Top Ten Reasons Why Companies Outsource

  • September 12, 2011
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By Roy Jonathan del Rosario

We have been hearing all about these outsourcing things in the business world over and over again. As cited in many articles, there are various reasons why companies outsource. In light of this, studies are directed to generate the best and most common reasons why companies do outsourcing.

Here is the annual survey of outsourcing end users conducted by the Outsourcing Institute which shows the top ten reasons why companies outsource:

1. Reduce operating costs
the reason why most companies pass some of the things they should accomplish to outsourcing centers is that they always encounter immensely higher research, advancement, marketing and deployment expenses when they try to do everything by themselves. An external provider’s cheaper cost structure, which may be the result of a better economy of scale or other benefit based on specialization, diminishes a company’s processing costs and boosts its competitive advantage.
2. Improve company focus

having the liberty from dedicating vigor to the fields that are not in its capability, the company can concentrate its resources on achieving its customers’ needs. Outsourcing gives the company a chance to focus on its principal business by having operational purposes assumed by an outside specialist.
3. Access to world class capabilities

globally-known providers create far-reaching investments in methodologies, technology and people. They obtain specialty by working with much clients who are on the same circumstance. This joint expertise provides clients a competitive benefit and helps them avoid the high cost of chasing technology and preparation.

4. Free resources for other purposes
outsourcing allows a company to readdress its resources, most often human resources, from non-principal activities toward customer service activities because every company has restrictions on the resources available to it. The company can forward these workers onto better value-adding activities. Workers whose energies are presently focused inbound can now be focused outbound which is on the customers.

5. Resources not available internally
outsourcing is a feasible option to creating the required competence from the ground. Companies outsource because they have no access to the necessary resources within the organization. New companies, spin-offs or organizations growing into new geography or new technology should consider the advantages of outsourcing from the very start.

6. Accelerate reengineering benefits
Reengineering aims for developments in vital measures of performance such as cost, quality, service and speed. But the need to boost competence can come into straight conflict with the need to invest in main business. As non-core internal purposes are continually put on the back burner, systems become less proficient and less beneficial. By outsourcing a non-core function to a world class provider, the company can begin to see the benefits of reengineering.

7. Function difficult to manage or out of control
Outsourcing is certainly one option for addressing this problem. It is critical to remember that outsourcing doesn’t mean abdication of management responsibility nor does it work well as a knee jerk reaction by a company in trouble. When a function is viewed as difficult to manage or out of control, the organization needs to examine the underlying causes. If the requirements expectations or needed resources are not clearly understood, then outsourcing won’t improve the situation; it may in fact exacerbate it. If the organization doesn’t understand its own requirements, it won’t be able to communicate them to an outside provider.

8. Make capital funds available
There is tremendous competition within most organizations for capital funds. Deciding where to invest these funds is one of the most important decisions that senior management makes. It is often hard to justify non-core capital investments when areas more directly related to producing a product or providing a service compete for the same money.
Outsourcing can reduce the need to invest capital funds in non-core business functions. Instead of acquiring the resources through capital expenditures, they are contracted for on an “as used” operational expense basis. Outsourcing can also improve certain financial measurements of the firm by eliminating the need to show return on equity from capital investments in non core areas.

9. Reduce risk
Tremendous risks are associated with the investments an organization makes. Markets, competition, government regulations, financial conditions and technologies all change extremely quickly. Keeping up with these changes, especially those in which the next generation requires a significant investment, is very risky.
Outsourcing providers make investments on behalf of many clients, not just one. Shared investment spreads risk, and significantly reduces the risk born by a single company.

10. Cash infusion
Outsourcing often involves the transfer of assets from the customer to the provider. Equipment, facilities, vehicles and licenses used in the current operations have value and are sold to the vendor. The vendor then uses these assets to provide services back to the client. Depending on the value of the assets involved, this sale may result in a significant cash payment to the customer.
When these assets are sold to the vendor, they are typically sold at book value. The book value can be higher than the market value. In these cases, the difference between the two actually represents a loan from the vendor to the client which is repaid in the price of the services over the life of the contract. Source: Survey of Current and Potential Outsourcing End-Users The Outsourcing Institute Membership, 1998
Source: http://www.outsourcing.com/content.asp

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