Outsourcing
A market trend, a ticket to globalization and a cost-cutting technique
Contents
Introduction

In today’s highly competitive world and profit-oriented markets, every
organization looks for methods and management techniques in order to gain
profits, increase market presence, or even eliminate competition.

OUTSOURCING has come up as an effective way of distribution of work, and
can now be seen in every business organization, large or small.

Definition and Meaning:

Even though Outsourcing has been around as long as the existence of work
specialization, but it is only recently that companies began employing specific
outsourcing models in order to carry out narrow functions.

Almost every organization outsources in some way. Typically, the function
being outsourced is considered non-core to the business. An insurance
company, for example, might outsource its janitorial and landscaping
operations to firms that specialize in those types of work since they are not
related to insurance or strategic to the business.
Outsourcing in simple words can be defined can as contracting with another
person or company to perform a specific function. The organization
performing the function are third party providers, or simply, service
providers.
Outsourcing: Details

Outsourcing can essentially be viewed as seeking assistance from a
group who might be better or specialized at a given task. But the
actual process involves much more details.

The process of outsourcing has many components attached to it, and
many details which can vary according to the region, organization,
business sector etc.

Now the variations and diverse types of outsourcing models can be covered through a
few basic questions. The basic questions regarding Outsourcing that will be answered in
the upcoming section:

WHAT do organizations outsource?

WHY do organizations outsource?

HOW do organizations carry out outsourcing?
THE WHAT

In today’s world, every organization is involved in outsourcing
and due to this the classification and types of outsourcing has
become very diverse.

After answering these questions there will be a detailed review
of the pros and cons of the process of outsourcing, along with
the case study of a few companies that have set outstanding
examples of outsourcing and offshoring.
Types of Outsourcing

There is a large variety of outsourced services, due to the
extensive use of outsourcing, but the following just
provides a broad classification describing the most
commonly used and major types of outsourcing contracts.
Business Process Outsourcing (BPO)

This is one of the most common types of outsourcing, in which
the organization contracts out a specific business process to a
third party service provider. The process may or may not be
core to the business.

Usually, BPO is implemented as a cost-saving measure for tasks
that a company requires but does not depend upon to maintain
their position in the marketplace. BPO is often divided into two
categories: back office outsourcing which includes internal
business functions such as billing or purchasing, and front office
outsourcing which includes customer-related services such as
marketing or tech support.

The large number of International call centers are a classic
example of BPO in which the companies outsource the process
of handling customer care and complaints.

The various kinds of business processes that can be outsourced
are:
•
HR
•
Legal
•
Engineering

Furthermore, a BPO that is contracted outside a company's own
country is sometimes called offshore outsourcing. BPO that is
contracted to a company's neighbouring country is sometimes
called nearshore outsourcing, and BPO that is contracted with
the company's own county is sometimes called onshore
outsourcing.
Information Technology Outsourcing (ITO)

ITO is the process by which a company outsources its computer
related work, such as programming to a third party service
provider. It is also called as IT Enabled Services (ITES). Of all
the types of outsourcing, ITO is by far the largest and the most
common one.

One might as well classify ITO as a part of BPO, but since it has
led to the emergence of a new section of companies and
service providers, it is often mentioned separately.

An organization would use IT outsourcing for functions ranging
from infrastructure to software development, maintenance and
support.




For example, an enterprise might outsource its IT
management because it is cheaper to contract a third
party to do so than it would be to build its own in-house IT
management team.
Or a company might outsource all of its data
storage needs because it does not want to buy and
maintain its own data storage devices. Most large
organizations only outsource a portion of any given IT
function.
The typical destination for ITO is India and Philippines.
The major reason for this being cheaply available IT
workforce and resources.
Most of the American and European companies outsource
everything from data entry to customer service to India
and other Asian countries.
Knowledge Process Outsourcing (KPO)

A Knowledge process can be defined as high added value
processes chain where the achievement of objectives is
highly dependent on the skills, domain knowledge and
experience of the people carrying out the activity. And
when this activity gets outsourced a new business activity
emerges, which is generally known as Knowledge Process
Outsourcing.

KPO or Knowledge Process Outsourcing typically calls for
work that needs higher levels of involvement from the
worker. The worker has to employ advanced levels of
research, analytical and technical skills and has to make
decisions of a higher order than BPO work.

Examples are pharmaceutical research and development,
patent/ intellectual property research, animation and
simulation. Data research and analysis, legal services,
content writing and development and database
development services. KPO industry is less old and less
mature than the BPO sector.
Operational Outsourcing

Operational outsourcing includes the contracting of specific basic jobs
that may not be related to the core of the business, but are essential
for the maintenance and operation of the organization and its
business.

This specific type of Outsourcing is more common within a
manufacturing context than in other industries, as the nature of
manufacturing provides opportunities for specific operational
activities to be handled outside of companies.

For example, machine maintenance and equipment repair can be
acquired through Outsourcing services or even specialized IT
outsourcing services that specialize in that specific type of equipment
or machinery. Other types of operational activities can include
landscaping, cleaning services, and facilities maintenance or property
management.
THE WHY

Most entrepreneurs start up their business and do most of
the work themselves, taking on the responsibility for
marketing, sales, HR, technology, and other components
of the business. As the business grows and they decide
they can’t handle all the tasks, they hire someone to do
the non-core work.

In the early days, cost or headcount reduction were the
most common reasons to outsource. In today’s world the
drivers are often more strategic, and focus on carrying out
core value-adding activities in-house where an
organization can best utilize its own core competencies.
The various reasons for outsourcing are:

Reduce and control operating costs:
Lower operational and labour costs are among the primary
reasons why companies choose to outsource. When properly
executed it has a defining impact on a company's revenue
recognition and can deliver significant savings.

Improve company focus:
Companies also choose to outsource or offshore so that they
may continue focusing on their core business processes while
delegating mundane time consuming processes to external
agencies

Gain access to world-class capabilities:
Outsourcing and offshoring also enable companies to tap in
to and leverage a global knowledge base, having access to
world class capabilities and expertise.

Free internal resources for other purposes:
Business owners who are great at their business but realize
they are weak at finances or are too busy and don't have
time to do the books or have tried but failed and as a result
have a financial mess to clean up. By delegating
responsibilities to external agencies companies can wash
their hands off functions that are difficult to manage and
control while still realizing their benefits

Necessary expertise or resources are not available
internally:
Many times stranded with internal resource crunches, many
world class enterprises outsource to gain access to resources
not available internally.
THE HOW

The process of outsourcing involves an agreement
between two or more organizations, and many a times
this also happens across large distances. So, the process,
as it turns out, can be a very complicated one.

A successful, offshore outsourcing strategy can provide
benefits and cost-savings for your company — process
improvements, expanded talent pools, cost containment,
improved focus on core business to name a few. However,
the inherent risks in an unsuccessful offshore project can
compromise the anticipated benefits. How do you
minimize those risks?
The conventionally followed process can be described in a
few steps:
1)
Planning Initiatives: Set objectives, deliverables, and
timetables and is responsible for achieving a clear vision
for the forthcoming outsourcing contract. This is also the
step where the organization must assess the risks and
resources.
2) Exploring strategic implications: This is the step in
which outsourcing as a strategic tool is looked at in light
of the organization's "vision of the future; current and
future structures; current and future core
competencies.” The objective is to see if the solution is a
good fit.
3)
Analysing cost and performance: In this step, the
organization must ensure that all costs required to
support the activity, both direct and indirect, are taken
into account. Current performance also needs to be
measured and analysed to establish a baseline against
which to measure improvement.
4) Selecting providers: Finding potential providers can be
accomplished through references from business associates,
advertisements, RFIs (requests for information), and the
like. Rolling out tenders and inviting bids which involves
scrutinizing every offer. Narrowing down the list of service
providers and finally the selecting the best one available.
5)
Negotiating terms: The association needs to carefully
map out with the provider not only the services to be
provided and pricing (including how changes in scope or
volume will be handled), but also performance standards,
management issues, and transition and termination
provisions. The creation of an excellent, welldocumented understanding at this point can substantially
contribute to the success of the relationship. The
association also needs to envision a worst-case scenario,
in which it outlines a plan of action should the
outsourcing relationship fail.
6)
Transitioning resources: There are few greater challenges
in the outsourcing process than successfully managing the
impact of the potential change-and then the transition
itself-on the staff of the organization. Human resource
issues should be carefully addressed, and with sensitivity.
Providing the terminated employees such benefits as
outplacement services makes good business sense.
7)
Managing the relationship: Outsourcing "is a new type of
management that requires new skills." In addition to the
scheduled meetings and reports, unforeseen things may
arise. Thus, while monitoring performance and evaluating
results is important, a relationship of trust that enables
problem solving is critical.
Case Study: Telecom
Sector
Bharti Airtel and Idea Cellular
Bharti Airtel: A Perfect Example

Bharti Airtel Limited is an Indian multinational telecommunications services
company headquartered in New Delhi, India. It operates in 20 countries across
South Asia, Africa, and the Channel Islands. Airtel provides GSM, 3G and 4G
LTE mobile services, fixed line broadband and voice services depending upon the
country of operation. It is the largest cellular service provider in India, with
192.22 million subscribers as of August 2013.Airtel is the largest mobile operator in
South Asia and the fourth largest in the world by subscriber base.

Airtel is credited with pioneering the business strategy of outsourcing all of its
business operations except marketing, sales and finance and building the 'minutes
factory' model of low cost and high volumes. The strategy has since been adopted
by several operators.

Airtel's telecom equipment is provided and maintained by Ericsson and Nokia
Solutions and Networks whereas IT support is provided by IBM. The transmission
towers are maintained by subsidiaries and joint venture companies of Bharti
including Bharti Infratel and Indus Towers in India. Ericsson agreed for the first
time to be paid by the minute for installation and maintenance of their equipment
rather than being paid up front, which allowed Airtel to provide low call rates
of ₹1/minute
How Airtel Succeeded?

In 2001-02, Bharti came up with the Minute Factory model. Bharti
outsourced network planning and IT backbone — considered core to
the business — and converted its fixed costs to variable costs.

Bharti Airtel is grew at an unprecedented rate, thanks to the Minute
Factory Model. To support this growth the operator decided to
outsource its operations and concentrate on its core focus of branding
and marketing.

With all the major operations outsourced, the organization focused on
the marketing end, and made a lot of profit by expanding it’s
customer base through the region-based schemes and offers it had to
offer.

It reduced their costs considerably and they were able to acquire
more customers and were able to pass on these savings to the
customers instead of the shareholders and this increased their
customer base even more and they again followed this pattern.
Idea Cellular

Incorporated as Birla Communications Limited on March 14, 1995. The
registered office is in Mumbai, Maharashtra. Idea is a pan-India integrated
GSM operator offering 2G and 3G services. With revenue in excess of $4
billion; revenue market share of nearly 15%; and subscriber base of over 121
million in FY 2013, Idea is India’s third largest mobile operator.\

Idea handles all of its operation as an independent organization, except the IT
backbone, which it had outsourced to IBM in 2007. Recently it has extended
the contract till 2020 by an additional amount of $700 billion.

In the business strategy Idea chose, a wide connect mattered enormously.
Idea chose to focus on rural and semi-urban customers—today, around 60% of
Idea's subscribers consist of rural customers.

As a late entrant, they realized they wouldn't be the best at any specific
thing. So, they focused on consumer experience. The focus led to advertising
campaigns that connected and lingered.