Factors Influencing the Outsourcing Decision

Offshore Outsourcing is viewed as a key tool to reduce costs. The basic advantages are the reduction in project timelines and savings on account of lower labor costs. There are some new challenges associated with the outsourcing that face a company when embarking on this process. Additional costs on vendor selection, legal costs, transition costs are sure to be incurred. Therefore, in spite of the obvious savings that can be realized, not many outsourcing vendors have been able to establish their ability to provide positive ROI to their clients, especially so in complex projects.

Any business has to conduct a thorough analysis of its vision, strategy and goals before deciding to outsource any part of their activities. Some key driving factors in this decision to outsource are:

Absence of specialists or experts: In case of many companies this is the sole driver that forces them to outsource. Complex process oriented projects demand expertise that may not be present in a company. At the same time, the requirement may not be full-time. Hence a via media solution is to get the job outsourced. The Outsourcing Institute has rightly said: "Outsourcing is a clever alternative to hiring".

Irregular demand for personnel: Large projects comprise of many smaller parts that need specialist intervention. But this need is intermittent and the company does not see value in hiring a full time (read costly) specialist. For example, a project that will get completed in a year or two hardly requires a full time person on the rolls of the company. It is wiser to outsource that part of the project to an offshore vendor and accrue gains to the company by saving the permanent cost on an employee.

High risk factor: Usually companies involved in high risk industries prefer to insure their risk by handing over the job to an offshore vendor who has advanced expertise in the subject. However, it is unreasonable to shift all the responsibility to the outsourcing partner because that takes away the "ownership" of the project from the company senior staff. Hiring experienced specialists who have the necessary hands on experience is a viable alternative in the long term.

Emphasis on perfect processes: The key strength of the vendors who take up the outsourcing projects is their ability to standardize their internal processes. The evolution of chaotic and ad hoc processes to mature, reliable software is a classic example of this perfection of management process. In many a case, this has a positive rub off on the client organization as they can absorb some of the standardized best practices from their outsourcing vendors.

Savings in management time: Time is literally money when it you consider the management's involvement in routine, secondary work in an organization. The management can concentrate on their key focus areas that demand intelligent, path breaking ideas and give their attention to top priority processes by outsourcing the mundane, repetitive activity to outside vendors.

Achieving and maintaining objectivity: Over time, the workers of a company become inert and impervious to new ideas and thoughts. They may cling to their age old beliefs saying "this is the way things are done here". And hence are not able to think up new solutions to get optimum results. It is a well known fact that old knowledge stops acquisition of new knowledge. Therefore, new ideas can be infused into the company by seeking the help of outside, impassionate experts who can suggest the right solutions keeping only the business needs in mind. This avoids playing the corporate politics by the incumbents within the company and is the true advantage of outsourcing.

It is important for the company to list out all reasons for the decision to outsource and also rank them in order of priority. All concerned subject matter experts within the company should be consulted, their requirements noted and a coordinated plan for outsourcing should be developed based on these discussions. If this is not done, wrong vendor might get selected or worse wrong processes may be outsourced resulting in loss of valuable time and money for the company.

While there could be any number of reasons for outsourcing, the main ones can be listed as:

1.) Achieving economies of production
2.) Developing the technological advances and manufacturing processes.
3.) Improving the customer service delivery processes
4.) Focusing on and improving core competency areas
5.) Outsourcing due to lack of trained, qualified manpower.

One must realize that outsourcing is not the panacea to all the problems ailing a company. A company cannot wish away its problems by outsourcing them. Any internal problem has to be studied with utmost care and concern. The aim of the management should be to identify the root cause of the problems and not treat the symptoms through outsourcing. If the causes are more deeply rooted with more historic background it will be unwise to expect an outsourcing vendor to solve them. Therefore, root cause analysis has to be done thoroughly and then option of outsourcing considered keeping in mind the long term strategic objectives of the company.