Why is outsourcing a good business strategy?

by FESPA | 07/01/2015
Why is outsourcing a good business strategy?

It improves efficiency, cuts costs, speeds up product development, and allows companies to focus on their “ core competencies”.

To many people, outsourcing is a frightening proposition. Yet this new business model, which has been adopted worldwide across both the private and the public sectors, provides multiple benefits. It enables an organization to achieve business objectives, add value, tap into a resource base and mitigate risk. In other words, from individual items all the way to systems management, choosing to use external providers allows the company or organization outsourcing a job (the “client”) to focus on what it does best.

Problems arise from the lack of, or poor, governance practices.

While the common public stereotype of outsourcing may be to make financial savings by taking advantage of lower-cost labour in another country (known as “offshoring”), outsourcing can be domestic as well as foreign. It can also give the client access to expertise and to a level of productivity not available in house. When a skills or production deficit exists (frequently in information technology) and the service provider can furnish a remedy, an outsourcing solution can meet the needs of both parties.

Statistics on the subject are an eye-opener. Accounting and consultancy firm Deloitte recently published its free 2014 Global Outsourcing and Insourcing Survey, which covers the political implications, regulations, outsourcing destinations, technology and vendor management. For example, the udemy.com platform for online courses published some revealing statistics for 2013. In that year, 43 % of the IT sector had been outsourced. This jumped to 60 % in the following year.

Deloitte also predicts outsourcing will continue to expand at rates of 12 % to 26 % across the functions analysed.

Economies of scale

Though the “father” of outsourcing may well be the early 19th-century British economist David Ricardo with his economic principle of “comparative advantage”, it was only in 1989 that imaging solutions company Eastman Kodak took the then revolutionary step of outsourcing its information technology systems.

Up until that time, the ideal model for business was a large and well-integrated company that owned, managed and directly controlled its assets. But large corporations found themselves unable to compete globally as bloated management structures hindered flexibility. Diversification became a rallying cry to broaden corporate bases and take advantage of economies of scale. For many large companies, this resulted in a strategy of concentrating on core business and competencies, identifying what was critical to the company’s future growth and what was not.

Assessing risk and reward

While outsourcing might appear to be an ideal solution for entities desirous of keeping overheads as low as possible and that infernal “head count” down, there are also perils to avoid.

Many studies have been carried out to examine the pros and cons of outsourcing. Booz Allen Hamilton, a leading management and technology consultancy, issued a report in 2014 describing “a mixed report card on traditional outsourcing”. It nevertheless pointed out: “Savings typically result because the outsourcing supplier can access a cheaper, more flexible workforce and the latest, most efficient technology. Organizations claim that they achieve, on average, a 15 % cost reduction through outsourcing.”

Datamark Incorporated, which delivers enterprise content management services to Fortune 500 companies, backs these claims. In its 2014 White Paper, it performed single-year and multi-year cost analyses for “individual item” business process outsourcing decisions. Taking a representative sample from the businesses under study, Datamark found cost savings of 31 % on a single-year cost analysis, while a three-year study of the same sampled business showed savings of 33 %. This obviously represents a very significant decrease in expenditure for some businesses and gives impetus to others to follow this attractive business model.

How ISO can help

ISO 37500 addresses issues of flexibility in outsourcing arrangements.

Adrian Quayle, outgoing Chair of project committee ISO/PC 259, Outsourcing, and Dr. Gargi Keeni of Tata Consultancy Services spoke to ISOfocus. Quayle explained that it had become apparent that standards makers would need to tackle the issues now arising from this business practice. ISO/PC 259 was created in response to the wide range of methodologies that developed at the inception of the outsourcing industry. These had invariably, over time, come to cover similar processes and themes. Following a pan-European survey conducted by the Netherlands standards body NEN, a proposal to develop an ISO International Standard was made.

Outsourcing practitioners were looking for a common vocabulary across all industry sectors, including typical outsourcing concepts, to improve the understanding of all stakeholders involved in managing the outsourcing life cycle.

This ultimately led to the drafting and publication of ISO 37500:2014, Outsourcing, whose authors were experienced sourcing/outsourcing practitioners involved in deals worldwide. Great pains were taken to ensure the standard provided a generic and industry-independent foundation, so that it may in the future be supplemented and tailored to suit industry-specific needs.

A collaborative spirit

Among the experts who were called upon, Dr. Keeni was a key contributor. As she told us, “It was a challenge to accommodate the viewpoints of all stakeholders, in the public and private sectors.” Nevertheless, she praised the collaborative spirit of all, which was key to resolving conflicting points of view over complicated requirements, in particular regarding whether innovation and continuous improvement should be factored into the life cycle, or if the importance of not infringing contractual requirements should take precedence.

Quayle, for his part, explained, “As well as focusing on the common processes and best practices for success, the team put governance at the heart of the standard. Experience has shown that many of the problems arise from the lack of, or poor, governance practices.”

ISO 37500 addresses issues of flexibility in outsourcing arrangements, accommodating changing business requirements. The risks involved in outsourcing are confronted to enable mutually beneficial collaborative relationships.

All sides of the outsourcing industry were invited to participate in the writing of the standard. Although the document is very much sector-agnostic and addresses outsourcing independently of the size of the organization, the experiences gathered by experts from an array of industries, including manufacturing and the information technology enabled service (ITeS), were highly valuable when putting the standard together. No doubt that, as ISO 37500 gains popularity and traction, even more sectors will weigh in and provide their know-how for the next revision of the standard.

Future looks bright

Over the past 25 years, the outsourcing industry has grown from nothing to a multi-trillion US dollar business worldwide. As a consequence, ISO will need to expand its involvement to cover the myriad ways outsourcing is being implemented.

The economies of scale, financial rewards, as well as the flexibility and increased productivity promised by outsourcing, will be a hot commodity for years to come, as the skyrocketing rates of increased outsourcing affect every segment of society.

Initially focused on highly transactional back-office processes or non-critical services, outsourcing now encompasses strategic functions, with some companies off-loading entire segments of their value chain.

So what does the future hold? As outsourcing spreads exponentially throughout the world, issues that have not yet come into existence will inevitably arise. ISO’s job will then be to monitor developments and trends and create standardized solutions to help all stakeholders find a way around – or over – the obstacles that block their path.

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