C’mon, you know you want to do it. It really works, and when it does it will make you feel really good. All the big kids are doing it. Just give it a try.
Outsourcing. Offshoring. Nearshoring. Managed Services. Shared Services.
Whatever you choose to call it, outsourcing has been a growing business trend since the 1990s. The outsourcing industry has helped launch the global economy by establishing professional services markets in far-off locations such as India, the Philippines and China, and has opened the doors to emerging markets in Latin America, Eastern Europe, the Caribbean and Africa.
The opportunities that are available from outsourcing to these markets are well known in the business community: lower costs, improved processing efficiencies, a greater focus on strategic activities. Until recently, these advantages have only been available to larger, global enterprises, and many of them have been realizing the benefits. Go down the list of the Fortune 500 and you will see that most of these companies utilize outsourcing, in one form or another, as part of their business-operating model. In a recent survey published by Duke University’s Fuqua School of Business, “Global Sourcing of Business Services-2015,” 80% of large companies (defined as those with more than 20,000 employees) use outsourcing in one form or another.
Recently, the outsourcing service sector has become more accessible to smaller businesses. Driven by technology innovations and great improvements in telecommunications infrastructure in offshore regions, as well as economic pressures to reduce cost and operate more efficiently, the SMB (“small and mid-market business) market has begun to look at outsourcing to support its business model. The Duke University survey reported that 58% of midsized companies (500-20,000 employees) and 43% of small companies (less than 500 employees) use outsourcing services.
Here are the four key questions business executives should be asking themselves when they are considering outsourcing some of their business operations:
- “Is Outsourcing Right For My Business?”
- “What Functions Should I Consider Outsourcing?”
- “Which Location Should I Outsource To?”
- “How Do I Get Started?”
Let’s start by defining the differences between the two prevalent offshore service delivery models: outsourcing and shared services.
Outsourcing involves an external third party providing services to organizations that were previously performed by internal staff. It is now common for many back office functions that are considered “transactional” to be provided by third-party outsourcers, sometimes in domestic locations, also known as “Onshoring,” but more typically done offshore, in locations ranging from Asia to Latin America.
Some niche services, such as legal and medical transcription, computer-aided design and engineering, web and graphics design and even movie production special effects, are now being provided by outsourcers, as well.
Shared Services, also known as “captive” service centers, differ from outsourcing in that these services are being provided to business unit(s) by a separate entity, which remains a part of the overall organization. Generally, multiple business units receive these services from the shared services center, which provides a consolidated operation that standardizes the business processes, systems and controls across all of these entities.
In both cases, transactional activities are the staple of these service delivery models, however, higher value activities, such as treasury, statutory reporting, financial planning and reporting, internal audit, and business analytics are now being provided through these service offerings.
The goal of both shared services and outsourcing is to reduce operating cost through labor arbitrage and/or greater economies of scale amongst the labor force. Other benefits that are being realized include cost-effective access to specialized skills and operational redundancy/business continuity. In addition, businesses are realizing improvements in operational performance through access to tools provided by third-party outsourcers that drive automation and process standardization. With outsourcing, due to the nature of the third-party relationship, companies are also able to establish a higher level of operational visibility and accountability through contractual service levels and performance metrics.
View part two of this five-part series to learn more about the “Game Plan for First-Time Outsourcers.”