Top 10 Reasons Companies Outsource
1. Reduce and control operating costs 2. Improve company focus 3. Gain access to world-class capabilities 4. Free internal resources for other purposes 5. Resources are not available internally 6. Accelerate reengineering benefits 7. Function difficult to manage/out of control 8. Make capital funds available 9. Share risks 10. Cash infusion Source: Survey of Current and Potential Outsourcing End-Users the Outsourcing Institute Membership, 1998
Lets briefly examine each one of these benefits and highlight the unique benefits to middle market companies.
Reduce and Control Operating Costs: Outsourcing in general and offshore outsourcing in particular, can be a powerful way to reduce administrative and production costs. By leveraging an outsourcing company's size, specialization and lower wage rates, small and mid-sized companies can drive down costs in their non-core business functions.
Improve Company Focus: By concentrating resources on core businesses, a company will become more efficient, drive costs further down, provide better service and expand its market share.
Gain Access to World-Class Capabilities: Outsourcing organizations take non-core administrative functions and make them their core businesses. They are experts in such business processes as Human Resources, Sales, Marketing, Finance, Accounting, Customer Service, Procurement, Business Administration and IT infrastructure, eCommerce, Data Processing, Network Management, Telecommunications, Data Security and Software Development. A well funded outsourcing company will invest heavily in people, technology and process engineering to provide state of the art services to their clients. This level of investment and commitment is beyond the abilities of most middle market companies.
Free Internal Resources for Other Purposes: Outsourcing frees key management from day to day routine and permits them to focus on priorities. Staff utilizes more of their skills; they have more interesting work and overall productivity increases. Boredom is the biggest enemy of productivity.
Resources Are Not Available Internally: In 2005, Bill Gates complained about Microsoft's difficulties in finding skilled programmers and opened Microsoft India. Finding qualified skilled workers is also a problem for small and mid-sized companies. Outsourcing permits a company to rapidly field an expert team and implement financial, marketing, manufacturing and distribution programs.
Accelerate Reengineering Benefits: Sometimes an executive needs to make a major change to save an organization and the staff does not have the skills or the interest to execute a plan in a timely manner. Outsourcing offers immediate access to qualified staff that may be more experienced and receptive to change.
Function Difficult to Manage/Out Of Control: Executives often seek to reduce excessive costs for IT, legal, marketing, customer service and HR. The costs can be measured in hard dollars and the time that these non-core businesses take to manage which can take focus away from the core business. Before a non core business becomes a bottleneck to growth, it may make sense to scale back and outsource.
Make Capital Funds Available: When properly implemented and executed, outsourcing improves cash flow in four ways: * Outsourcing, especially offshore outsourcing, is cheaper than running the operation internally. * By focusing more resources on the core business it becomes more efficient and profitable. * Capital expenditures and fixed costs are lowered and are transformed to variable costs driving up operating margins and lowering break even points. * Because Outsourcing increases the value of a business, the capital markets place a higher multiple on future earnings.
Share Risks: A well thought out outsourcing partnership will provide for the outsourcing company to adopt new technology, methods and productivity increases. Small and mid-sized companies can develop a partnership with a better founded provider who shares the risk of innovation.
Cash Infusion: Some outsourcing companies will purchase staff and infrastructure for cash in exchange for a long term outsourcing commitment ranging from 7 to 10 years.
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