BPO 1 - ELEC 1
Lesson 1: Outsourcing
Lesson Objectives:
At the end of the lesson, you should be able to:
1. Define outsourcing
2. Explain the reasons why companies outsource
3. Identify the different types of outsourcing
To outsource means to obtain goods or services from an outside or foreign supplier. This implies
that every time we buy something from someone else or ask somebody else to do something for us rather
than doing it ourselves, we have, in essence, outsourced the production of that good or service.
Outsourcing Defined
In 1989, outsourcing has been formally recognized as a business strategy. Since most organizations
are not entirely self-sufficient, they outsource some portion of their work which they cannot do to an outside
party with better competency.
Here are some ways outsourcing has been defined:
It is the practice of sending certain job functions outside a company instead of handling them in
house.
Outsourcing is a business practice in which services or job functions are farmed out to a third party.
This means hiring a party outside a company to perform services and create goods that traditionally
were performed in-house by the company's own employees and staff.
In managerial accounting, it is the decision to buy a product or pay someone to make it for you
instead of making the product for yourself.
Outsourcing is to bring in outside specialists to take over functions that would otherwise be
performed by employees (or not performed at all, due to a lack of expertise within the company).
These definitions tell us that for the past three decades, outsourcing has been a common practice that
a company engages in by contracting a servicing outside-firm to do designated tasks that would
otherwise have been done inside the company.
How does Outsourcing Work? Outsourcing can take place in the following scenarios:
Scenario 1: EJ Telecom, a network provider, relinquishes the task of answering customer service related
calls to CBATech, Inc. This a classic example of call centers handling inquiries and concerns of its clients’
customers.
Scenario 2: EJ Telecom asks ABC Media, a public relations firm, to handle its social media channels. This
is an example of a company utilizing the expertise of another company for its marketing related function.
Scenario 3: EJ Telecom finds it expensive to produce its products, mobile phone, in its home country.
Therefore, they signed a contract with a manufacturer in China to produce it. When it is completed, it will
then be shipped to wherever the home country may be. Now, this is an example of outsourcing in the
manufacturing and production sector.
The scenarios above are just a few typical examples of how outsourcing occurs. Today, almost every
part of a company’s operations can be outsourced. The reasons behind outsourcing will be discussed in the
next lesson.
Why Do Companies Outsource?
We have learned that outsourcing occurs when a business firm hires an external service provider to
perform tasks that traditionally were done internally by its own employees. This implies that the company
may be capable of performing these tasks but still chooses to have them outsourced. So, why do companies
engage in this practice?
The following are some reasons for outsourcing:
Capacity Management
- This is the management of the limits of an organization's resources, such as its labor force,
manufacturing and office space, technology and equipment, raw materials, and inventory. Inadequate
or improper capacity management can affect a company's financial performance and impede its
business prospects. Through the delegation of responsibilities that are difficult to manage and control
to external companies, or are beyond their capacity to manage, business firms are able to improve
their flexibility, efficiency, and performance.
Lower Cost
- Outsourcing is usually a cost-cutting measure undertaken by companies. Through outsourcing,
companies are able to replace expensive local or in-house resources with less expensive resources
from external service providers. Cost reductions are brought about by lower labor costs, tax
differentials, or government incentive programs in other locations.
Better Performance
- Since outsourcing allows the use of specialized external providers which can deliver service with
better quality, companies can improve their focus on more important core business functions. The
business performs better due to increase efficiency when some time-consuming functions that the
company may lack resources that are outsourced to a more capable external service provider.
Deloitte, one of the largest management consultancies in the world, conducted its 2016 Global Outsourcing
survey. The image below shows its findings about why companies outsource.
The result shows that although cost is the major reason why companies outsource, it is not about
saving money by lowering costs anymore. A small portion of the result presents that outsourcing can be a
tool in a company’s transformational change. Outsourcing can be driven by the benefits it provides. There
could be more reasons for reasons for outsourcing than the ones stated above.
Types of Outsourcing
Outsourcing can be classified based on location and business needs or the types of jobs a service provider
outsources.
1. Business Process Outsourcing
- This is a method of contracting a third-party service provider for various business related operations.
This type is the most common and usually provides services for customer support and administrative
tasks.
- An entrepreneur hiring a virtual assistant to answer customer emails and set client appointments is an
example.
2. Professional Outsourcing
- Sometimes referred to as body shopping, this occurs when individual specialists or professionals
are contracted to handle multiple small tasks. When a start up company starts to develop a mobile
app, but lacks iOS developers, it can opt to hire professional engineers to help in the app
development. Another example of professional outsourcing will be hiring accountants to help with
the annual tax filing and income statements.
3. IT Outsourcing
- IT services are commonly provided these days. This is about technology-related services and
resources being contracted for a part or the entirety of an IT business function.
- Applications and software development, web hosting, and database management are some examples
of frequently outsourced IT services.
4. Multisourcing
- This involves contracting multiple service providers, instead of letting only one firm, to work on a
project. This approach promotes competition among service providers and collaboration between
different sources to bring the best service quality to their common client.
- An example will be a company contracting different service providers each working on sales,
customer support, and digital marketing units separately.
5. Manufacturer Outsourcing
- When a company contracts an external factory to produce its products or parts of its products, then
manufacturer outsourcing has occurred. This is primarily done to reduce labor cost and take
advantage of the infrastructure and equipment of the servicing company. Clothing factories in
Bangladesh being contracted by famous fashion brands to produce its products is an example.
6. Process-Specific Outsourcing
- This is a method of contracting a service provider to handle specific tasks or procedures. This
involves a very comprehensive contract which details delivery timeline, product costs, and customer
contacts. A company hiring a service provider to handle all recruitment related tasks, such as
management of posting, application tracking, and evaluation, is an example of process-specific
outsourcing.
7. Project Outsourcing
- When companies lack the capability, or the manpower, to handle multiple projects, it can outsource
some of its projects to a third party service provider. In this way, the quality of output would not be
compromised due to lack of focus on each of them. An example will be a law firm experiencing a
sudden surge of cases may choose to hire contract lawyers to keep up with the high demand of
workload.
8. Offshore Outsourcing
- Commonly known as offshoring, this means the service provider being contracted is based in another
country. This is done to take advantage of low labor costs and global skills available in other
countries An online shopping website based in the US outsourcing a part of its operations to the
Philippines, or a telecommunications company based in Australia outsourcing its customer services
to India, are examples of offshoring.
9. Onshoring
- This type is sometimes called local outsourcing, or in some cases, reshoring, is about a company
contracting with a service provider in the same home country. No part of the business process is
taken outside to a different country. A livestock farm who decided to sell in the meat market may
contract the services of the nearest slaughterhouse.
10. Nearshoring
- Similar to offshoring, nearshoring occurs when a firm seeks the services of a service located outside
but within close (near) proximity of the home country. For example, a cosmetics company in the
Philippines may choose to produce its lotion in Thailand. Once production is complete, the product is
shipped to the Philippines for distribution.
