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Why Outsourcing

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Outsourcing: An essential component of remote business success

Outsourcing, like leveraging, became one of the buzzwords of business in the 1990s. Unlike leveraging, the concept of outsourcing has since evolved into an essential component of successful business strategy.

Broadly speaking, the concept of outsourcing has gained favour as a result of the ongoing globalisation of markets, leading to increased competition. The reasons for its popularity are simple and measurable: not only does outsourcing enable businesses to focus on their core activities, but the provision of various support services by independent specialist companies – ranging from human resource management through facilities management to procurement, consolidation, forwarding and logistics – this has created opportunities to improve cost control while maximising access to scarce international resources. Moreover, the trend towards outsourcing has less to do with cost reduction than cost management: companies are looking to extract maximum value their money.

In addition, outsourcing of certain services has provided companies with the tools required to implement transformational agendas. It does so by alleviating the inordinate amount of time and effort that a successful transformation process demands, effectively turning management strategy and objectives into on-the-ground change. Indeed, outsourcing can prevent the stillbirth of a company-driven change programme by compelling the buy-in and commitment of employees to the programme. Outsourcing may also be the end-result of the change process, with the provision of non-core functions formerly housed within the company becoming buy-outs.

In general, there are five strategic and five tactical reasons for outsourcing, all of which display a common thread in terms of cost containment, implementing change and optimising access to resources and skills that may not be available through traditional avenues. These reasons are summarised following:

Strategic Reasons:

  • Improving business focus – Outsourcing allows businesses to focus their resources on core functions and issues while an outsourced expert takes care of time-consuming, daily operating issues.
  • Gaining access to world-class capabilities – Specialist outsource services providers can offer extensive expertise in their chosen fields, as well as world-class knowledge and capabilities – including infrastructure, technology, tools and techniques. In addition, they are more likely to keep pace with global trends, business relations and a healthy balance sheet. Companies that use these specialists effectively tap into a resource that far exceeds the scope of in-house services.
  • Accelerating re-engineering benefits – The re-design and re-engineering of businesses can be optimized by employing the specialist services of outsourced agents, whose impartiality removes emotional impediments and whose expertise in this area ensures the implementation of best practice and healthy ethical practices.
  • Risk-sharing – Investments in rapidly-changing fields (such as information technology) carry certain levels of risk. By partnering with specialized service providers, companies can mitigate this risk to a large extent either by; leveraging the knowledge and expertise of the outsource service provider in this regard, or by leveraging the inherent flexibility that outsourcing provides.
  • Re-directing resources to more strategic activities – Every organization is limited to some extent by the resources at its disposal. Rather than dilute the efficacy of these resources through attention to non-core activities, maximum impact can be achieved by outsourcing these functions while focusing in-house resources on core business matters.

Tactical Reasons:

  • Better management of operating costs – This is the single, most compelling reason for outsourcing. By converting a budget cost structure into a cost-for-service structure management can focus its attention on service delivery, while simultaneously tapping into the (generally) lower operating cost structure of a specialized outsource service provider.
  • Making capital funds available – By outsourcing selected functions, a company can convert capital investments in these fields into a variable cost structure, which in turn allows the company to re-direct its capital expenditure into core business areas. This may also offer the benefit of improving certain financial performance indicators by eliminating the need to show return on equity from capital investments in these non-core areas.
  • Improving short-term cash flow – Depending on the operating model chosen, outsourcing can entail the transfer of assets to the outsource service provider – such as equipment, facilities, vehicles and licenses used currently within the operating infrastructure. The effective ‘sale’ of these items translates into a cash injection.
  • Gaining access to scarce resources – The majority of companies does not have the scope or infrastructure to employ experts (or even specialists) in every functional area (especially non-core functions). By outsourcing, companies can obtain access to highly knowledgeable and skilled human resources in these areas – often at global scale, thereby gaining exposure to world-class expertise and international trends.
  • Gaining control of difficult-to-manage or out-of-control functions – This is the least popular reason for outsourcing, but may nevertheless prove fruitful – provided management acknowledges that outsourcing is not a ‘quick fix’ for ‘problem’ areas.

Although it is clear that outsourcing can add measurable value to today’s businesses, the practice is not necessarily fail-safe. To the contrary, the success of any outsourcing arrangement depends on several factors, not the least of which is a solid contractual agreement between the company and the outsource service provider. A contract that is based on a thorough understanding of the expectations of both parties with proper supervision and ongoing auditing to measure service levels.

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