Outsourcing

Outsourcing. There, I said it. Outsourcing does not have the same connotation as the words "Christmas Bonus". It implies jobs will be lost and processes will change. There are benefits and in today’s environment it’s necessary. This page will discuss what it is and how everyone can benefit. Everyone.

When a company outsources it delegates a nonessential function to another company. The advantages are twofold: The outsourcing company can focus on its core business and the function that was outsourced may be performed better. After all, those services are the core business of someone else.

While “outsourcing” means contracting work to other companies, “offshoring” means work is contracted to other countries.

Outsourcing allows companies to save money on functions such as accounting, HR, R&D, payroll and customer support. When this happens companies can focus on building a strategy as opposed to building an organization around the product.

Manufacturers typically outsource about 80% of its finished product.

GE documented its business rules and processes. Employee knowledge was captured on visual maps which allowed GE to integrate outsourcing into its own functions and transfer its best practices to India.

The Indian company contracted with GE’s nonessential functions enhanced them through Six Sigma (Six Sigma is discussed in this site).

As alluded to above, there are many reasons a company would decide to outsource. In addition to strategic and competitive reasons there is the cost of labor. This is the first thing that comes to everyone’s mind when faced with the issue. Here are some numbers:

A Java programmer earns close to $70,000 per year in the U.S. In India, they would make $5,000. Per year that is.

Net savings on operations run between 20% - 40%.

Although the savings are apparent, quality does not usually suffer. Help desk outsourcing and call centers are a good example of this. As a matter of fact each time you call Dell, you can ask the customer service rep what the weather is like in Bangalore.

In India, call center jobs are held in high esteem while in the West, it is just the opposite. I’ve called call centers in India (not on purpose). The conversations were relatively good experiences every time. Due to an English-speaking population, India is the call center capital of choice.

The first year of an outsource contract, savings are closer to 15%. During this time the company must invest in knowledge transfer and training.

• Which functions are core to the business and which are nonessential?

• Are you willing to outsource an entire nonessential function?

• Outsourcing will leave you with additional resources. Are you willing to apply those and improve your core business?

• Do you know how to find a partner whose core business is your nonessential business?

• Are you willing to build an open and trustworthy relationship with your providers?

The decision to outsource is not generally met with open arms. Here are some objections to the concept:

• Control. The notion that outsourcing will limit control and flexibility over certain functions has merit. These items can be addressed in the service agreement. But on the other hand, management will actually increase control over core processes.

• Negative reaction form customers. Customers may be surprised at the level of service they can receive. If a function is offshored, a company may provide customer service that meets any time frame.

• Employee resistance. Functions and job roles will change with some being eliminated. This is necessary when a company enhances efficiency. Companies should be prepared for this. Proper communication should be disseminated to all employees that will be affected.

Outsourced employees should receive either transitional services or job retraining. This is a market based economy. If job roles change, the employee may not command the same salary.

On the other hand, with new training, this can become the start of something new.

Like any new project, when the decision is made to outsource a function……it must go through a series of steps:

The business must define its goals, assign a project champion and resources must be allocated.

Establish service baselines and clarify to what extent the business is to be outsourced. Develop an RFI (request for information) and begin the search among a list of vendors.

After a vendor is chosen, work to clarify what performance measurements are to be in place. Address pricing, governance and service level agreements.

Begin implementation. Shift the function from your company to theirs.

Relationship management. This vendor should be considered a partner. Lines of communication should be open.

One interesting idea I’ve read is reward your vendor for good performance. Whether it’s speed, service or quality…...positive reinforcement (example: cash) is like tipping the maitre d’. You’ll always get a good table.

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