Introduction to Outsourcing
Many companies have taken outsourcing a stage further. The majority of time-consuming tasks involved in developing and managing services can be outsourced leaving the company itself with time to remain focused on your day-to-day activities.
This type of client/supplier relationship has remained largely unchanged for 50 years and can be traced back to the 19th century. The relationships are often strained and the contracts are often overly simplistic.
However, other industries have embraced the concept of outsourcing and have created new variations in outsourcing contracts which seek to mitigate and otherwise address the most common problems and client complaints.
Furthermore, changes in the market over the last ten years have exposed many of the old fashioned relationships as being costly and ineffective. The increasing requirements of the buying sector, global management contracts and increasing financial requirements, both buyer and client imposed, have put traditional outsourcing agreements under strain.
There are a lot of reasons to outsource - the business case is an essential part of the success of the outsourcing business. However, over time two main categories have emerged: tactical outsourcing and strategic outsourcing.
A business embarks on a tactical (or reactive) outsourcing contract if it has a problem that needs a solution. For example, let us assume that the continued cost (both financially and in terms of resource) of Mechanical Engineering is proving a strain on a business. What is the best way to solve this problem? By carrying out tactical outsourcing.
On the other hand, a strategic (or proactive) outsourcing contract aligns an organization's long term aspirations to the services that the provider supplies. For example, Company X wishes to produce a simple machine in the short term, but wishes to be fully capable of producing complex special machines, or assembly lines within ten years. The outsourcing of its technical functions, such as program management, controls engineering or mechanical engineering is strategic.
What is outsourcing?
The key difference between a traditional supplier relationship and outsourcing is that in a traditional supplier relationship, new services are being procured. In an outsourcing contract, a customer will (to a lesser or greater extent) already be carrying out the services in-house. The customer will transfer the function to the outsource provider. So, an organization of three people who started the company a month ago and wish to 'outsource' its Mechanical Engineering or Program Management will, strictly speaking, be entering a supplier contract, not an outsourcing arrangement.
Any company that has invested time in building up a team to run accounting, HR, program management or IT, and now requires a third party to assist in those services - will probably be outsourcing when it tenders a contract.
What to outsource?
As outsourcing has proliferated through different industries, the courage to outsource more and more functions is increasing.
For example, much of the airline industry has outsourced all non-"airline" functions: its technology, catering, baggage handling, engineering, maintenance, networks and so on. The airline concentrates on flying planes.
Typical areas for a manufacturing company to outsource would be mechanical engineering and program management including the machine design, leaving the manufacturing company to "key" decisions and focus on day to day activities.
Rarely, even core functions (as opposed to just the non-core functions) of an industry are being outsourced, leaving a skeleton staff to manage the relationship.
It is essential to understand the interplay between the functions in a company and how the processes within those functions interact with other parts of the organization. The first task will therefore be a functional review to identify both what is core/non-core, and also which processes can be made more efficient through outsourcing.
Essential: Good planning and advice!
So far, so good. However, not all outsourcings work! An unwary customer is often hostage to the bargaining strength of an experienced provider who will tell its customers to rely on "the spirit of the relationship" in order to agree any issues which may arise.
With good planning and advice, the chances of failure can be significantly mitigated. The key areas to examine, in the first instance are:
What are the perceived benefits of outsourcing the function?
What are we outsourcing? This question sounds obvious, but the extent to which a function is outsourced is often overlooked.
Why are we outsourcing - for strategic, tactical, or other reasons?
To whom are we outsourcing?
If our in-house function has no agreed service levels, how will we set and introduce appropriate measures?
What are the long-term plans for our business and how will this affect the scope of the services?
Recently, a new question needs to be added to the list. Where is the organization to outsource?
Overseas outsourcing or "off-shoring" involves the transfer of a function to a third party in a country that can take advantage of a cheap and skilled workforce and/or significant tax breaks e.g. India and China.
The press regularly reports on spectacular successes and failings in the outsourcing marketplace. The fact remains that in most successful outsourcing, an organization looking to outsource will have assessed the business case in detail.
The manufacturing market has a clear opportunity for sharpening its approach to outsourcing and we can expect to see more effective use of outsourcing in the next few years.
Will you wait too long before reviewing your own business and see your competitors walk away with a greater share of your business?
Types of outsourcing
There are many different types of outsourcing, and new types being "invented" by the month. We set out a few of the more relevant forms, below.
Transformational Outsourcing
Transformational outsourcing can be defined as the transfer of an existing
function to a third party provider, who in turn transforms such function further
for the benefit of the client. Commentators have alternatively defined this as
"the transfer of a function, plus consultancy".
A cynic might ask, "Surely, one of the benefits of outsourcing is that the
outsourcing providers will improve the function to be outsourced?" What is so
different about transformational outsourcing?
It is all a question of degree. Most people embarking on an outsourcing are not
expecting a radical overhaul of their business process, just improvements to
their existing process. This is one of the most exciting areas for the
manufacturing industry.
ASP
The term 'ASP' stands for application service provision. ASP can be seen as a
subset of technology outsourcing for, predominantly, the SME market. ASP, in
theory, allows small and medium-sized businesses access to technology
applications that were only previously available to large corporations.
A few years ago, the markets looked forward to exponential growth in ASP.
However, ASP has simply not taken off - for a number of reasons. Top of the list
is the acknowledgement by some suppliers of the SME market, and the specific,
off the- shelf solutions tailored to fit such market. However, ASP is something
that could be successfully embraced in the manufacturing market, and should not
be written off. The majority of the manufacturing industry is comprised of
small to medium sized companies which would struggle under the weight of a large
engineering overhead. If, as an alternative, large scale engineering projects
can be contracted on an ASP basis and run by a separate company set up to do
just that, smaller businesses can benefit from the integration that these
companies can bring to a business.
BPO
'BPO' stands for business process outsourcing. Typical business processes to be
outsourced include the payroll, accounts and human resources functions. I
Supply Chain Outsourcing
Many organizations rely on a large number of logistics and other supply chain
providers to provide a number of functions, including manufacturing, sourcing,
delivery handling and distribution, payment and warehousing functions. In a
supply chain outsourcing a company outsourcers several or all the supply chain
functions to one provider, who either provides all the services itself, or
primes the arrangement whilst relying on a number of trusted subcontractors.
Advanced Services And Program Management SM is a service by which many types of outsourcing have been combined. Program management and mechanical engineering can be designed to meet a companies outsourcing needs. A complete solution that is designed to work with a companies product, manufacturing or process engineering personnel, in order to aid in or coordinate the concurrent development and/or improvement of a product, process or manufacturing challenge. This allows a company to remain focused on their core competencies and increase project accountability for delivering projects on time and within budget.
Click here to learn more about A. S. A. P. Management SM
Overseas outsourcing
The national newspapers have been full of stories about companies outsourcing all manner of work to India and other countries. At present, it is large organizations who are taking advantage of this type of outsourcing. They are better able to manage the risk and have the capacity to change quickly if the arrangements do not work out. However, it has not been proven that the success of these initial ventures led to these companies benefiting from cost reductions and a better quality of service and many other companies in the industry begun to investigate how to take advantage as they quickly see their competitive advantage increase.
For More Information Contact:
CompanyLongName
CompanyAddress
Tel: CompanyPhone
FAX: CompanyFAX
Internet:
CompanyEmail