OutsourcingA market trend, a ticket to globalization and a cost-cutting

technique

Introduction In today’s highly competitive world and profit-oriented markets, every

organization looks for methods and management techniques in order to gain profits, increase market presence, or even eliminate competition.

OUTSOURCING has come up as an effective way of distribution of work, and can now be seen in every business organization, large or small.

Definition and Meaning:Outsourcing in simple words can be defined can as contracting with another person or company to perform a specific function. The organization performing the function are third party providers, or simply, service providers.

Even though Outsourcing has been around as long as the existence of work specialization, but it is only recently that companies began employing specific outsourcing models in order to carry out narrow functions.

Almost every organization outsources in some way. Typically, the function being outsourced is considered non-core to the business. An insurance company, for example, might outsource its janitorial and landscaping operations to firms that specialize in those types of work since they are not related to insurance or strategic to the business. 

Outsourcing: Details

Outsourcing can essentially be viewed as seeking assistance from a group who might be better or specialized at a given task. But the actual process involves much more details.

The process of outsourcing has many components attached to it, and many details which can vary according to the region, organization, business sector etc.

Now the variations and diverse types of outsourcing models can be covered through a few basic questions. The basic questions regarding Outsourcing that will be answered in the upcoming section:

WHAT do organizations outsource?

WHY do organizations outsource?

HOW do organizations carry out outsourcing?

THE WHAT

In today’s world, every organization is involved in outsourcing and due to this the classification and types of outsourcing has become very diverse.

After answering these questions there will be a detailed review of the pros and cons of the process of outsourcing, along with the case study of a few companies that have set outstanding examples of outsourcing and offshoring.

There will be a case study of about 6 organizations, covering 3 industrial sectors, 2 from each.

Types of Outsourcing

There is a large variety of outsourced services, due to the extensive use of outsourcing, but the following just provides a broad classification describing the most commonly used and major types of outsourcing contracts.

Business Process Outsourcing (BPO) This is one of the most common types of outsourcing, in

which the organization contracts out a specific business process to a third party service provider. The process may or may not be core to the business.

Usually, BPO is implemented as a cost-saving measure for tasks that a company requires but does not depend upon to maintain their position in the marketplace. BPO is often divided into two categories: back office outsourcing which includes internal business functions such as billing or purchasing, and front office outsourcing which includes customer-related services such as marketing or tech support.

The large number of International call centers are a classic example of BPO in which the companies outsource the process of handling customer care and complaints.

The various kinds of business processes that can be outsourced are:

• HR

• Legal

• Engineering   Furthermore, a BPO that is contracted outside a

company's own country is sometimes called offshore outsourcing. BPO that is contracted to a company's neighbouring country is sometimes called nearshore outsourcing, and BPO that is contracted with the company's own county is sometimes called onshore outsourcing.

Information Technology Outsourcing (ITO)

ITO is the process by which a company outsources its computer related work, such as programming to a third party service provider. It is also called as IT Enabled Services (ITES). Of all the types of outsourcing, ITO is by far the largest and the most common one.

One might as well classify ITO as a part of BPO, but since it has led to the emergence of a new section of companies and service providers, it is often mentioned separately.

An organization would use IT outsourcing for functions ranging from infrastructure to software development, maintenance and support.

For example, an enterprise might outsource its IT management because it is cheaper to contract a third party to do so than it would be to build its own in-house IT management team.

Or a company might outsource all of its data storage needs because it does not want to buy and maintain its own data storage devices. Most large organizations only outsource a portion of any given IT function.

The typical destination for ITO is India and Philippines. The major reason for this being cheaply available IT workforce and resources.

Most of the American and European companies outsource everything from data entry to customer service to India and other Asian countries.

Knowledge Process Outsourcing (KPO) A Knowledge process can be defined as high added

value processes chain where the achievement of objectives is highly dependent on the skills, domain knowledge and experience of the people carrying out the activity. And when this activity gets outsourced a new business activity emerges, which is generally known as Knowledge Process Outsourcing.

KPO or Knowledge Process Outsourcing typically calls for work that needs higher levels of involvement from the worker. The worker has to employ advanced levels of research, analytical and technical skills and has to make decisions of a higher order than BPO work.

Examples are pharmaceutical research and development, patent/ intellectual property research, animation and simulation. Data research and analysis, legal services, content writing and development and database development services. KPO industry is less old and less mature than the BPO sector.

Operational Outsourcing Operational outsourcing includes the contracting of specific

basic jobs that may not be related to the core of the business, but are essential for the maintenance and operation of the organization and its business.

This specific type of Outsourcing is more common within a manufacturing context than in other industries, as the nature of manufacturing provides opportunities for specific operational activities to be handled outside of companies.

For example, machine maintenance and equipment repair can be acquired through Outsourcing services or even specialized IT outsourcing services that specialize in that specific type of equipment or machinery. Other types of operational activities can include landscaping, cleaning services, and facilities maintenance or property management.

THE WHY Most entrepreneurs start up their business and do

most of the work themselves, taking on the responsibility for marketing, sales, HR, technology, and other components of the business.  As the business grows and they decide they can’t handle all the tasks, they hire someone to do the non-core work.

In the early days, cost or headcount reduction were the most common reasons to outsource. In today’s world the drivers are often more strategic, and focus on carrying out core value-adding activities in-house where an organization can best utilize its own core competencies.

The various reasons for outsourcing are:

Reduce and control operating costs:

Lower operational and labour costs are among the primary reasons why companies choose to outsource. When properly executed it has a defining impact on a company's revenue recognition and can deliver significant savings. Improve company focus:

Companies also choose to outsource or offshore so that they may continue focusing on their core business processes while delegating mundane time consuming processes to external agencies

Gain access to world-class capabilities:

Outsourcing and offshoring also enable companies to tap in to and leverage a global knowledge base, having access to world class capabilities and expertise. Free internal resources for other purposes:

Business owners who are great at their business but realize they are weak at finances or are too busy and don't have time to do the books or have tried but failed and as a result have a financial mess to clean up. By delegating responsibilities to external agencies companies can wash their hands off functions that are difficult to manage and control while still realizing their benefits

Necessary expertise or resources are not available internally:

Many times stranded with internal resource crunches, many world class enterprises outsource to gain access to resources not available internally.

THE HOW The process of outsourcing involves an agreement

between two or more organizations, and many a times this also happens across large distances. So, the process, as it turns out, can be a very complicated one.

A successful, offshore outsourcing strategy can provide benefits and cost-savings for your company — process improvements, expanded talent pools, cost containment, improved focus on core business to name a few. However, the inherent risks in an unsuccessful offshore project can compromise the anticipated benefits. How do you minimize those risks?

The conventionally followed process can be described in a few steps:

1) Planning Initiatives: Set objectives, deliverables, and timetables and is responsible for achieving a clear vision for the forthcoming outsourcing contract. This is also the step where the organization must assess the risks and resources.

2) Exploring strategic implications: This is the step in which outsourcing as a strategic tool is looked at

in light of the organization's "vision of the future; current and future structures; current and future core competencies.” The objective is to see if the solution is a good fit.

3) Analysing cost and performance: In this step, the organization must ensure that all costs required to support the activity, both direct and indirect, are taken into account. Current performance also needs to be measured and analysed to establish a baseline against which to measure improvement.

4) Selecting providers: Finding potential providers can be accomplished through references from business associates, advertisements, RFIs (requests for information), and the like. Rolling out tenders and inviting bids which involves scrutinizing every offer. Narrowing down the list of service providers and finally the selecting the best one available.

5) Negotiating terms: The association needs to carefully map out with the provider not only the services to be provided and pricing (including how changes in scope or volume will be handled), but also performance standards, management issues, and transition and termination provisions. The creation of an excellent, well-documented understanding at this point can substantially contribute to the success of the relationship. The association also needs to envision a worst-case scenario, in which it outlines a plan of action should the outsourcing relationship fail.

6) Transitioning resources: There are few greater challenges in the outsourcing process than successfully managing the impact of the potential change-and then the transition itself-on the staff of the organization. Human resource issues should be carefully addressed, and with sensitivity. Providing the terminated employees such benefits as outplacement services makes good business sense.

7) Managing the relationship: Outsourcing "is a new type of management that requires new skills." In addition to the scheduled meetings and reports, unforeseen things may arise. Thus, while monitoring performance and evaluating results is important, a relationship of trust that enables problem solving is critical.

Outsourcing in various Business Sectors Over the past years there has been rampant inclination of companies

in various sectors to opt for outsourcing to increase their profits marginally. The chart shows the business percentage opting for outsourcing.

Case Study: Telecom Sector

Bharti Airtel and Idea Cellular

Bharti Airtel: A Perfect Example Bharti Airtel Limited is an Indian multinational telecommunications services

company headquartered in New Delhi, India. It operates in 20 countries across South Asia, Africa, and the Channel Islands. Airtel provides GSM,3G and 4G LTE mobile services, fixed line broadband and voice services depending upon the country of operation. It is the largest cellular service provider in India, with 192.22 million subscribers as of August 2013.Airtel is the largest mobile operator in South Asia and the fourth largest in the world by subscriber base.

Airtel is credited with pioneering the business strategy of outsourcing all of its business operations except marketing, sales and finance and building the 'minutes factory' model of low cost and high volumes. The strategy has since been adopted by several operators.

Airtel's telecom equipment is provided and maintained by Ericsson and Nokia Solutions and Networks whereas IT support is provided by IBM. The transmission towers are maintained by subsidiaries and joint venture companies of Bharti including Bharti Infratel and Indus Towers in India. Ericsson agreed for the first time to be paid by the minute for installation and maintenance of their equipment rather than being paid up front, which allowed Airtel to provide low call rates of ₹1/minute 

How Airtel Succeeded? In 2001-02, Bharti came up with the Minute Factory model.

Bharti outsourced network planning and IT backbone — considered core to the business — and converted its fixed costs to variable costs.

Bharti Airtel is grew at an unprecedented rate, thanks to the Minute Factory Model. To support this growth the operator decided to outsource its operations and concentrate on its core focus of branding and marketing.

With all the major operations outsourced, the organization focused on the marketing end, and made a lot of profit by expanding it’s customer base through the region-based schemes and offers it had to offer.

It reduced their costs considerably and they were able to acquire more customers and were able to pass on these savings to the customers instead of the shareholders and this increased their customer base even more and they again followed this pattern.

Idea Cellular Incorporated as Birla Communications Limited on March 14, 1995.

The registered office is in Mumbai, Maharashtra.  Idea is a pan-India integrated GSM operator offering 2G and 3G services. With revenue in excess of $4 billion; revenue market share of nearly 15%; and subscriber base of over 121 million in FY 2013, Idea is India’s third largest mobile operator.\

Idea handles all of its operation as an independent organization, except the IT backbone, which it had outsourced to IBM in 2007. Recently it has extended the contract till 2020 by an additional amount of $700 billion.

In the business strategy Idea chose, a wide connect mattered enormously. Idea chose to focus on rural and semi-urban customers—today, around 60% of Idea's subscribers consist of rural customers.

As a late entrant, they realized they wouldn't be the best at any specific thing. So, they focused on consumer experience. The focus led to advertising campaigns that connected and lingered.

Case Study: IT SectorDell and HP

Dell: Supply chain outsource in 2009.

Dell was the hardware manufacturing success story of the 1990s, thanks to such innovative business practices as selling to customers directly and assembling devices to order. The past ten years, however, have seen Dell rather lose its edge to Apple in the consumer space and to Hewlett-Packard in business.

That has prompted an attempted reinvention at the company. One of the most conspicuous facets of this has been Dell’s acquisition of IT service provider Perot Systems in the second half of 2009. Just as significant, though rather less visible, has been the expansion of its global supply chain to include both retailers and so-called original design manufacturers, which sell complete devices for Dell to rebadge.

This transformation placed a significant new burden on Dell’s supplier engagement processes, and the disparate systems that supported them. The company therefore decided to outsource these processes and systems to Inovis, a US-based ‘business-to-business’ outsourcing provider.

Inovis describes the platform it built to support Dell’s supply chain infrastructure as “the largest hosted B2B cloud environment in the world”, based on the volume of transactions it now supports. Even so, the move to a fresh site made possible some radical feats of consolidation, and the underlying infrastructure has been reduced by 200 servers, 20 networks, 20 data center racks, ten databases and six terabytes of storage.

This wasn’t a simple infrastructure outsourcing job, however. Inovis has taken responsibility for the functional operations of transactions between Dell and its suppliers. Tim Ratliff, senior architect for enterprise solutions at Inovis, spends 90% of his time on the Dell site, and is currently working to extend his client’s electronic invoicing systems across all of its territories, including Mexico, Brazil, the EU and Asia-Pacific. This job requires considerable domain expertise, Ratliff explains. “The regulations for what has to go into an e-invoice are entirely different in Brazil from what they are in Mexico,” he says. “And they are different in every European state.”

Indeed, it is arguably a combination of Inovis’s domain expertise and the consolidation capabilities of cloud technology that made possible this transformation, which took seven months and involved over 2,000 suppliers.

That said, it is perhaps a little early to judge the success or otherwise of Dell’s new supply chain strategy. Early signs are good, however: the company’s profit jumped 52% in its most recent financial quarter.

Dell’s profits increased massively when it implemented outsourcing of its supply chain at the end of 2009.

HP’s venture in outsourcing

HP has announced $1 billion investment in offshore outsourcing, selecting six countries—Bulgaria, China, Costa Rica, India, Malaysia and the Philippines—as its global delivery hubs. Those six spots are "best for our clients and best for where our markets are headed," says Robb Rasmussen, VP and general manager, Best Shore, HP Enterprise Services. (Best Shore is what HP calls its global services delivery strategy within HP Enterprise Services.)

The company, which acquired IT service provide EDS two years ago, maintains that the restructuring will involved a total of 9,000 layoffs over the next two years as well as 6,000 new hires.

These six hubs are all large campus-like facilities, housing IT outsourcing, business process outsourcing and applications capabilities. From an enterprise services perspective. HP also has other needs for work done offshore. Take the case of our Cyberjaya, Malaysia location where we have opened a state-of-the art global delivery hub with thousands of employees that do global delivery work on behalf of our clients. Our CIO Randy Mott will also have cadre (in Malaysia) that will maintain applications for HP. Our CFO will build out financial functions there as well

Womack,VP of Best Shore enablement spoke in an interview- We've been doing business out of Kuala Lumpur [Malaysia] since 1986. It's one of our longest running global delivery centers. Of course in India, we have our most mature center, anything from apps to IT to BPO. In China, we have been operating out of six different cities. In the last three weeks, we've opened up a center in Suzhou, China, which has the full-blown application suite—from application development and management to testing and SAP implementation. From an ITO standpoint, the primary focus is service desk. If you need level one or two support, we might do that in China. They'll also provide BPO processingBPO without voice.

The difference between our hubs and the other centers is we will drive as much depth and breadth of the service portfolio in the hubs as we can so we can.

Major chunk of services of HP are of outsourcing.

Thank You

CreditsYash JainTizil Saini

Ayush Goel