions in 40 organizations. We purposely chose companies competing in a wide variety of industries, including airlines, banking, chemicals, electronics, food manufacturing, petroleum, retailing, and utilities. We sought out both successes and failures so that we could identify the practices that differentiated the former from the latter.