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Outsourcing : Meaning, Features, Scope, Types of OSP & BPO

Last Updated : 23 Jan, 2024
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What is Outsourcing?

Contracting out non-core and regular activities in which a company lacks competence to other agencies in order to benefit from their experience, knowledge, and efficiency is called Outsourcing.

It is a business practice, known as contracting out or business process outsourcing in which one company hires another company or an individual, such as a service provider or vendor, or a third party to perform tasks, handle operations, or provide services that are normally or previously performed by the company’s own employees. 

This service provider/vendor arranges for its own personnel or computer systems to do and focus on a certain activity or service, which it can do better, quicker, and cheaper than the hiring firm, either on-site at the hiring company’s own facilities or some external remote locations. Many types of jobs, including manufacturing operations, human resource activities, and financial functions, like accounting and payroll processing, can be outsourced. Companies can outsource whole departments, such as their IT department, or even parts of a department.

Features of Outsourcing

1) Outsourcing implies contracting out

Outsourcing means sourcing from outside rather than performing it in-house or in the organisation on its own.

For example, Most businesses have recruited their own sanitation employees to maintain the neatness, cleanliness, and overall housekeeping of their facilities. That is, sanitation and housekeeping duties were carried out in-house.
However, many corporations have recently begun to outsource these tasks, i.e., they have entrusted other agencies to undertake these activities for their organisations on a contractual basis.

2) Non-core business activities are generally outsourced

Most organisations do not prioritise sanitation and cleaning. Of course, for municipalities and sanitation service providers, these tasks are important to their business. A hotel’s main activity is housekeeping. In other words, depending on the business a firm is in, some operations will be critical to its primary business purpose. Other actions may be seen as secondary or incidental to achieving the primary purpose.

For example, the goal of a school is to educate or develop children via academic and co-curricular activities. These actions clearly define the main activities. Running a cafeteria/canteen or a bookstore is not a school’s primary activity.

When organisations first begin to experiment with outsourcing, they may outsource solely non-core activities. However, as they gain experience managing interdependencies, they may begin to receive even fundamental functions provided by outsiders.

For example, a school may form a partnership with a computer training facility to provide computer education to its students.

3) Processes might be outsourced to a captive unit or a third party

This represents how a company can outsource part of its activities to captive and third-party service providers. A multinational corporation deals with a diverse range of products and markets. A variety of procedures, including requirements, selection, and training, may be outsourced. It will assist to reduce operating costs by avoiding duplication of work.

Scope of Outsourcing

1) Outsource Financial Services

In today’s competitive market, with fluctuating economic conditions and high levels of regulation, fund managers, bank managers, and investment banks are considering middle and block offices as areas where they might gain competitive advantages. The difficulty is to identify innovative methods to reduce expenses, enhance flexibility, and improve processing efficiency while maintaining control. Financial services must be outsourced to a provider with subject expertise as well as experience that differentiates you from the competition.

2) Outsource Technological Services

The technological sector is changing at such a rapid pace that it is hard to keep up with new innovations. Recent innovations in the industry might result in a new language being used on a regular basis by stakeholders.

Documents containing out-of-date terms and information might indicate that the technology utilised is out-of-date. One must rely on professionals who are aware of the current developments in the world of technology in order to be on the leading edge of technology.

3) Writing services

Writing may be outsourced in two ways: Copywriting and Proofreading.

Companies may not have the funds to engage a professional writer, but they still want their advertising and marketing content to be appealing and captivating. As a result, they outsource the job to freelance writers, who are hired on a contract basis to execute particular tasks.

4) Customer care service

Customers require many types of information from a company. Sales and marketing need interaction with customers.

1) Marketing: Marketing activities include telemarketing, surveys, marketing campaign management, etc.

2) Customer analytics: It consists of profitability analytics, reporting, and complaint analysis.

3) Sale: This includes inbound and outbound sales, as well as co-browsing.

4) Support: This includes account activation, new customer registration, and complaint monitoring.

Types of Outsourcing Service Providers

There are two types of outsourcing service providers:

1. Captive Service Providers

A large multinational corporation deals in diverse products and markets them to a large number of countries . A number of processes, such as recruitment, selection, training record and payroll, management of accounts receivable and accounts payable, customer support are common to all its subsidiaries operating in different countries.

If these processes could be centralised and assigned to a business unit created specifically for this purpose, it would result in the avoidance of resource duplication, realisation of efficiency and economy in the performance of the same activity on a large scale at one or a few select locations, and thus a substantial reduction in costs. As a result, if the job of completing some internal activity is sufficiently vast, it may be advantageous for the firm to have a captive service provider, i.e., a service provider set up to provide services of a certain type to just one firm.

For example, General Electric (GE) is the largest captive BPO unit in India for providing certain kinds of services to the parent company in the United States as well as to its subsidiaries in other countries.

2. Third Party Service Providers

These procedures may be outsourced to third-party service providers who operate independently in the market and provide services to other companies as well.

Horizontals: The hired party service providers are the persons/firms, which specialise in some processes, such as Human Resource Management (HRM) and provide their services to a wide base of clients, cutting across industries. These types of  service providers are called horizontals in the outsourcing terminology .

Verticals: Verticals may specialise in one or two industries and scale up to doing a number of processes from non-core to core.

Concerns over Outsourcing

1) Confidentiality: Outsourcing necessitates the exchange of a great deal of critical knowledge and information. It can harm the interest of the party that outsources its processes, and even has a risk of competitors getting information about the company’s policies, deals, technology, etc.

2) Sweat shopping: The countries which outsource their work seek to get maximum benefit from the low cost manpower of host countries. Moreover the work outsourced requires ‘doing skills’ instead of ‘thinking skills’, which does not build competency and capability of the outsourcing partner.  

3) Ethical Concerns: In order to cut the cost, company has to outsource the work or get the job done from other countries where the work is done in an unethical way. For example, In some of the developing countries, weak laws prevail for child labour and women.

4) Resentment in the Home Countries: Because of outsourcing, employment opportunities are shifted to other countries indirectly. Resentment is caused in the home countries amongst the people, especially when home country is suffering from the problem of unemployment.

Business Process Outsourcing (BPO)

In business jargon, business process outsourcing is contracting out some of a company’s non-core tasks and responsibilities to a third party. It keeps an emphasis on its main activities despite outsourcing non-primary business to a vendor. It is effectively carrying out corporate endeavours outside of the organisation.

This strategy is commonly used in the industrial sector. A few lateral functions that makeup BPO services are accounting, customer relations, payroll, and human resources (HR). The fundamental characteristics of BPO are workforce availability, cost-effectiveness, speed, and flexibility.

For example, A manufacturing company may contract with a supply chain management expert to handle its supply chain management. Therefore, it simply means contracting with an outside service provider to handle one or more non-core business activities or procedures. There are two parties: the client company (the outsourced), and the vendor or outside service provider (the outsourcer)

Categories of BPO

Based on where they are located, BPO organisations may be categorised into several : 

1) Onshore outsourcing is when a company hires a service provider based in the same country. It is also known as domestic outsourcing.

2) When a company hires a service provider in a neighbouring country, it is referred to as nearshore outsourcing.

3) When a company hires a service provider in another country, this practice is known as offshore outsourcing. Another name for it is offshore.

Knowledge Process Outsourcing

Knowledge process outsourcing (KPO) is the process of outsourcing complex, high-level work from a firm to a vendor. Therefore, the tasks that the company would outsource are core activities.

They require expertise, technical knowledge, and skill. In order to cut costs, a company may sometimes offshore specific tasks or outsource them to a different company (a vendor) or a subsidiary situated in the same country.

KPO is more challenging than BPO

BPO services are non-core activities that are outsourced. KPOs will thus be a subset of BPOs. KPO, on the other hand, combines more fundamental tasks with specialised and technological labour.

The company outsources to KPOs not to reduce its workload, but rather for their professional labour and subject expertise because competent and educated labour is far less expensive in developing nations like India. It also presents an opportunity to lower expenses.

A KPO, therefore, acts as an umbrella, covering a variety of operations. KPOs come in a wide variety of forms, including market research, legal discovery, financial research, pharmaceutical and biotechnology, data analytics, creative design, and technical content writing.

KPO is more complicated, demands knowledge, and deals with insight experiences and expertise. BPO is less complicated and volume-driven. BPOs want candidates with a minimum level of education, excellent communication abilities, and broad computer experience. KPOs seek out candidates with more professional qualifications and high levels of expertise.

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