Provide and explain one example of a time when outsourcing would be appropriate. Please write
600 words on this.
Outsourcing if done correctly offers multiple benefits to the parent company. The nature and quantum
of benefit would be dependent on the organization who decides what to outsource, how much to
outsource and why outsource. Outsourcing need not be a global outsourcing, it can equally be
domestic outsourcing also. To elaborate this matter further, we take example of a large integrated
steel company with multiple processes which can be categorised as manufacturing/ sales services as
well as auxiliary services. These auxiliary services could be accounting services, information system
management, in plant logistics services, external inbound and outbound supply chain management,
scrap disposal services, plant maintenance services, utility management services etc. As it could be
seen all the above processes are important for running the company. However, core process of the
organization is steel manufacturing, sales processing and distribution. All others are there to serve the
core process and therefore may be termed as non-core processes or auxiliary process. However,
demarcation between core and non-core processes is not straight jacketed and is decided by company
management after giving lot of careful thoughts on this matter.
There are various key issues which are considered to decide whether to outsource or not. Keeping all
the processes under the banner of parent company requires that a lot of of employees are to be kept
under company’s roll which means high wage bills and maintenance of social security system viz
pension, medical benefits etc. Companies would always prefer to keep its wage and social security
bill as low as possible.
Also, keeping all the all the auxiliary services under the company requires additional capital
investment in non-core assets which a company prefers to avoid as it wants to conserve cash.
Third, the question arises whether the company has the necessary expertise and efficiency to carry
out the required job in a cost-effective manner. For example, a steel company runs a large volume of
information system both within plant as well as at its field locations. A global company e.g. IBM will
most likely have better expertise, efficiency to run these information systems for the steel company in
a more cost effective manner than the steel company itself. There have been instances when a large
Indian steel company had outsourced its full information management system to IBM and reaped
dividend out of such decisions.
Similar example can be cited for logistics operation. Companies do want to have control on its logistics
operation, but also realise that they do not have the required skilled resources to run such operation
on a sustained basis nor it can achieve the cost benefit and / or efficiency because it does not possess
the economies of scale which a third-party logistics provider would offer. Thus, many steel companies
have outsourced their important logistics operation. However as mentioned, to have sufficient control
on its supply chain many a time the parent company picks up a minority or majority stake in such
outsourced company to ensure that objective of the outsourced company is well aligned with the
objective of the parent company.
Another key benefit of outsourcing is the ease of setting high performance and delivery parameters.
When all the processes run within the company, they all run as “cost centres” which may not feel the
desperate need to adhere to set performance standard. However same business when outsourced is
treated as “revenue centres” for the outsourced company which puts more focus on the delivery
parameters since usually the relevant outsourcing contract links revenue to achievement of specific
performance standard. This helps the parent company to draw cost advantage through competitive
price terms agreed with the outsourced company as well as through improved process efficiency.