Why Do Companies Outsource?
Outsourcing: What Is It and Why Do Companies Do It?
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By Marty Pine
Updated February 05, 2017
What Is Outsourcing?
Outsourcing can be defined as “the strategic use of outside resources to perform activities traditionally handled by internal staff and resources." Outsourcing is a strategy by which an organization contracts out major functions to specialized and efficient service providers, who ultimately become valued business partners. And in some cases, outsourcing involves the transfer of employees from the company to the outsourcing company.
Why Do Companies Outsource?
There are many reasons why a company may choose to outsource certain business functions. Some of the most common reasons include:
- Reducing and controlling operating costs
- Improving company focus
- Gaining access to world-class capabilities
- Freeing internal resources for other purposes
- Streamlining or increasing efficiency for time-consuming functions
- Maximizing use of external resources
- Sharing risks with a partner company
But these reasons aren't enough to implement a successful outsourcing program. In fact, companies must ensure that they consider all of the components and are able to meet the requirements for successful outsourcing.
Requirements for Successful Outsourcing
In the early days, cost or headcount reduction were the most common reasons to outsource. Today, the drivers often are more strategic and focus on carrying out value-adding activities in-house where an organization can best utilize its own core competencies.
The critical areas for a successful outsourcing program include:
- Clarity concerning company goals and objectives
- A strategic vision and plan
- Vendor selection
- Relationship management
- Properly structured subcontract and vendor agreements
- Open communication with affects stakeholders
- Senior leadership support and involvement
- Careful attention to personnel issues
- Short-term financial justification
Let's dive a little deeper into two of these requirements: open communication and executive and senior leadership support.
Open communication and executive support are particularly important to a successful outsourcing process. Additional consideration should be for a workable Service Level Agreement (SLA), which is openly available, to all staff involved.
Whatever the outcome of the outsourcing arrangement, managing change is fundamental to the success of the program. Assessing stakeholder requirements is the first part of this process, and having open channels of communication during this time are vital. Everyone concerned should be involved in the process.
Strategic objectives, such as outsourcing initiatives, must come from the top echelon of a company. Senior management must articulate the goals and objectives of the outsourcing initiative and communicate how the process will benefit the organization.
Today’s managers are looking ahead and recognizing that the responsibility for ensuring the success of their enterprise’s outsourcing initiatives does not stop when the ink has dried on the contract, but unfortunately, this has not always been the case.
How to Avoid Failed Outsourcing with Relationship Management
The combination of uncertainty and lack of attention to critical details has created a present day scenario where, according to The Gartner Group, 25 percent of outsourcing contracts will be renegotiated or canceled within three years. Ongoing management of the relationship is important. Senior management must stay involved during the implementation of the contract. Not only should there be a clearly defined escalation procedure, but senior management should meet at appropriate intervals to discuss the outsourcing relationship. Meetings also should be held at the operational level to address the working of the outsourcing contract in practice, to identify and resolve any problems that have been encountered, and to agree on changes to ensure continued satisfaction
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