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Outsourcing Strategy | Components, Levels, Benefits & Limitations

Outsourcing strategy


What is Outsourcing Strategy ?


Outsourcing strategy is the process by which the company utilises the service of another company or service provider to perform tasks which were being done in-house. The company adopts this strategy so that it can get its resources to focus on activities in which it is the best and hence stretch the resources to the maximum. Outsourcing can be practiced by all sizes of companies and normally leads to a major cost advantage to the company and also gives it the opportunity to focus on core activities.

The rationale behind outsourcing is to reap the benefits of outside service providers who are specialists in the outsourced activity. The benefits can accrue to the company in many forms. The most obvious one is the improvement in the profitability of the company by reduction in the cost. The company also gains by getting access to world class resources and does not have to incur any expenditure in having to train its own resources. The benefits can also be a matter of convenience for the business owner. The yardstick for deciding on a strategy of outsourcing is the benefit that such a strategy will reap for the company. As long as the benefits are more, the outsourcing process can be considered a success.

Components of Outsourcing

Components of Outsourcing Strategy


A company must initiate an exercise within itself to check for readiness before embarking on a strategy of outsourcing. The Outsourcing Institute has identified some critical factors to check for in a company. These are :

1) Ability to Build Relationships : 
The managers who will have to drive the outsourcing initiative need to have the necessary experience to build sustainable relationships and also build successful alliances. This is very critical for the success of the outsourcing initiative.

2) Management Support : 
The support of the management team is absolutely essential for the success of the strategy. The top management needs to provide a conducive environment, it also needs to foster an environment of innovation and encourage a mind-set in the company which encourages managers to try new methods and approaches.

3) Plan for Overcoming Roadblocks : 
Almost all outsourcing initiatives run into severe obstruction in companies. The management therefore needs to conduct periodic assessment of the various stakeholders about the likely resistance they may face in an outsourcing strategy.

Levels of Outsourcing Strategies


In manufacturing activities typically the manufacture. of components or sub-assemblies is outsourced by the company. In operations, outsourcing can take place in the following levels : 

1) Individual : 
The company may outsource some particular positions. This could be because the position is not performing properly or it could be a technical position which could be of a very complex nature and difficult to fill internally. Searching for such position internally could be a very cumbersome and expensive proposition and in this scenario it is better for the company to outsource.

2) Functional : 
Companies are structured on a functional basis where each function acts as a cost centre. The company may choose to outsource a particular function. For example, companies could choose to outsource HR as a function to a service provider. Many Indian companies outsource HR to companies like Addeco, Team Lease, etc.

3) Process : 
The processes in a company determine the flow of products and services through the company. A company can have many functions but the core processes in the company can be maximum twelve to fifteen. The company can choose to outsource some processes. For example, it may choose to outsource the Payroll processing.

Outsourcing Strategy Advantages and Disadvantages


Benefits of Outsourcing Strategy


The Outsourcing Strategy Benefits are:

1) Smoothness and Expertise : 
One of the biggest benefits of outsourcing is that the company avails the services of vendors who are specialists in their field. These vendors have knowledge, technical skills which are often better than that of the company. They are thus able to offer specialised services. Thus the tasks can be fulfilled by the company in a much faster time and with much better quality.

2) Concentrating on Core Process Rather than the Supporting Ones : 
By outsourcing the activities, the company gets more time to focus on the core activities and get the maximum out of its resources.

3) Risk-Sharing : 
Risk is reduced by diversification. Since the company outsources non-critical activities outside the company it also spreads its risks. Also since the vendor is a specialist, he can manage the risks of the outsourced activities better. As a result the overall risk of the company reduces.

4) Reduced Operational and Recruitment Costs : 
By outsourcing the company eliminates the need to hire people in-house. As a result, the costs of - recruitment and training also reduce substantially. This is one of the biggest advantages of outsourcing.

Limitations of Outsourcing Strategy


The limitations of outsourcing are as follows : 

1) Risk of Exposing Confidential Data : 
By outsourcing the company runs the risk of exposing its confidential data. For example, if it outsources its HR, Payroll and Recruitment to a third party vendor then it has to divulge all details regarding its employees.

2) Synchronising the Deliverables : 
The choice of the outsourcing partner becomes critical. In case the partner is not chosen properly then problems like delayed delivery times, inferior quality and wrong assignment of responsibilities arise. It is easier to deal with these problems internally than having to resolve the problems of an external partner on whom there is no control.

3) Hidden Costs : 
There are often hidden costs in outsourcing which do not get captured in the agreement.

4) Lack of Customer Focus : 
The outsourced partner provided standardised services to all the companies in the industry. In this situation, it is often difficult to focus on the particular needs of the client company.

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