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The sales and production capacity are expanded during period when such expansions could not be financed in the company. Outsourcing accelerates expansion by tapping into the provider’s developed capacity, process and systems. One of the primary reasons why a company will want to save is the ability to take advantage of economies of scale. Outsourcing firms are able to consolidate data centre operations, which provides lower overhead cost on a per-customer basis. Outsourcing firms acts as aggregator for telecommunication networking and cost reduction.

Outsourcing enables organisations reducing costs and overheads required to perform its back office activities. In today’s business world organisations applications management outsourcing have to expand its back office activities. Such expansion may consume resources at the expense of the main activities of the company.

Outsourcing important but mundane activities can allow you to refocus your in-house resources on the activities that make you profitable without sacrificing quality or service. This website is using a security service to protect itself from online attacks. There are several actions that could trigger this block including submitting a certain word or phrase, a SQL command or malformed data. Creating a timeline and completion date for negotiations will help to rein in the negotiation process. A library search on “outsourcing information technology” articles for the past year and a half identified over 700 articles, almost all describing IT outsourcing as reported in the various industry trade journals. During the first year, there is a heavy capital payment followed by the extraordinary costs for switching responsibility and executing the appropriate cost-reduction initiatives.

Companies may choose to outsource IT services onshore , nearshore , or offshore . Nearshore and offshore outsourcing have traditionally been pursued to save costs. The second dimension of the strategic grid that we generalized was the importance of new applications development. Here we generalize applications development to the importance of innovative information resource management. Indeed, in-house applications development is one aspect of this dimension, but modern development initiatives commonly involve a number of outside partners as well. For the customer, the first-year benefits are clear; usually the customer receives a one-time capital payment.

For eg, looking at it from a CIO’s perspective, in a fixed price contract, the amount of risk the outsourcer faces is more than the time and material contract. Regardless of the type of contract, the CIO will be sharing the responsibility for the future direction of the technology within his/ her company with the outsourcer. The CIO responsibility is to ensure the technology integration with business processes within the company, the outsourcer will assist by introducing the new technology with proper skills to implement. As with most questions about outsourcing, the optimal answer depends on what’s being outsourced and why. While decade-long deals have largely gone by the wayside, a transformational outsourcing deal may require more time to reap benefits for both client and vendor. But when outsourcing desktop maintenance or data center support, a shorter relationship may work better.

Most times a company will embrace the “centre of expertise” concept, just to have highly specialised personnel work on the new technology and provide support for the existing systems. When considering how outsourcing can help you grow, don’t limit yourself to looking at the cost of hiring outside contractors versus handling a task with your current staff. Whether through expanding production, marketing your company more extensively, or disrupting the way your industry does business, outsourcing can provide an opportunity for you to innovate, grow, and rise above the competition. Outsourcing is the business practice of contracting with an outside party to take care of certain tasks instead of hiring new employees or assigning those tasks to existing staff. It’s a popular way for businesses to lower operational costs and streamline operations while still handling important functions.

Negotiating The Best Outsourcing Deal

For example, let’s say your company lands a large contract that will significantly increase the volume of purchasing in a short period of time. By outsourcing purchasing responsibilities, you free up personnel to focus on the contract itself. While the outsourcing industry is not quite as fickle as fashion, the prevailing wisdom about the best length for an outsourcing contract has changed over the years. When outsourcing first emerged as a viable option, long contracts — as many as 10 years in length — were the norm. As some of those initial deals lost their shine, clients and vendors moved to shorter contracts. Businesses often think about outsourcing purely in terms of cost savings, but outsourcing can do more than just lower expenses.

what is outsourcing management

They may also be a regular part of business operations, such as contracting with a cleaning firm rather than hiring janitors as employees. Finally, don’t take any steps toward transitioning the work to the outsourcer while in negotiations. An outsourcing contract is never a done deal until you sign on the dotted line, and if you begin moving the work to the outsourcer, you will be handing over more power over the negotiating process to them as well. Help can also be found within your organization, from within IT and the business. There is often a reluctance to do this because any hint of an impending outsourcing decision can send shivers throughout IT and the larger organization. But anecdotal evidence suggests that bringing people into the decision-making process earlier rather than later makes for better choices and also creates an openness around the process that goes a long way toward allaying fears.

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Some consultants may have a vested interested in getting you to pursue outsourcing rather than helping you figure out if outsourcing is a good option for your business. Often, a customer can charge a vendor a penalty fee if certain SLAs are not met. Used judiciously, that’s an effective way to keep a vendor on the straight and narrow.

  • Traditionally, IT organizations have spent six months to a year or more on the IT outsourcing transaction process, finding the right providers and negotiating a suitable contract.
  • Help can also be found within your organization, from within IT and the business.
  • Organisations which are exposed to global forces of demand, supply and increased international competition, are not any more protected by local business environment.
  • In contract negotiations, CIOs need to spell out that vendors should cooperate and refrain from blaming each other, or else risk losing the job.
  • An outsourcing company can often bring better management skills to your company than what would otherwise be available without significant restructuring.
  • CIOs need to find qualified staff with financial as well as technical skills to help run a project management office or some other body that can manage the outsourcing portfolio.

Generally speaking, overly long contracts should be avoided unless there is a great deal of flexibility built into the contract. Demand for digital transformation–related technologies specifically is driving interest in certain metropolitan areas. IT professionals to gird against potential increased restrictions on the H-1B visas they use to bring offshore workers to the U.S. to work on client sites. In the periods of high employee turnover operations of business may become uncertain. In such condition of uncertainty, outsourcing can provide a significant level of continuity of operations of the company. Through outsourcing, companies can transfer a significant portion of its work to third parties.

Outsourcing, through doing back office activities, helps the companies to refocus on the main business activities. Operations or activities whose costs are going out of control must to be considered for outsourcing. Departments which are running in uncontrolled and poorly managed condition over time are motivators for outsourcing.

Maintain Lower Costs

But as IT services — and, increasingly, as-a-service — deals have gotten shorter, that lengthy process may no longer make sense. While the selection process still demands diligence, there are some more iterative transaction processes that can reduce the time required to procure IT services. To make an informed decision, articulate what you want from the outsourcing relationship to extract the most important criteria you seek in a service provider. It’s important to figure this out before soliciting any outsourcers, as they will undoubtedly come in with their own ideas of what’s best for your organization, based largely on their own capabilities and strengths. Outsourcing contracts are structured for very long periods of time in a world of fast-moving technical and business change.

what is outsourcing management

Ten years is the normal length of a contract in an environment in which computer chip performance is shifting by 20 percent to 30 percent per year. In recent decades, outsourcing has emerged as a major trend in human resources all over the world. It has become the practice in where certain job functions are sent outside of a company instead of performing them in house. Day by day, more and more companies are focusing on outsourcing as an easy way to grow as well as reducing overhead and payroll costs. Departments that might have evolved over time into uncontrolled and poorly managed areas are good candidates.

Outsourcing pursued as a “quick fix” cost-cutting maneuver rather than an investment designed to enhance capabilities, expand globally, increase agility and profitability, or bolster competitive advantage is more likely to disappoint. Some industry experts point out that increased automation and robotic capabilities may actually eliminate more IT jobs than offshore outsourcing. needs to review the security of your connection before proceeding. From sole proprietors to large corporations, businesses of every size can useoutsourcing to help their company grow and expand while keeping expenses as low as possible. But start by realizing that no one outsourcer is going to be an exact fit for your needs. Our purpose in this article is to provide a concrete framework to help senior managers think about IT out-sourcing and focus on how to manage the alliance to ensure its success.

It Outsourcing Models And Pricing

As your business grows, outsourcing can be a way to promote innovation, disrupt your industry, and access new skill sets that reposition your company in the market. Outsourcing allows operations or departments that have cyclical demands to bring in additional resources when they’re necessary. The outsourcing company can then be released when things slow down again, maintaining a company’s flexibility. Outsourced tasks may be occasional, such as hiring an accountant to do your taxes once a year.

Outsourcing Services

That tension must be managed closely to ensure a successful outcome for both client and vendor. The term outsourcing is often used interchangeably — and incorrectly — with offshoring, usually by those in a heated debate. But offshoring is a subset of outsourcing wherein a company outsources services to a third party in a country other than the one in which the client company is based, typically to take advantage of lower labor costs.

The Outsourcing Transition

Businesses that have seasonal or cyclical demands to increase activities can think of outsourcing. Outsourcing allows companies to gather innovative business ideas and planning from widely diversified sources. In today’s cloud-enabled world, however, IT outsourcing can also include relationships with providers of software-, infrastructure-, and platforms-as-a-service. In fact, cloud services account for as much as one third of the outsourcing market, a share that is destined to grow. These services are increasingly offered not only by traditional outsourcing providers but by global and niche software vendors or even industrial companies offering technology-enabled services.

Successful outsourcing is about relationships as much as it is actual IT services or transactions. As a result, outsourcing governance is the single most important factor in determining the success of an outsourcing deal. Without it, carefully negotiated and documented rights in an outsourcing contract run the risk of not being enforced, and the relationship that develops may look nothing like what you envisioned. Many organizations bring in an outside sourcing consultant or adviser to help figure out requirements and priorities. While third-party expertise can certainly help, it’s important to research the adviser well.

Focus On Core Activities

But no CIO wants to be in the business of penalty-charging and collecting. Bad service from an outsourcing vendor, even at a deep discount, is still bad service, and can lead to greater problems. It’s best to expend energy on finding out why the SLAs are being missed in the first place and working to remedy the situation. Strong SLAs alone will not guarantee success when outsourcing IT services. A service level agreement is a contract between an IT services provider and a customer that specifies, usually in measurable terms, what services the vendor will furnish. Service levels are determined at the beginning of any outsourcing relationship and are used to measure and monitor a supplier’s performance.

For instance, your HR manager is on extended medical leave and her administrative assistant is leaving for a new job. Outsourcing the human resource function reduces risk and allows the company to keep operating while the manager is unavailable. It also gives you time to hire a new assistant without rushing the decision because the office is understaffed. Theoverheadcosts of some operations are extremely high, but you might want to offer them to satisfy customers, expand your business model, or compete in the marketplace. Outsourcing can be a good option if the cost of expanding to handle those operations yourself is too expensive, would take too long to effect, or would create inefficiencies in your business model.

Outsourcing has brought a significant change in the organisational structure. Many organisations prefer works to be done through outsourcing at a lower cost. Such organisation reduces the size of its formal structure and focus on outsourcing. In the past, it was considered that an organisation must have some physical structures.

Some common areas of this business are marketing services, website creating, analysis and etc. The success or failure of an outsourcing deal is unknown on the day the contract is inked. Getting the contract right is necessary, but not sufficient for a good outcome. One study found that customers said at least 15 percent of their total outsourcing contract value is at stake when it comes to getting vendor management right. A highly collaborative relationship based on effective contract management and trust can add value to an outsourcing relationship.

In addition, outsourcing can bring improved management skills for organisations. When a company outsources HR activities such as Training and Development, Payroll and Recruitment services, there is a significant level of risk if confidential company information is exposed to a third-party. If wrong party is selected for work, it may result a low quality output or inappropriate timing. It is easier to control quality inside the organisation rather than with an outsourced party.

The customer must have mature governance and vendor management practices in place. In contract negotiations, CIOs need to spell out that vendors should cooperate and refrain from blaming each other, or else risk losing the job. CIOs need to find qualified staff with financial as well as technical skills to help run a project management office or some other body that can manage the outsourcing portfolio. Outsourcing is difficult to implement, and the failure rate of outsourcing relationships remains high. At the heart of the problem is the inherent conflict of interest in any outsourcing arrangement. The client seeks better service, often at lower costs, than it would get doing the work itself.

In some cases, global companies set up their own captive offshore IT service centers to to reduce costs or access skills that may not result in net job loss but will shift jobs to overseas locations. Outsourcing can bring big benefits to your business, but there are significant risks and challenges when negotiating and managing outsourcing relationships. Here, we break down everything you need to know to ensure your IT outsourcing initiatives succeed. In the simplest terms outsourcing can be described as farming out of different services to third parties. Periods of high employee turnover can add uncertainty and inconsistency to a business. Outsourcing provides a level of continuity to the company while reducing the risk that a substandard level of operation could bring, even over a short period of time.