Outsourcing

Transcription

1 Outsourcing The strategic use of resources to perform activities traditionally handled by internal staff and their resources. It is a management by witch an organization outsources major non core functions to specialised, efficient service providers. 1

2 Development of outsourcing and key driving forces of development Outsourcing has developed as a reaction to the overdiversification that took place in the 1970s and 1980s Key driving forces of outsourcing development: - dinamic business environment - fast and unexpected changes - development of tehnology The goals of outsourcing Control and cut expenses To focus on core activities of the company To get the best competences To alocate the internal resources To benefit more quickly from reengeneering To control the functions of the company that is hard to control To decrease the risk To get some innovative ideas 2

3 Reasons for Outsourcing Traditional role - reaction to problem Reduction and control of costs Avoid large capital investment costs Insufficient resources available Modern role business strategy Allows company to focus on their core competencies Creating value for the organization and its customers Building partnerships Reasons for Outsourcing 3

4 Offshoring and Outsourcing Outsourcing: subcontracting business outside of the company Offshoring: moving business from one country to another Offshore outsourcing: transferring business outside of the country, to another firm Most of the research pertaining to offshore outsourcing simply call it outsourcing Offshoring and Outsourcing Outsourcing refers to the transfer of business processes from inside an organization to outside an organization. The people who conduct the business processes change from internal employees to professionals outside the organization Offshoring refers to getting work done in a different country, usually to leverage cost advantages Offshore outsourcing refers to the cross-border transfer of business processes to a provider located outside a firm`s home country of operations and tipically in a location with greater available talent and lower cost 4

5 Offshoring and Outsourcing When offshoring occurs, a business moves all or some of its activities to another country Outsourcing, on the other hand, is the process of utilizing third party workers for traditionally in-house business tasks; this may take place either inside or outside the company's home country Both are typically done to save a business money Definition Risks and criticism Offshoring Offshoring means getting work done in a different country Offshoring is often criticized for transferring jobs to other countries. Other risks include geopolitical risk, language differences and poor communication Outsourcing Outsourcing refers to contracting work out to an external organization Risks of outsourcing include misaligned interests of clients and vendors, increased reliance on third parties, lack of inhouse knowledge of critical (though not necessarily core) business operations Benefits Benefits of offshoring are usually lower costs, better availability of skilled people, and getting work done faster through a global talent pool Usually companies outsource to take advantage of specialized skills, cost efficiencies and labor flexibility 5

6 Process of outsourcing implementation 1. Activation of outsourcing idea 2. Identifying the best outsourcer 3. Negotiating and contracting 4. Implementation 5. Managing the relations Activation stage Identification of need for action due to improvement of business activites Making of strategic analysis Identification of key competences 6

7 Outsourcer selection stage Determination of qualifications that company needs to satisfy Criteria for evaluation Evaluation of criteria Negotiating and contracting stage Proces of negotiating and contracting includes: range of services production services standards of performance management and control definiton of prices changes in business process terms for contract cancelation 7

8 Implementation stage Switch of intern units to an outsourcer Stage of transformation depends on the complexity of the units that is outsourced Comunication with empolyees about the importance and benefits gained by outsourcing Relationship development stage Defining the control methods for tracking the work of an outsourcer Defining the measures for the work of an outsourcer Project cooperation Innovation development cooperation 8

9 Outsourcing What Activities? Traditional Outsourced Services of Expertise throughout the 20 th Century: Accounting, Advertising, Auditing, Law, Management Consulting, Investment Banking, IT Services, Transaction Agency, Employee Recruitment 1970s Wave: Manufacturing: components 1 st then finished goods assembly 1990s the Modern Wave: BPO Business Process Outsourcing HR, Call Centre/HelpDesks, S/W programming, ERM/ EDD, ASP, Medical Diagnosis (xray) Contrast with Traditional InSourcing Vertical Integration of 19 th Century EX: Japanese Keiretsu Outsourced Activities 9

10 What business units are the most outsourced? What functions are best not to outsource? Strategic planning management Finance management Control of the supply Quality control and environmental issues control 10

11 Problems With Outsourcing Loss of Control Increased cash outflow Confidentiality and security Selection of supplier Too dependent on service provider Loss of staff or moral problems Time consuming Provider may not understand business environment Provider slow to react to changes in strategy Benefits of offshoring Reduced costs Different balance between labour and infrastructure costs Large pool of welleducated professionals Quality management Financial incentives offered by foreign governments Follow the sun operations 11

12 Offshoring risks Cultural issues Higher overheads Geopolitical concerns Risk to corporate reputation Poor IP protection Exchange rate fluctuation Unreliable power suppliers Salary inflation Loss of expertise Security concerns Data protection issues Legal issues Inadequate infrastructure Offshoring risks and countermeasures Geopolitical factors - choosing a supplier becomes more complex Risks Military conflict Terrorism Social unrest Countermeasures Spread operations over several locations Contingency plans Consider using a multinational service provider 12

13 Offshoring risks and countermeasures Loss of expertise Risks Unlike traditional outsourcing, staff do not transfer to the outsourcing service provider Skills cannot be brought back in-house when outsourcing contract ends Offshoring may detract new recruits Countermeasures Clarify future of in-house IT department Identify all business-related expertise and consider retaining in-house Contract management function Offshoring risks and countermeasures Putting your company s reputation at risk Risks Customer problems are inflated by media reports Shareholder concerns Impact on brand loyalty Conflict with corporate values Countermeasures Monitor customer feedback and complaints Act fast to prevent problems escalating Position offshoring in wider context of business strategy Incorporate in Corporate Social Responsibility plans and reports 13

14 Main problems of offshoring in Croatia Special Problems: Negative Consequences Qualified professionals are losing their jobs to offshore workers who will work for less Difficulty of monitoring child labor Difficulty of managing remote locations with those who understand the culture, and are in synch with corporate objectives 14

15 Special Problems: Negative Consequences Loss of incentive for college students to pursue IT careers as family members and friends lose jobs Loss of trust between employees and the employer as more jobs move offshore Due to new roles, competencies, and skills required when outsourcing, inefficiencies and disorganization result Special Problems: Positive Consequences Proven beneficial as far as cost, quality, and value of work delivered Improved service delivery and access to a greater number of highly qualified talents In-house organizations lack the assurance of quality standards that those with offshore operations have 15

16 Special Problems: Myths and Realities Myth: A job outsourced is as good as a job lost Reality: Outsourcing is a budget balancing act. Outsourcing does not call for job losses, but increased efficiency. This helps the firm to focus its resources on their most valuable aspects of business, namely producing and selling its products. The end result of this drive toward efficiency is evident to Americans in lower prices and higher standard of living. Foreign outsourcing goes hand in hand with higher wages, lower prices, higher profits, and enhanced competitiveness. Procurement outsourcing Procurement is not as easily outsourced as other functions procurement results tie directly into the cost of goods sold and the business's profit-and-loss statements Despite a substantial growth in outsourcing in the past several years, procurement outsourcing is less than 2 percent of all outsourcing activities 16

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18 Procurement outsourcing Outsourcing procurement is often undertaken by very large companies to save money Procurement requires a great deal of focus on cost saving, profit maximization and compliance Often good procurement strategies can be the difference between a profitable company and a failed business A preferred operating model involves outsourcing some transactional procurement operations as a first step, or combining end-to-end solutions for specific categories Outsourcing procurement benefits Cost reduction from head count, training, office space and computerization Market leverage allowing for better discounts Transaction cost per purchase are lowered by economies of scale Marketing knowledge of which suppliers are best for each product to be purchased Highly skilled staff that specialize in purchasing 18

19 Outsourcing procurement benefits Improved communication between purchasing experts and the company staff Better management information and purchasing analysis is available for people who understand the purchasing environment Globalization means that the same products are often required in different countries Negotiation by an expert in the field is often more effective and profitable Key problems that may arise from outsourcing: Continuity of service: there is a hand over time that needs to be managed so that products continue to be delivered during this period A reduction in control: by outsourcing you lose control over the day to day purchasing activities so you should ensure that you retain a reliable company and have a measurable and enforceable service level agreement 19

20 Key problems that may arise from outsourcing: Outsourcing management: you need to manage the outsourcing procurement on a continual basis and ensure compliance to your contracts Integration: you need to integrate your technology so that your accounts and warehousing systems are updated, but your staff needs to understand what is happening on a day to day basis 20