| Outsourcing is not a new concept as basically it's a | | | | control over that process & finally increased |
| "subcontracting of tasks" which were prevalent & | | | | dependency. |
| even prevalent today, & we know that the | | | | Reduction in the Responsiveness to the changing |
| Rationale for subcontracting is to save cost & | | | | environment |
| time so that the party subcontracting the task may | | | | Outsourcing Often Reduces Organizations' |
| specialize itself in its core competencies without | | | | Responsiveness to Market Changes and Poses |
| wasting time & intellect in the task that may be | | | | Internal Political, Organizational, and Cultural Challenges. |
| subcontracted. | | | | Multi-year contracts result in a loss of flexibility to react |
| When we talk about outsourcing we say that An | | | | to market changes, hurting companies' |
| organization entering into a contract with another | | | | competitiveness. are concerned about the loss of |
| organization to operate and manage one or more of | | | | flexibility to react to changes in the market (e.g., |
| its business processes. We call it as outsourcing of | | | | competitive, regulatory), as a result of being locked into |
| process. Outsourcing originated and became popular | | | | multi-year deals. |
| as a cost-saving strategy during a recessionary | | | | Vendors push for long-term deals to recoup initial |
| environment. Usually the processes that are | | | | investments and make profits. When pressed to |
| outsourced are the support processes and not of | | | | shorten deal length, prices increase. Here we find a |
| extremely high strategic importance, but necessary for | | | | There is an explicit trade-off between maintaining |
| doing business. In a nutshell outsourcing deals with the | | | | flexibility and lowering cost. |
| people and processes in and around business. | | | | We find a clear Shift of Bargaining Power to the |
| No doubt about the success of outsourcing which is | | | | Vendors, While Contracts Often Provide |
| visible in present context & even a favourable | | | | Limited Protection. Handover of control and knowledge |
| regime for a country like India where human capital is | | | | to the vendor creates an ongoing dependency on the |
| abundant. But Organizations have now begun to | | | | vendor. This dependency ultimately shifts power to the |
| recognize the real costs and inherent risks of | | | | vendor and weakens the organization. This is slow but |
| outsourcing. Instead of simplifying operations, | | | | sure process, Once an organization has gone through |
| outsourcing often introduces complexity, increased | | | | the process of adjusting its retained organization and |
| cost, and friction into the value chain, requiring more | | | | its skill sets, it no longer holds the capabilities and skill |
| senior management attention and deeper | | | | sets to manage these functions in-house, increasing |
| management skills than anticipated. It is generally said | | | | dependency on the vendor. |
| that "Outsourcing is an extraordinarily complex | | | | Long-term contracts and proprietary systems further |
| process, and the anticipated benefits often fail to | | | | increase vendors' bargaining power. Vendors might |
| materialize." | | | | lock companies into using proprietary systems, making |
| The outsourcing requires a complex series of | | | | it difficult to switch vendors in the future. |
| tradeoffs: cost savings versus growth, speed versus | | | | Organizations are trying to offset this trend by |
| quality of service delivery, and maintaining | | | | negotiating shorter-term, more flexible contracts and |
| organizational cohesion versus knowledge and | | | | by working with multiple vendors. However, these |
| innovation. Service providers and organizations have | | | | mitigation strategies provide limited protection. |
| inherently conflicting objectives, putting the | | | | Short-term deals even (less than three years) often |
| organization's objective for innovation, cost savings, | | | | create high dependency on vendors, holding |
| and quality at risk. Moreover, the service provider's | | | | organizations captive. "Second sourcing" (wherein two |
| structural advantages do not always translate into | | | | outsourcers provide services to forestall monopoly |
| cheaper, better, or faster services. The world's largest | | | | pricing power) is difficult with services outsourcing. |
| companies should be able to replicate the service | | | | Multi-vendor models increase the level of complexity, |
| provider's structural advantages in-house and rely on | | | | requiring additional resources from the organization. |
| the service provider only under specific circumstances, | | | | Vendor dependency cannot be fully mitigated because |
| such as fixing deep-seated structural problems or | | | | the organization no longer owns the functions, |
| maintaining infrastructure operations. | | | | knowledge, people, and systems. |
| An unfavorable mix of rising costs and increased | | | | And, organizations then find themselves trapped in |
| demand will drive up the cost of outsourcing for | | | | deals with higher rates and low-quality delivery. |
| organizations and vendors. Weaknesses in operational | | | | Illusion of Costs saving |
| management will result in more deal failures, prompting | | | | Outsourcing, which originated as a popular cost-saving |
| organizations to bring more operations back in-house. In | | | | strategy during a recessionary economic environment, |
| the long run, organizations that continue to outsource | | | | is still dominantly driven by cost-related objectives and |
| will experience a loss of bargaining power to vendors | | | | the perception that organizations benefit from vendors' |
| as the supply side consolidates. Those that apply | | | | economies of scale. However, evidence of tailored |
| strong skills in deal structuring and risk management | | | | deals and inhouse economies of scale at large |
| and strong management skills to oversee deals from | | | | organizations suggests that vendors' scale advantages |
| inception to execution will be best positioned to reap | | | | may be illusory. Lack of transparency, bundling of |
| the benefits of outsourcing. | | | | services, and a variety of marketing techniques have |
| In the Real World, Outsourcing Frequently Fails to | | | | created suspicion about the savings from outsourcing. |
| Deliver Its Promise. To prove this statement Here is a | | | | Real-world experiences suggest that the potential for |
| chart which represent that what were the | | | | cost savings has been overstated. |
| expectations of the companies & what were the | | | | Limited transparency to a vendor's pricing and cost |
| resultant of the outsourcing there task. | | | | structure makes it difficult to understand cost savings. |
| Outsourcing of jobs were done to increase the | | | | Transparency to a vendor's costs decreases as |
| efficiency of the Outsourcing company & to | | | | outsourcing contracts are bundled with other services. |
| increase their core competency as we said earlier but | | | | Bundling makes it difficult for organizations to distinguish |
| the trade offs are heavy as compared to the benefits | | | | unit costs and complicates business cases. Bundling |
| which are anticipated. | | | | allows financial engineering that hides the true |
| Let's understand that what may be the various risks | | | | economics of the deals. Vendors employ marketing |
| which are attached with this process. | | | | techniques that can create illusory cost savings. |
| Concerns over Data Security | | | | Under-market pricing is common due to fierce |
| It is an important factor which is bothering the minds of | | | | competition among vendors. Vendors undertake |
| top management of the companies whose core | | | | contracts that are not economically viable for them, |
| business involves transfer of confidential data, like | | | | especially with early mega-deals or strong brand |
| banks. | | | | entrants. Which results in poor performance & |
| Two successive well published cases in the immediate | | | | losing quality. |
| past of Indian BPO's not being able to protect | | | | Conclusions |
| confidential client data bring into sharp focus not just | | | | Organizations have now begun to recognize the real |
| the security issues connected with one of India's | | | | costs and inherent risks of outsourcing. Instead of |
| fastest growing areas in the services sector. | | | | simplifying operations, outsourcing often introduces |
| The first case involves a fast growing areas listed | | | | complexity, increased cost, and friction into the value |
| BPO which has a strong business relationship with | | | | chain, requiring more senior management attention and |
| Citicorp, the worlds largest financial service group one | | | | deeper management skills than anticipated. In addition, |
| of the pioneers of outsourcing. | | | | outsourcing has allowed organizations to transfer |
| A few employee of the BPO allegedly obtained, | | | | financial and operational risk to vendors, but |
| through fraudulent means, confidential data including | | | | organizations are discovering that their contracts will |
| passwords from their clients. All citibank's customers in | | | | never fully protect them against customer damage |
| US & thereafter withdraw money. | | | | and business losses caused by service disruption. |
| The most recent case has arisen out of a "sting | | | | Many have responded by bringing operations back |
| operation" mounted by a British tabloid. One of its | | | | in-house. |
| undercover reporters managed to "buy" data of some | | | | Outsourcing will lose "holy grail" status. In the future, |
| 1000 account holders of several British banks from a | | | | companies will not outsource because it is the latest |
| junior employee of a delhi based BPO, to which the | | | | management fad, and "it is the thing to do." Vendors |
| banks had outsourced a chunk of their routine | | | | will become more selective in choosing new clients to |
| business. | | | | avoid taking on "mess for less." Organizations will |
| Here the tradeoff is clear easiness of work at the | | | | outsource less. Organizations will carefully define core, |
| cost of Data Security. Is outsourcing really reducing the | | | | strategic, and "thought-leadership" functions and will |
| burden? | | | | keep those inhouse to retain knowledge, confidentiality, |
| Structural Risks | | | | and control over key functions. Some organizations will |
| Outsourcing Generates Fundamental Risks and | | | | decide to outsource only short-term using the |
| Concerns, More than Half of Which Are Structural and | | | | Transform-Operate-Transfer model. As a result of |
| Cannot Be Fully Mitigated. Companies are exposed to | | | | outsourcing only "commodity processes" or |
| fundamental outsourcing risks and are facing go/no-go | | | | outsourcing temporarily for a transformation, |
| challenges as new risks emerge. 45 percent of the | | | | organizations will outsource a smaller percentage of |
| companies who outsoucing stated that an organization | | | | their operating expenses. Many organizations will also |
| should not outsource processes that it does not fully | | | | engage in large scale reinsourcing thereby further |
| understand. emphasized that outsourcing without fully | | | | eroding the outsourcing market. Organizations' |
| understanding the organization's processes and cost | | | | attempts to manage margins and increase the level of |
| structure is extremely risky because the organization | | | | caution when outsourcing will lead to shorter contracts |
| will not know what to demand from vendors and how | | | | and a squeeze on profit margins of large providers. |
| much to pay. In the below given graph are given some | | | | This situation will prompt Vendors to continue to |
| structural risks which are faced by the companies. | | | | rationalize services, cost structure, and pricing. |
| Limited transparency and an increased lack of control | | | | However, Outsourcing Will Remain a Useful Solution |
| due to vendors' subcontracting is again defecting the | | | | Within the Conservative Context of These Five |
| objectives of outsourcing. Global companies often are | | | | Models. |
| unable to find global vendors to provide standardized | | | | Centralize-Standardize-Outsourceo Initially, |
| services across the different regions, driving them to | | | | organizational processes that have been targeted for |
| employ multiple vendor relationships or scale back | | | | outsourcing are centralized and standardized, allowing |
| outsourcing objectives. | | | | the company to achieve efficiencies internally and to |
| Loss of Control | | | | gain detailed management insights into processes and |
| Loss of control over outsourced functions poses a | | | | costs.o Newly-achieved efficiencies allow visibility into |
| substantial threat to ongoing operations. It is viewed | | | | potential outsourcing business cases.o Increased |
| that loss of control over outsourced functions is a | | | | management insight into the functions enables clear |
| substantial risk. | | | | definition of operational and cost demands from |
| - "Avoid outsourcing 'lock, stock, and barrel,' in order to | | | | vendors.o These companies will engage in typically |
| maintain control (over our value chain)." Said by an top | | | | lower levels of outsourcing, and will keep most cost |
| management official who is not in favour of | | | | savings in-house rather than sharing them with the |
| outsourcing. | | | | vendor. |
| Due to the above cause many companies are bringing | | | | Transform-Operate-Transfero Organizations employ |
| outsourced functions back inhouse because they | | | | vendors to transform a function and to run it for a |
| realize they have lost control over critical processes. - | | | | short-term period.o Transformations are often more |
| "Too much outsourcing results in lack of control. | | | | easily achieved externally than internally; thus, the |
| Companies should not outsource key areas where | | | | benefits outweigh short-term outsourcing costs.o This |
| losing control can be disastrous." Is a statement which | | | | model is relevant especially for companies in volatile/ |
| shows again a serious tradeoff i.e outsourcing a critical | | | | fast-moving industries, where rapid changes and |
| process is to save cost but at the cost of loss of | | | | adjustments are required. |