The Realities of Outsourcing

A couple of weeks back, a friend of mine who is running a number of businesses here in the Philippines asked me a question — “What is outsourcing?”

I wanted to answer right away but I did not know where to start. Not because I didn’t know the answer but I was a bit surprised that my friend knew the word “outsourcing” but was not aware of what it meant.

I tried to give my friend the simplest answer possible, so I told him: “You know how to drive but you’re asking someone (driver) to drive for you, that’s outsourcing.” Not the best example, I know. I know for a fact that my friend hires an agency to handle their HR needs, so I told him that’s outsourcing. They also hire the services of a firm that handles their deliveries — that is outsourcing. They also hire the services of an accounting firm to handle most of their financial and government transactions — that is again outsourcing. And of course, the most popular and widespread method of outsourcing — call centers — to handle customer needs, queries and complaints.

In other words, outsourcing is the delegation of an internal process to an external entity specializing in the management of that operation. It involves transferring or sharing management, control and/or decision-making of a business function to an outside supplier, which involves a degree of two-way information exchange, coordination and trust between the outsourcer and its client.

Reasons for outsourcing

The top reasons I can think of why majority of the companies are outsourcing their processes are: Cost reduction, focus and access to expertise. Most businesses are outsourcing their payroll, HR, legal, marketing operations so that they will receive a higher level of service quality and expertise without adding too much cost. Other possible reasons why companies decide to go outsourcing: solve worker shortage, speedup time to market cycles, maximizing in-house resources and more.

Now regardless of your reason why you chose to outsource, the next most important thing you should know is how to choose the right outsourcing partner. Who should you work with considering that you’re practically sharing risk and management tasks in a way. First of course is you have to work with an outsourcing company that is reputable. Before you sign any contract, you may want to visit their workplace first for a couple of times and observe their operations. Also, try to look beyond cost-savings. Consider the long-term partnership you will be having with the company — their capability to innovate and grow with your company. For offshore outsourcing companies, you have to consider the culture and the time difference.

Outsourcing results take time before they show, so don’t be too much in a hurry. You should also plan carefully which process or jobs you will outsource. Whether you like it or not, there will be jobs that are better done internally than given externally. Also do your computation. Cost does not only involve money but also time — will it be faster and more effective if you do it within the company?

The next challenge is how to measure the outsourcing arrangement success. Your Return of Investment (ROI) will be one determinant. Before you even start outsourcing, you need to establish your goals and define metrics for calculating project progress. It won’t be easy but it’s important to develop this method of measuring success, at the beginning of the process. Give a lot of attention with your Service Level Agreements (SLA), it doesn’t have to be complicated or over-specific but make sure it requires meeting certain obligations and/or project time frames. Review your SLA from time to time during the project to ensure that you’re meeting your goals. When outsourcing’s value is accurately measured, it makes future project fund allocation easier to obtain and justifies the means to its end. Do it right and you’ll be sure to reap the rewards.

Just remember, not because most companies are into outsourcing means you should also join the bandwagon. Assess your needs before you decide to engage yourself into outsourcing services. If you think your company is doing fine without going into outsourcing, then stay that way. The bottomline is whether it’s done internally or externally, you have to be effective and efficient.

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