Outsourcing: Then and Now

Outsourcing is the buzz word for this millennium. It is defined as a business practice used by different companies to reduce costs by transferring parts of work to third-party suppliers rather than completing it internally. It is also sometimes referred to as “contracting out”.

Outsourcing has been a common practice and is believed to have existed a long time ago. But it was not until 1989 that it was formally identified as a business strategy. In the 1990s, as the companies seek to improve their finances, they began to outsource roles that are not related to their core business but are necessary to run a company. Functions such as human resources, accounting, security, plant maintenance, and housekeeping were contracted out to service companies specializing in general administration work. Outsourcing during this time was seen as a cost-saving measure. It was given that core competencies were not to be outsourced. Functions that give the company a strategic advantage or make it unique stay internal.

Through the years, outsourcing has gained popularity. More and more businesses have adapted this strategy. The reasons for outsourcing then and now have changed. Apart from the fundamental reason for outsourcing, which is to reduce and control operating costs, the following are now also deciding factors in outsourcing:

To focus on core business
– Next, to improving financial gains, the main reason why companies outsource is to concentrate on their core competencies.

Gaining access to world-class capabilities
– Globalization has opened doors for companies seeking high-quality work for less cost. Having an offshore company handle non-core business activities leads to better service.

Freeing internal resources for other purposes
– Companies need people to focus on what matters most to their business. By outsourcing support services, companies gain more time and capital to move their business forward.

Streamlining or increasing efficiency for time-consuming functions
– Spending hours working on an issue or project that is not the company’s core business is a waste of time, energy and money. By outsourcing these services, companies become more efficient.

Flexibility
– Today’s global economy is full of uncertainties. Companies must then be able to adapt instantly to change. It should have the ability to expand or downsize quickly depending on market demands.

Sharing risks with a partner company
– Risk management is one good reason to outsource. This goes hand in hand with flexibility. Through outsourcing, companies minimize the risk of labor-related issues.

The nature of outsourcing and the manner by how it is practiced have also greatly evolved. The following shows how outsourcing has progressed through the years.

Growing number of outsourced jobs
– Job functions outsourced today are no longer limited to administrative tasks. Functions most commonly outsourced now include data entry, telemarketing, information technology and even customer support. These jobs require full attention, expertise and most especially, time, which businesses do not have the luxury of.

Outsourcing complex tasks
– In order to maximize the pool of talented workers worldwide, companies have begun to outsource complex and more difficult tasks. Complex scientific and R&D projects are contracted out to companies that employ highly qualified scientists and engineers. Likewise, banking institutions have increasingly relied on offshore providers for help with full-system projects, no longer limited to low-level maintenance application tasks.

Core competencies are now being outsourced too
– Core competency is also defined as any function that gets close to customers. Customers are the lifeblood of business. Years ago, it was an absurd thought to outsource customer service functions and to rely on other companies to cater to the customers’ needs. But today, customer service is probably the most popular among outsourcing services.

Small and medium companies join the trend
– Before, only large companies were into outsourcing. But now, small and medium-sized companies have joined in the trend. This paved the way for acquisitions and mergers, which in turn were significant in helping small and mid-sized companies to thrive and grow.

More developing countries join the outsourcing market
– India has been the leader in the outsourcing services in the 90’s because of its large, educated, English-speaking population. However, there have been growing opportunities for more developing countries to enter the outsourcing services market. Countries such as China, Russia, Eastern Europe, Latin America and the Philippines have benefited from this opportunity because of their well-educated workforces, stable government and of course, low wage.

In this era of information technology where almost anything is a click away and almost everybody is available online, it is a good opportunity to make the most out of outsourcing. Outsourcing does not only benefit the third-party service provider, but also the global businesses that rely on them to reduce cost and gain efficiency.

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