Business development includes initiatives and activities aimed towards making a business better by strategic business decision, outsourcing is one of the processes by which company contract for outsourcing certain non-essential or non-core processes of a company to a third party which has expertise in that field and focusing on the core activities to which company is good at, which leads to better profit and business expansion.
“Do what you do best, and outsource the rest.”
–Peter Drucker
Introduction
Profit maximization, increasing the quality of the product by focusing on the core area of a business is the primary purpose of a business. To make the business more sustainable, and grow faster in this global competition, the need for outsourcing arises. Outsourcing is a great option to make the work process easier to handle by which the company focuses on the core business processes. Outsourcing increase the performance of the business, manage and control the operations of the firm, helps in reducing the investment of the firm, and also helps in improving the image of the firm.
Outsourcing
Outsourcing means sourcing from outside means getting something done from external sources rather than doing it within the organization. Outsourcing is a process of contracting a business function to a specialized agency. It is a contract between an organization and a specialized agency to perform the non-core activity, and even some of the core activities such as recruitment, training, and development or advertising, which are handed over to the third party to perform on behalf of the organization. The Company hires regular service from an external source (mostly from other countries) which were previously done internally.
In business, outsourcing involves the contracting out of a business process to another party. The concept “outsourcing” came from American Glossary ‘outside resourcing’ and it dates back to at least 1981. Outsourcing sometimes involves transferring employees and assets from one firm to another, but not always. Companies primarily outsource to reduce certain costs – such as non-core business expenses, high taxes, high energy costs, excessive government regulation/mandates, production, and/ or labour costs.
The main types of outsourcing structure that normally exist are:
- Onshore outsourcing
- Nearshore outsourcing
- Offshore outsourcing
Onshore outsourcing is also termed as domestic outsourcing. It is a process of contracting services from other firms within the same country. The purpose of onshore outsourcing is to transfer the nonessential activities that still hold business value but not parts of the core business activity to a third party, which is specialized in that activity. For example- when you live in India and have a vendor in India.
Nearshore outsourcing is the process of contracting services performed by people in neighboring countries, or countries with the same time-zone or geographic rather than in your own country. For example- when you live in India and have a vendor in Bangladesh.
Offshore outsourcing is a practice of collaborating with an external organization to carry out some of the business activities from abroad means contacting agencies, or firms, or teams with different time-zone or geographic. For example- an American company hires outsourcing services in India. Business process outsourcing (BPO), infrastructure, technology, and software outsourcing are the main categories in offshore outsourcing.
Contract
The term contract has been defined under section 2 (h) of the Indian Contract Act,1872.[1]
“Contract is defined as an agreement enforceable by law.”
A Contract is an agreement between two parties that creates mutual legal obligations. It can be either oral or written. The elements for a legally enforceable contract are mutual consent, valid consideration, capacity, valid offer, and legality.
Outsourcing Contracts
The Outsourcing contract is a legal document that contains details of what a company expects from the outsourcing company. Not only regarding work but also contains information and details regarding the quality, pricing, timelines, parameters, rewards, etc., of the activities that are outsourced for which agreement, are made between the parties. Outsourcing contract is made for some common activities which include: human resource management, facilities management, accounting, customer support and services, design, content writing, supply chain management, engineering, and legal documentation.
Advantages of Outsourcing
The advantages of outsourcing the work are as follow:
- Focus on the core business process
Outsourcing non-core business activity will help in increasing the time and money in which companies are good at. It is always more cost-effective to outsource everything except core business activity.
- Reduced overhead expenses and labor costs
For short term projects, hiring and training staff is expensive as they hardly produce the high quality of work which is required. With the outsourcing fixed labor costs convert into variable costs, means the company needs to pay only for the service which is consumed. For the seasonal and cyclical demands for additional resources outsourcing is beneficial.
- Control flow of cash
With outsourcing fixed cost will convert into variable cost by this the cash flow can invest in other parts of the business. This is especially useful while launching a new product or reaching a new business vertical if the company has any investor, this will please them to see as the company has the cash flow to invest in new projects.
- Increased efficiency
When the company outsources the activity to an outsourcing partner, which is specialized in that sector, it will bring years of experience in business practices and expertise in delivering complex outsourcing projects. This leads to an increase in efficiency and productivity in the business process.
- Save on infrastructure and technology
Investment in infrastructure and technology will eliminate when the company outsources the activity. The outsourcing partner takes the responsibility of the business process and hence develops infrastructure and technology for the activity that is outsourced.
Disadvantages of Outsourcing
The disadvantages of outsourcing the work are as follow:
- Confidentiality risk
Outsourcing of business activities involves someone new in the business activity of the company, this leads to an increase in the confidentiality risk. Companies need to take due diligence to mitigate this risk as much as possible when it decided to outsource.
- Loss of control
When the company outsources the business activity, the company gains the advantages of having an expert do it for the company but at the same time company loss some control over the function and leaves some freedom of control over the outsourcing company to do things they see fit. If the supplier company will not give freedom than they won’t be able to give a good result.
- Hidden costs
The main reason behind outsourcing is cost-saving, but the company needs to be aware of potential hidden costs. An outsourcing contract contains all the details of the service that the outsourcing company will be providing. Any additional that come up later, and is not covered under in the contract, will constitute an additional charge.
- Reduce quality control
Outsourcing companies may often be motivated by profit rather than a job well done. The work which is outsourced may come back quickly but will lack the standard and quality which is required.
- Lack of internal talent development
If the company outsources a function than the company employees will not be able to develop the skill regarding that activity.
Statistics of Outsourcing
According to the Deloitte 2016 Global Outsourcing Survey, 78% of business owners across the globe are satisfied with their outsourcing partner. North & South America constitutes 42% of the outsourcing buyer region. Europe, Middle East, and Africa constitute 35%. The remaining 23% comes from Oceania & Asia.[2]
In the 2017 report, Deloitte reported that 31% of all IT services were outsourced and Statista confirms that the global outsourcing industry generated 88.9 billion U.S. dollars in revenue.[3]
Most outsourced jobs
- Programming jobs
- IT Support jobs
- Phone/Customer support
- Business Process Outsourcing
- Marketing jobs
- Content writing
- Virtual Personal Assistants
- Accounting jobs
- Graphic Designers
- Human Resource
- Data Entry
Case laws
In Nabha Power Limited v. Punjab State Power Corporation Limited,[4] Supreme Court held that while interpreting the terms of the outsourcing contract, courts should not endeavor to imply terms into the language of the contract; rather, read the contract as per its express terms. Court held that a term cannot imply by the court which was not explicitly expressed by the parties.
In Sh. Sunderarajan, Bangalore v. United India Insurance Co.,[5] it was held that if a public company outsourced its activity to a private company then it should take care of its main responsibility of providing the answer script even if the work has been outsourced to a private company.
Conclusion
Today many organizations partially or completely outsource the non-core activity, the main reason behind outsourcing is that companies want to focus on their main business activity. Outsourcing can offer greater budget flexibility and control. Outsourcing lets organizations pay for only the services they need when they need them.
Questions
Question 1: What is outsourcing?
Question 2: What is outsourcing Contract?
Question 3: What are the advantages of outsourcing?
Question 4: What are the disadvantages of outsourcing?
Question 5: What are the most outsourced jobs?
[1] https://www.latestlaws.com/bare-acts/central-acts-rules/section-2-interpretation–clause/
[2] https://blog.ipleaders.in/outsourcing-contracts-know-about/
[3] https://intetics.com/white-papers/why-and-what-do-companies-outsource
[4] (2018) 11 SCC 508:https://indiankanoon.org/doc/10332596/
