Outsourcing of Services

Another important trend in business, of late, has been outsourcing of some of its activities i.e., use of outside sources to perform activities traditionally handled by internal staff and resources. For example, most companies have so far had their own staff for cleaning and security activities in their organisations. But, of late many companies have started entrusting these tasks to outside agencies on contractual basis.

In fact, outsourcing is a management strategy by which an organisation contracts out its major non-core functions to specialized service providers with a view to benefit from their expertise, efficiency and cost effectiveness, and allow managers to concentrate on their core activities.

The Information Technology (IT) is one area in which this approach is growing fast, and in recent years, outsourcing the operation of IT systems has been supplemented by a move to outsourcing the whole business processes such as payroll processing, cheque processing, etc. This is known as BPO (Business Process Outsourcing).

Need for BPO

  1. Improvement in productivity.
  2. Reduction in cost.
  3. Opportunity to focus on core business.
  4. Updation of technology.
  5. Stimulates entrepreneurship, employment and export.

Features of Outsourcing of Services

The basic features of outsourcing of services are:

  1. It involves contracting out an activity to an outside specialised agency which takes complete responsibility to handle it effectively using its own manpower.

  2. Normally outsourcing is done in case of non-core activities such as housekeeping, security, etc. But, of late, it has been extended even to some of the core activities. For example, a school may engage a Computer Training Institute to handle computer education to its students or a bank may outsource its cheque processing.

  3. There are two main forms of outsourcing the business processes:

    • outsourcing to a third party.

    • outsourcing to its own subsidiary company specially formed to handle a specific activity.

Merits of Outsourcing of Services

  1. It provides an opportunity to the organisation to concentrate on areas in which it has core competency or strength. It keeps the organisation free from repetitive and mundane functions.

  2. It helps better utilisation of its resources as the management can focus its attention on selected activities and attain higher efficiency.

  3. It helps the organisation to get an expert and specialised service at competitive prices leading to provision of improved service and reduction in costs. The BPO organisations have considerable strength and adapt best practices to provide the service more efficiently.

  4. It enables expansion of business as resources saved from outsourcing can be used for expanding the production capacity and the product line and seek new markets.

  5. Apart from financial returns, it facilitates inter-organisational knowledge sharing and collaborative learning.

Limitations of Outsourcing of Services

  1. It may be opposed by labour unions who feel threatened by possible reduction in their strength and prospects.

  2. It reduces confidentiality as outsourcing involves sharing a lot of information with others. This implies a possibility of its communication to the competitors by such persons.

  3. Globalised outsourcing at times causes resentment in the manpower of the home countries who feel threatened by increased competition.

  4. The organisation hiring others may face the problem of loss of managerial control because it is more difficult to manage outside service providers than managing one’s own employees. Not only that, it may also lead to decrease or total loss of in-house expertise and the organisation becomes partially or totally dependent on the service provider.

In view of the limitations of outsourcing, it becomes necessary for the outsourcing company to take the necessary preventive steps, remain in constant touch with the service provider, and maintain control of the outsourced operations.

Knowledge Process Outsourcing (KPO)

KPO means outsourcing services that require expertise of a higher order. i.e. high end Knowledge Work is done by an outside organisation. KPO is mainly done to improve the efficiency and quality and to reduce costs of doing business. KPO requires professional with right skills, attitude and experience.

Distinction between BPO and KPO

BPO KPO
Repeatable processes Non repeatable process
Quick learning is needed Need regular learning process
Large number of workers Smaller work force
Comparatively less experts Specialists or experts
Predetermined way to solve problem No predetermined way to solve problem