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