Monday, November 22, 2010

Benefits of Outsourcing

By definition, outsourcing involves the delegation of the execution of one or several business processes to an external service provider, usually located on a foreign country where labor costs are considerably cheaper.

The type of activities typically outsourced include information technology, customer support and call center functions like telemarketing, customer service, market research, manufacturing, designing, web development, content writing, ghostwriting and engineering.

The most obvious reason for outsourcing is the reduction of the overall cost of the service to the business, but there are other economic advantages, such as:

  • Focus on Core Business — Resources (for example investment, people, infrastructure) are focused on developing the core business. For example often organizations outsource their IT support to specialized IT services companies.
  • Cost restructuring — Operating leverage is a measure that compares fixed costs to variable costs. Outsourcing changes the balance of this ratio by offering a move from fixed to variable cost and also by making variable costs more predictable.
  • Improve quality — Achieve a steep change in quality through contracting out the service with a new service level agreement.
  • Knowledge — Access to intellectual property and wider experience and knowledge.
  • Contract — Services will be provided to a legally binding contract with financial penalties and legal redress. This is not the case with internal services.
  • Operational expertise — Access to operational best practice that would be too difficult or time consuming to develop in-house.
  • Access to talent — Access to a larger talent pool and a sustainable source of skills, in particular in science and engineering.
  • Capacity management — An improved method of capacity management of services and technology where the risk in providing the excess capacity is borne by the supplier.
  • Catalyst for change — An organization can use an outsourcing agreement as a catalyst for major step change that can not be achieved alone. The outsourcer becomes a Change agent in the process.
  • Enhance capacity for innovation — Companies increasingly use external knowledge service providers to supplement limited in-house capacity for product innovation.
  • Reduce time to market — The acceleration of the development or production of a product through the additional capability brought by the supplier.
  • Commodification — The trend of standardizing business processes, IT Services, and application services which enable to buy at the right price, allows businesses access to services which were only available to large corporations.
  • Risk management — An approach to risk management for some types of risks is to partner with an outsourcer who is better able to provide the mitigation.
  • Venture Capital — Some countries match government funds venture capital with private venture capital for start-ups that start businesses in their country.
  • Tax Benefit — Countries offer tax incentives to move manufacturing operations to counter high corporate taxes within another country.
  • Scalability — The outsourced company will usually be prepared to manage a temporary or permanent increase or decrease in production.
  • Creating leisure time — Individuals may wish to outsource their work in order to optimise their work-leisure balance.

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