Outsourcing’s in the news these days, what with the US presidential election and all, but it’s usually covered from an “is it good for us” angle—where “us” is the American people or the national economy.
But how about you? Is it good for your organization?
I’m interested in your current perspective on outsourcing—please let me know what you think by responding to the poll at the bottom of this blog post.
I’ll let A.B. Maynard, TEC’s outsourcing analyst, speak for the rest of this post—the excerpt below is from his article Outsourcing 101 - A Primer, and I thought it was an excellent overview of the factors you should consider before making a decision.
Why Do It?
There are a number of reasons that drive companies to outsource some or many of the work activities. The list of reasons include
- Lower costs (or lower total costs). Sometimes achieved through lower wages costs, but also through economies of scale by providing the same service to multiple companies.
- Improve service. Often, better educated or skilled people perform the task, and thus perform it better.
- Obtain expert skills. An outsource firm is allegedly an expert in that particular activity, and thus should be able to do it better than the customer.
- Improve processes. Given that outsourcers are very experienced at a particular set of processes, they can help the customer to improve their processes.
- Improve focus on core activities. Outsourcing frees management from having to worry about the inner-workings of a non-core activity. The customer focuses on their core competence, the outsourcer focuses on theirs.
Outsourcers often can gain economies of scale. For example, it doesn’t make sense for 500 companies to have expertise in the new tax laws for 401(k). The outsourcing company can have 3-4 people focused on it, and leverage the knowledge over those 500 companies. This is an important point because costs aren’t just getting re-categorized or shuffled around—there is overall new efficiency in the supply chainMake no mistake about it. Except for two or three very specific examples, the number one reason that companies outsource is to reduce their costs for the same or better service or product.
Why Not Do It?
Outsourcing is not right for every company.
- The company may be too small to effectively outsource (although a concept called “shared services” could be right for such a company).
- The company’s culture may not appropriate for outsourcing.
- There may be customer reasons that limit or prevent the company’s ability to outsource.
- Some government agencies do not allow their contractors to outsource anything to an offshore location.
- Outsourcing takes a type of management leadership that may be different than that which exists within the company today.
What do you think? Should your organization move toward outsourcing as a strategy?
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Before you outsource, you should prepare your self for the consequences that possibly happen to your business,and of course finding the right business partner is the key to success. Also before entering your business in outsourcing industry you should be knowledgeable about about the organization.
Hi AutoCAD Designer,
Generally I understand, but how should we prepare ourselves? What do you mean by the ‘organization’. Do you mean we have to know ourselves (the company you work for)first to find the right business partner? What kind of self check-up can we do?
Before any decision of what oursource, first we must to know what is the value chain of the business.
We must identify the key process using Top Down Annalysis.
In each process we find many subprocess and we can evaluate what represents value added to the process.
Each process that not represent value added is candidate to outsourcing.
Not all process must be outsourced, only those not represent value added and the cost-benefits of manage in ousourcing is verified.
it is rightly said that it is not for all companies .it is highly company specific .
Cost incurred for Outsourcing may not be cheaper across all outsourcing models. However, Outsource can allow setting a more demanding quality level to the outsource partner, which a company may not wish to spend too much time to focus.
I will talk about the human part resulted from the outsourcing, there maybe a lack of team-work specially if contractor keeps changing their employees, there will be a gap in the pay between your staff and contractor and this will have negative impact sometimes, loyalty, security, integrity and the having services that is remote or does not coop with your organization culture/strategy.
Outsourcing is often given a bad press, especially where it initially results in job loses. However, protectionism only really slows the innevitable and makes companies less competitive.
One great outsourcing example - James Dyson was criticised when he outsourced the production of his vacuum cleaner overseas with the loss of jobs in the UK. However, it proved so successful that the company grew very rapidly and he now employs more service people in the same area of the UK than before. Sometimes the longterm picture has to be taken.
I think, any business should use both outsourcing and insourcing according to the needs and goals of staffing. However, small business are not advised to go to outsourcing as it adds more financial burden (extra salaries)and may conflicts with organizational culture. At the same time, we need to get the best from people using appropriate motivations.
Our small sixteen person admin office has outsourced two processes in the past year with good results-payroll and IT. Altho the IT costs were initially higher, once we became familiar with the process, it has allowed us to direct staff to more important work within the association and leave IT to a company that specializes in IT and nothing else. We have seen no negatives after nearly a year of outsourcing and are considering other ways we might utilize outsourcing, for example our web development processes.
I just read that the rising fuel costs are great potential benefit for the USA manufacturing industry.
With the cost of fuel, it is almost at the point where the cost of shipping steel from Brazil to China/Malayasia and finished goods from China to the USA is more then $40.00 per metric ton.
That is just at the break-even point, where at $42.00 per metric ton, it is less expensive to manufacture in the USA and avoid the long leadtimes. And jobs will be created in the USA too.
Oil and environmental issues. We still need to evaluate the value chain of the business as Martingl said. How about programming? There is no shipping cost. Coding and testing could be good subprocess for outsourcing. I also thought the case of vacuum cleaners in the UK mentioned by Will highlights the upside of Outsourcing.
Outsourcing is a controversial issue given this is an election year in the US; quite ironically the key battleground states will be those whose economy has been adversely affected by outsourcing. I’ve myself been a victim of jobcuts in the IT industry as a result of outsoucing on two occasions. My perspective is that Free Trade only works when business has free and unfettered access to international markets. China must provide wider access to its markets and it must peg its currency to international currency rates. Furthermore, rather than ask for people to pay in North America carbon taxes. Many of the world’s largest sources of environmental polution are in Asia and the US.
It is my fear that outsourcing is leading to erosion of the middle class in North America, as it is in serious trouble beginning with high fuel costs, the problems in the sub-prime mortgage market, rising health care costs, and the decline in public education. This comes at a time when in record numbers babyboomers are retiring. Unfortunately for us in North America we have a cold climate and we need housing and heat and shelter, and since many of us live in urban areas we cannot grow crops. Therefore we need to call upon politicians to enforce and hold nations like China accountable and hold corporate giants accountable to the markets they serve.
Sometimes it’s difficult to separate political considerations from business considerations.
In fact, outsourcing is not a new concept, whatever it is called and wherever it is done; onshoring, nearshoring, offshoring… New products, emerging technology, and competitive substitutes can also replace others in the marketplace. Can you imagine life without plastics now? I believe it is a part of economics and business dynamics. Cost alone is not the determinant factor in subcontracting a business sub-process. Surely language, culture, and business customs—as well as the skills of the outsourcing vendors—should be assessed. In general India is stronger in dealing with English-speaking countries, while Japan’s major software development outsourcing partner is China. Israel, on the other hand, gets more from the US and Europe.
Can anybody tell me what should be manufactured in USA? What is America manufacturing? IT related products? What kind of hardware if not software? Printers? computers?