Define outsourcing and Explain its advantages.
Ans. Outsourcing is contracting with another company or person to do a particular function. Almost every organisation outsourcers in some way. Typically, the function being outsourced is considered non-core to the business. An insurance company, for example, might outsource its janitorial and landscaping operations to firms that specialize in those types of work since they are not related to insurance or strategic to the business. The outside firms that are providing the outsourcing services are third- party providers, or as they are more commonly called, service providers.
Advantages of Outsourcing :
1. Focus On Core Activities : In rapid growth periods, the back-office operations of a company tax will expand also. This expansion may start to consume resources (human and financial) at the expense of the core activities that have made your c(x company successful. Outsourcing those activities will allow refocusing on those business activities that are important without sacrificing quality or service in the back-office.
Example : A company lands a large contract that will significantly inc0( increase the volume of purchasing in a very short period of time; Outsource purchasing.
2. Cost and Efficiency Savings : Back-office functions that are complicated in nature, but the size of your company is preventing you from performing it at a consistent and reasonable cost, is another advantage of outsourcing.
Example : A small doctor’s office that wants to accept a variety of insurance plans. One part-time person could not keep up with all the different providers and rules. Outsource to a firm specializing in medical billing.
3. Reduced Overhead : Overhead costs of performing a particular back-office function are extremely high. Consider outsourcing those functions which can be moved easily.
Example : Growth has resulted in an increased need for office space. The current location is very expensive and there is no room to expand Outsource some simple operations in order to reduce the need for office space. For example, outbound telemarketing or data entry.
4. Operational Control: Operations whose costs are running out of control must be considered for outsourcing. Departments that may have evolved over time into uncontrolled and poorly managed areas are prime motivators for outsourcing. In addition, an outsourcing company can bring better management skills to your company than what would otherwise be available.
Example : An information technology department that has too many projects, not enough people and a budget that far exceeds their S ‘contribution to the organization. A contracted outsourcing agreement will force management to prioritize their requests and bring control back to that area.
5. Staffing Flexibility : Outsourcing will allow operations that have seasonal or cyclical demands to bring in additional resources when you need them and release them when you’re done.
Example : An accounting department that is short-handed during tax season and auditing periods. Outsourcing these functions can a provide the additional resources for a fixed period of time at a consistent cost.
6. Continuity & Risk Management : Periods of high employee turnover will add uncertainty and inconsistency to the operations. Outsourcing will provided a level of Continuity to the company while reducing the risk that a substandard level of operation would bring to the company.
Example : The human resource manager is on an extended medical leave and the two administrative assistants leave for new jobs in a very short period of time. Outsourcing the human resource function would reduce the risk and allow the company to keep operating.