Outsourcing - Compiled by Halley Thokchom
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A compilation on Outsourcing – Halley Thokchom Page 1 of 31 1. OUTSOURCING - DEFINITION AND CONCEPT OF OUTSOURCING Outsourcing is, in simple words, giving the responsibility and the management of an activity to an external supplier (manufacturing activities) or provider (service activities), instead of doing it internally. It is different from subcontracting, which implies an obligation of means, whereas outsourcing is based on an obligation of results. It must also not be confused with downsizing, which consists in increasing productivity, efficiency, and competitiveness by reducing the size of a company. (Freeman & Cameron, 1993). In this case, a group of activities is totally abandoned, which cannot be amalgamated to an outsourcing strategy. To the contrary, an outsourcing strategy consists in a real transfer of activities from the client outsourcing company to the providing outsourcing company (also called provider or outsourcer). The downsizing strategy is a consequence of the redefinition of a company’s core business, whereas the outsourcing strategy follows from a strong will to refocus on its core business. It is nevertheless interesting to notice that 23% of downsizing operations result from outsourcing operations. (American Management Association, 1997). Another confusing practice is reengineering, which consists in the fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in critical, contemporary measures of performance, such as cost, quality, service, and speed. (Hammer & Champy, 2001). Reengineering must certainly not be assimilated to outsourcing, even if it sometimes leads to it. Even while all these related practices might be part of a whole outsourcing operation, they cannot be assimilated to outsourcing strategies. The complexity of the issues that arise in connection with outsourcing projects varies depending upon many different factors requiring numerous areas of expertise to be tapped into, such as tax, insurance, risk management, finance, project management, change management, information technology, and a perfect and essential knowledge of the environment involved. Levels of Outsourcing There are three levels of outsourcings: tactical, strategic, and transformational. Tactical Outsourcing On the first level, tactical, the reasons for outsourcing are usually tied to specific problems being ex perienced b y the firm. Often th e firm i s alread y in trou ble and outsourcing is seen as a direct way to address problems. Typical examples of “trouble” are: the lack of financial resources to make capital investments, inadequate internal managerial competence, an absence of talent, or a desire to reduce headcount. Not surprisingly, tactical outsourcing often accompanies large-scale corporate restructuring. Thus, many tactical relationships are forged to: • Generate immediate cost savings. • Eliminate the need for future investments. • Realize a cash infusion from the sale of assets. • Relieve the burden of staffing.
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