The role of outsourcing in business

Outsourcing is subcontracting a part of the process of a business to a third party company. This process could be in the form of market research, human resources, information technology, web design and development, real estate management, product design, customer service, engineering, accounting, product design, manufacturing etc. It involves transferring management or everyday activities of a business function to an external service provider.

A business may decide to outsource a part of its business process in order to make better use of its factors of production such as land, labor, capital, resources and information technology, conserve energy by taking advantage of the competencies of other businesses, lower cost, and make more efficient use of its time and energy.

There are different types of outsourcing

• Multisourcing, which enables different parts of a clients business, be sourced from different contractors. This is used for large outsourcing agreements such as in IT.
• Offshoring is transferring an organizations function to another business in another country. This is possible as a result of increasing demand for globalization. A good example is the increasing presence of Indian companies in America and the United Kingdom where the major process outsourced is accounting in order to calculate tax returns across seas for people in America.

The process of outsourcing starts with the suppliers presenting their proposals often through a bidding process to the client who wants to have its business process outsourced. The client deliberates on the processes they get from different suppliers and pick the one that has the best offer. This process of deliberation could involve interviewing the supplier. After the best offer is selected, the client and supplier go into negotiation where the proposals are converted to contractual agreement. The contract is finalized when both parties reach an agreement and this agreement is a legally binding document between both parties.

After the agreement has been reached, the transitions stage begins and this involves transfer of staff between the two companies and assumption of duties. Transformation is a set of projects that precede the main agreement while on-going service delivery is the execution of the contract.

In some contracts, benchmarking is introduced. Benchmarking involves renegotiation of the amount paid to the supplier. In this situation, a third party benchmarking company is called upon to compare the amount being paid to the supplier against current market prices and based on the agreement between the parties involved the price can be adjusted. The contract can either be renewed or terminated based on the needs of both parties.

Advantages of outsourcing include improved quality, access to talent, risk management, capacity management and operational expertise. However, it is not in all cases that outsourcing is good as it could also lead to reduced quality also known as Quality Fade, and quality risk which is the propensity for a service to be defective as a result of operational related issues.
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