This is the first part of a short guide on outsourcing. If you have landed on this article via a Google/Bing search then I encourage you to take a look at this article first and then come back to this one.
Outsourcing Overview
The term outsourcing has traditionally been applied to the transferring of business functions or processes (e.g., customer support, IT, accounting) to other, often foreign companies.
For example, when you call your Internet provider to solve a technical problem you are likely to talk to a technician in Bangalore, India, or Bucharest, Romania.
Outsourcing is now being applied to contracting significant chunks of project work.
For example, HP and Dell work closely with hard drive manufacturers to develop next-generation laptops. Toyota and Daimler Chrysler collaborate with suppliers to develop new automobile platforms.
Outsourcing and the film industry.
During the golden era of Hollywood, huge, vertically integrated corporations made movies studios, such as MGM, Warner Brothers, and 20th Century—Fox, own large movie lots and employ thousands of full-time specialists—set designers, camera people, film editors, and directors. Star actors like Humphrey Bogart and Marilyn Monroe were signed to exclusive studio contracts for a set number of films (e.g., six films over three years).
Today, most movies are made by a collection of individuals and small companies who come together to make films project-by-project. This structure allows each project to be staffed with the talent most suited to its demands rather than choosing from only those people the studio employs.
Outsourcing and product development.
This same approach is being applied to the creation of new products and services. What follows below depicts a situation in which a zero-gravity reclining chair is being developed.
The genesis for the chair comes from a mechanical engineer who developed the idea in her garage. The inventor negotiates a contract with a catalog firm to develop and manufacture the chair. The catalog company in turn creates a project team of manufacturers, suppliers, and marketing firms to create the new chair.
Each participant adds requisite expertise to the project.
- The catalog firm brings its brand name and distribution channels to the project.
- Tool and die firms provide customized parts which are delivered to a manufacturing firm that will produce the chair.
- Marketing firms refine the design, develop packaging, and test market potential names.
- A project manager is assigned by the catalog firm to work with the inventor and the other parties to complete the project.
Many outsourced projects operate in a virtual environment in which people are linked by computers, faxes, computer-aided design systems, and video teleconferencing. They rarely, if ever, see one another face-to-face.
On other projects, participants from different organizations work closely together, for example, at a construction site or in shared office space. In either case, people come and go as services are needed, much as in a matrix structure, but they are not formal members of one organization, just technical experts who form a temporary alliance with an organization, fulfill their contractual obligations, and then move on to the next project.
Outsourcing advantages:
1. Cost reduction. Companies can secure competitive prices for contracted services, especially if the work can be outsourced offshore. Furthermore, overhead costs are dramatically cut since the company no longer has to internally maintain the contracted services.
2. Faster project completion. Not only can work be done more cheaply, but it can also be done faster. Competitive pricing means more resources for the dollar.
For example, you can hire three Indian software engineers for the price of one American software engineer.
Furthermore, outsourcing can provide access to equipment that can accelerate completion of project tasks.
For example, by contracting a backhoe operator you are able to accomplish in four hours what it would take a landscaping crew four days to complete.
3. High level of expertise. A high level of expertise and technology can be brought to bear on the project. A company no longer has to keep up with technological advances. Instead, it can focus on developing its core competencies and hire firms with the know-how to work on relevant segments of the project.
4. Flexibility. Organizations are no longer constrained by their own resources but can pursue a wide range of projects by combining their resources with talents of other companies. Small companies can instantly go global by working with foreign partners.
Outsourcing disadvantages:
1. Coordination breakdowns. Coordination of professionals from different organizations can be challenging, especially if the project work requires close collaboration and mutual adjustment. Breakdowns are exacerbated by physical separation with people working in different buildings, different cities, if not different countries.
2. Loss of control. There is potential loss of control over the project. The core team depends on other organizations that they have no direct authority over. While long-term survival of participating organizations depends on performance, a project may falter when one partner fails to deliver.
3. Conflict. Projects are more prone to interpersonal conflict since the different participants do not share the same values, priorities, and culture. Trust, which is essential to project success, can be difficult to forge when interactions are limited and people come from different organizations.
4. Security issues. Depending on the nature of the project, trade and business secrets may be revealed. This can be problematic if the contractor also works for your competitor. Confidentiality is another concern and companies have to be very careful when outsourcing processes like payroll, medical transcriptions, and insurance information.
Conclusion
Few people disagree that reducing costs is the primary motive behind outsourcing project work. However, recent industry polls indicate a shift away from simply nailing the best low-cost deal to securing services from companies that provide the best value in terms of both cost and performance.
Performance is not limited to simply the quality of specific work but also ability to collaborate and work together. Companies are doing their homework to determine “Can we work with these people?”
You can find the next piece of the puzzle here. Please let us know your views on the subject and let’s spark a discussion.
