Tuesday, December 05, 2006

Advantages of Outsourcing

This article points out some advantages of outsourcing, not just in a context of IT but in general context as well. Economist Simon Domberger published a study in 1998 called "The Contracting Organization" in which he published the results of his study of various organizations.

According to this study, the following are the benefits of Outsourcing:

If an organization focuses its attention on the activities at which it is very good and efficient, the value that it can add is maximized and it benefits from the economies of scale as well.

This can be seen in organizations like Nike or Nokia or iPod which focuses just on product design and outsourcers all its manufacturing activities elsewhere.

Market Discipline
When an organization contracts out the delivery, support or maintenance of its product of service, the focus shifts to right place i.e. Customers, Competitors and Markets. Thus it becomes better at spotting trends and responds to changing market conditions.

With outsourcing, the company starts to focus on outputs and not inputs and that leads to process innovations and reengineering to deliver maximum customer value.

As an organization works with a network of vendors it will find it easier to add or change vendor organization in response to market demand. This leads to huge financial benefits.

It is always more difficult jettisoning an in-house department than stop working with a vendor organization, when the demand for goods and services are no longer there. Similarly, in a short-run an organization cannot build up a department immediately for a new product or services.

Cost Savings
Of course, outsourcing delivers significant cost savings in comparison to delivering the product or service in-house. This is because of two main factors

1) Specialization in vendor's organization:
A specialized vendor passed on its benefits of engineering processes and economies to scale to your organization which results in cost savings

2) Low Cost labor:
An organization can benefits from access to low cost labors in other countries such as India.

More and more customer wants a single point to manage all their IT requirements and saying a "no" means loosing an account forever. In such a scenario outsourcing what you cannot do yourself is matter of survival.

Here is a summarized list of reasons why you might consider outsourcing as a strategy for your business:
1. You can get access to product or services that you cannot produce internally
2. You can get access to more skills / expertise
3. You use your in-house staff in more profitable ways
4. You can match any increase or decrease in demand more effectively
5. You can concentrate on your core, most crucial businesses
6. Allow and encourage more efficient work practices
7. Penalize non performance at contract level agreements
8. Reduce cost of operations
9. Improve cash flow in your organization
10. Improve the flexibility of your business

Thus, there is more to Outsourcing then just saving money. When you start looking at the bigger picture, you realize that outsourcing as a strategy is crucial to compete effectively in the future.

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