Outsourcing

Content of the concept “outsourcing” and basis of emergence of outsourcing

Outsourcing

Outsourcing — use by firm customer on a contractual basis of resources of a third party.

For understanding of an essence of this phenomenon it is necessary to determine a ratio of the term “outsourcing” with the following interconnected concepts:

  • Insourcing — use of the internal factors of production (sources, resources) i.e. which are in ownership and structured in the organization;
  • Koosorsing — performance of works or rendering services by common efforts of internal divisions and the entrepreneurial structures (outsourcers) attracted on a contractual basis;
  • Auttasking — transfer outside, i.e. to other entrepreneurial structures, separate tasks on functioning and organization development;
  • Autpleysment — withdrawal of personnel out of limits of entrepreneurial firm and its transfer to the state to the third (third-party) organizations;
  • Outstaffing — use of personnel of a third party for accomplishment of labor functions within the organization customer according to standards of activities of the organization customer and under the leadership of managers of this organization (lease of personnel);
  • Subkontrakting — the purchase of all of services, works, necessary for activities of firm, and tangible assets at third parties which isn’t assuming replacement of internal divisions of the buyer;
  • Kontrakting a miss — transfer of contracts “on the party”:
    transfer by the company holder of trademark of contracts for production under this brand;
    involvement of subcontractors by the prime contractor (contractor) for accomplishment of the general contract;
  • Backsourcing — return of functions of the outsourcer to the organization and their execution by own forces.

Emergence of outsourcing as economic event is a reaction of business to strengthening of the competition in the conditions of the new economy based on knowledge, services and information. Leads new economic conditions to complication of the relations of coherence and interdependence of all participants of the market relations including at the global level. Contradictory tendencies to expansion of specialization and labor co-operation, isolation and coherence of the main economic agents of actively created global market find the specific reflection in outsourcing as an economic event.

Strategy of outsourcing

The simplest translation of the word “outsourcing” from English means “attraction of external resources”. From the middle of the 1990th in the Russian Federation outsourcing was positioned as promotion of information technologies and services by third parties.

In development of outsourcing there are determinations reflecting the separate parties of this type of service or historical features of market grouping of outsourcing. So, as outsourcing it is understood:

  • transfer to the third-party contractor of some business functions or parts of business process of the company;
  • the strategy of company management directed to transfer of maintaining functionally necessary, but not the main directions to organization activities to the companies specializing in this specific kind of activity:
  • use of external resources for activities accomplishment. traditionally conducted by forces of own personnel and with use of own resources:
  • specialized activities (the range of services for the solution of tasks on automation and informatization of activities and engineering support of one company provided by other company);
  • method of increase in efficiency of functioning of the entity due to concentration of all efforts on the core business and transfers of non-core business processes on accomplishment of the third-party, specializing in these business processes organization capable it is more effective to solve the tasks set for it;
  • method of optimization of activities of branch companies due to concentration of efforts on the core business and transfers of non-core, support functions to the external specialized organizations (outsourcers) on a contractual basis with the corresponding reduction of staff of the entity occupied with accomplishment of non-core, support function.

J. Heywood Brian understands transfer of a third party of the certain tasks, business functions or business processes which are usually not a part of the core business of the company, but, nevertheless, necessary for full functioning of business as outsourcing. It can be functions of development, production, technical support, servicing, administration, even sales by highly qualified specialists of third-party firm. Under a concept of outsourcing the one-time works performed by the contractor on contracts or subcontracts don’t get. The main difference of outsourcing from, for example, sub contracting consists that it is the strategy of company management, but not just a type of partner interaction, and assumes a certain restructuring of internal processes and the external relations of the company.

The main criterion of a conclusion or not conclusion of processes to outsourcing is cost reduction (due to more outstanding performance of work of the company outsourcer) and improvement of quality of the provided services.

Advantages which are got by the company by transfer of non-core functions to third parties:

  • growth of profitability of business, decrease in cost value of the functions transferred to the outsourcer (due to narrow specialization the miss – a sorser which, on the one hand, reduces cost due to bulk sale of knowledge and abilities and with another — provides quality of functions at the same price because of the competition);
  • concentration of efforts on core business;
  • attraction of others experience (the outsourcer specializes in a certain type of activity and serves a large number of firms that allows it to understand all current questions and to make use of the acquired experience);
  • access to the latest technologies (the firm outsourcer has more incentives and opportunities for acquisition and development of new technologies of work that within the separate entity can be unprofitable);
  • reliability and stability (the outsourcer bears responsibility for the performed work according to the service agreement and the current legislation, and it is in certain cases given the right of nondisclosure of customer information to the third parties);
  • flexibility of scales of business (in case of increase (reducing) in scales of business the entity will need to hire (to lay off) workers to incur costs on their training and advanced training, the equipment of a workplace and updating program and professional to providing, to pay taxes on the salary fund, compensation when reducing, etc., that requires time and costs and leads to decrease in mobility of business and growth of expenses. For the outsourcer growth or reducing scales of business of the client means only review of cost of services):
  • redistribution of the resources which are earlier involved on secondary directions, big freedom of the direction of investments into infrastructure of the company (outsourcing reduces need of investment into support of minor functions and in development of the activities which aren’t providing the main profit share of the company);
  • transfer of responsibility for accomplishment of specific function (the strategy of risk diversification between the company and the outsourcer).

Treat number of the risks reducing effect of transfer of works and services to third parties:

  • increase in operating costs;
  • reduction of a labor productivity in core activities;
  • loss of control over own resources, a management separation from a part of activities of the company;
  • leakage of confidential information;
  • legal risks;
  • danger of a conclusion out of the limits of too many types of competences and deprivation of a part of own resources and opportunities (in such cases the company risks to lose types of activity which can provide it competitive advantages);
  • danger of bankruptcy of the outsourcer (what causes additional problems on search of other outsourcer and to transfer to it I put all).

For each entity the level and types of risks are individual, but it is possible to designate general: confidentiality violation threat; costs for return of process, the conclusion of the new outsourcing contract in case of a gap of the relations; dependence on one service provider; threat of bankruptcy of the contractor of services. Risks of transfer of business process on outsourcing are estimated quantitatively and qualitatively. If the risk of delegation is rather high, then it is reasonable to leave business process in intra-corporate hierarchy. In case of risk level, low or acceptable for the customer, the final decision on a possibility of delegation of business process of the specialized organization and the conclusion of the outsourcing contract is made.

It is reasonable to determine efficiency of application of outsourcing on the basis of comparison of costs and results, i.e. by “incremental” sizes of estimative indicators. Such comparison can be performed by the principles: “to” and “after” outsourcing, “with outsourcing implementation” and “without outsourcing implementation”.

At the final stage the management of the company based on the executed calculation of cost efficiency of use of outsourcing, comparison of benefits and possible risks makes the decision on a possibility of transfer of certain functions on outsourcing.

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