The Dimensions of Outsourcing: A Perspective

The Dimensions of Outsourcing: A Perspective

Senior Consultant

Deva Industries, Inc.

Did you know Michelangelo did not chisel the whole Pieta, or that Rodin did not cast The Thinker? While they had the ideas and created the designs others were hired to complete these artistic works.[1] Tasks were outsourced, so to speak! Today numerous artist needing technical/mechanical support because of the medium they chose to work, such as carbon fibers, titanium or the use of lasers to mold epoxy or any other moldings, do the same.[2] Jeff Koons is one of those artists who outsource.[3] Also a common practice among artists is the authorization of publishing houses, and others, to create prints, which of course is outsourcing.

Defining Outsourcing and Stages

What the devil is outsourcing anyway? Putting outsourcing in perspective, the word "outsourcing" is not in the 80s or early 90s Webster Dictionaries. Moreover it is not in the vocabulary of many computer systems. In fact, it has appeared only recently in the vocabulary of businesses in the mid-90s. Basically, outsourcing is "contracting" for products and services. In a general sense then, we all outsource for something whether oil change, car wash, laundry, house cleaning or lawn service. I suppose we could even say we are outsourcing when we go to a restaurant for dinner!

From a business point of view, in the United States, outsourcing has changed over the years. It primary used to be a local phenomenon executed between and among the town businesses; this I call Stage 1. With the railroad and telegraph outsourcing to businesses in other geographic locations became possible and grew; Stage 2. The telephone and highways contributed to its expansion eventually encompassing businesses throughout the United States; Stage 3. However, while previously ships made international outsourcing possible, it was the aircraft that improved upon it, as well as internal U.S. outsourcing; Stage 4. However, one can argue that radio and television were the capstones of outsourcing, as we knew it, for they were the awareness factor; Stage 5. Computer and Internet technologies created the total technology/human interaction dimensions of outsourcing; Stage 6. Consequently, it is the interrelationship of transportation, telecommunication and computer related technologies that has established the foundation for outsourcing that is known and growing today!

Outsourcing Rational

What are the reasons for outsourcing? They have changed somewhat from the origin of the concept a long time ago, although many reasons have stayed the same. In the "good old days" of America with its small villages and towns and distances between them, businesses were usually one of a kind with very little overlap or competition and almost everyone had limited resources, knowledge and skills. Thus businesses, individuals and families turned to those in the community who specialized in certain good and services. For example, those who needed special metal products went to the Smithy because he had the forge, tools and metal access and capability to produce what was needed. For the rest of the town, the investment to produce the same results was prohibitive, or just too expensive relative to their investment in time and money and other resources that would take them away from their main focus, such as raising cattle, farming or running the dry goods store. Therefore, in today's parlance their objectives were basically… accessing expertise, focusing on core business and maximizing available resources[4].

Today's outsourcing rationales are fluid and will continue to change based on global politics/economy, and the evolution of IT, business practices, competition and the marketplace. Historically, companies have tended to retain their core capabilities; those that provide a competitive advantage and outsource some of those that do not. However, with time processes, functions or equipment that once created a competitive advantage become commonplace, such as quality assurance programs or just-in-time logistics. Consequently, some of these old core business processes, etc. become candidates for outsourcing and that is what outsourcing companies have and will take advantage of to build their businesses.

Business Process Outsourcing Emergence

Nevertheless, business process outsourcing per se was really a limited option until the late 1940's. Previously, outsourcing focused primarily on product or service items. From a business service prospective such things as temporary help, finance and accounting and legal matters were outsourced. Looking at a product point of view, it was typically unique items needed in manufacturing or items needed in the growing retail businesses. True business process type outsourcing, as we know it may well have begun with ADP back in 1949, with its payroll services for businesses.[5] IT outsourcing support functions began to appear in the late 1970s or early 80s in a broader sense than running payrolls. HR Outsourcing (HRO) is purported to have begun in the late 1980's or early 90s…"with record keeping for pension plans, 401k plans and the like… and directly talking with employees of client organizations."[6]

But, looking at the origin of today's HR Outsourcing concepts: First, the bundling of business process outsourcing really had its origin with Staff/ Employee Leasing and Professional Employer Organizations (PEO) businesses. They basically contracted with companies to handle their administrative processes for a fee, plus became co-employers thereby sharing the associated risks. They administered payroll and related tax matters, benefits, risk management and Human Resources (HR) that included among others adherence to laws and regulations, employee-employer relations, personnel recruitment and outplacement and unemployment. Second, while they divided these administrations into different categories Leasing/PEOs companies where in fact administering primarily HR functions. Third, many of these companies have in fact morphed into being HROs, plus by definition are also Business Process Outsourcing (BPO) companies.

The emergence of the Applications Service Organizations (ASO), BPOs, HROs and other challenging models within the PEO industry, are really a reflection of the outsourcing trend worldwide. The marketplace has been changing and will continue to change, as will the competition, as more companies around the world address more cost-effective and competitive ways to conduct business. In the United States, the momentum has been building in various ways for several decades. These included the maturation /sophistication of management in all business sectors, the creation of new or refinement of existing produces/services along with associated processes, the use of more advanced technology and the design of more flexible management and operational structures. So what's the current status and prognostication for the future?

Outsourcing Markets

According to several outsourcing advocates, the market is rapidly growing. In a J. P. Morgan Securities, Inc. recent report it stated…" according to the Outsourcing Institute, 36% of all companies with sales of more than $50 million outsource currently, up from 29% in 1996. In addition, a recent study by CFO Magazine and AMR Research revealed that 64% of companies surveyed foresaw their overall use of outsourcing increasing, with the 29% staying the same. Only 2.4% predicted a decrease in the use of outsourcing."[7] Additionally, Gartner, Inc. estimates the global outsourcing market will grow to close to $275 billion by 2005.[8]

So why is outsourcing growing? There are numerous reasons including:[9] [10] [11] Real cost savings; access to quality, experienced personnel not available in-house; affordable state-of-the-art technology support; minimizes investment resources and risk; improved service delivery and client feedback; freeing up and allowing the focus of internal resources on core processes and growth strategies; improving loyalty by protecting core employee jobs from the vagaries of the economy; and, permitting adaptability to changing client needs. Interestingly the U.S. Chamber of Commerce reported "companies can save as much as 41% in hidden costs by outsourcing."[12]

Relative to accessing quality personnel noted above, there are two factors that are coming into play in the outsourcing market related to Human Capital Management (HCM). The first is the declining numbers in the workforce, and second is maintaining and retaining existing human capital. In terms of the former, a November 1999 U.S. Bureau of Labor Statistics study projected a growing gap between available jobs and personnel to fill them due to declining birth rates and retiring workers. As a result businesses will look to outsource processes where they do not have the personnel to properly execute. Addressing the second issue of maintenance and retention, companies are striving to recruit and retain top talent and maximize performance, because human capital is what differentiates between business value in a service economy. Therefore, businesses are increasingly paying attention to the value enhancement strategic aspects of HR and becoming more interested in outsourcing the tactical processes such as payroll, benefits and record keeping processes.[13] Consequently, processes related to HCM will receive increasing attention by companies.

Given all of the above…What are the specific markets? Almost any type of domestic business, government agency or institution whether large, medium or small; every one of them outsource today, with some being more advanced than others are in what and how they outsource. However, from a market perspective keep in mind U.S. small businesses having less than 500 employees have and will continue to accounted for more than 90% of the U.S. economic growth, and employ more than 50% of the private workforce.[14] Some are currently outsourcing processes and many more are expected to follow. Two less obvious, but more specific markets are private and public institutions of higher learning. They outsource everything from food and janitorial services to fund raising, faculty supplements, and IT support. Another is the medical community that is just beginning to lower the barriers to outside outsourcing support for the professions. including among others, IT support across the spectrum of information sharing, whether hospitals, clinics or private practice relative to a variety of disciplines and services.[15] The medical professions are ripe for professional outsourcing. But, the risks are high! Know thy market! Mismanagement by outsourcing service providers could be very costly including their demise.

A growing market is Europe. Major focus has been on the IT service sector. U.S. companies such as IBM, EDS and Computer Sciences Corporation have made a major commitment to the region.[16] While they are concentrating on, for example, services such as IT management services, software development, integration, maintenance and support, hardware maintenance and support, they have contracts with companies such as Exult and Xchanging, a London based company, to provide HR outsourcing support to their European clients.[17] In fact, as noted above, HR outsourcing is projected to be a major European growth market, as it is in the U.S.[18]

Self-Service Centerpiece

As Web services become more of a reality permitting seamless communications between and among software, self-service will dominate outsourcing. Self-service is the feature of outsourcing that addresses the individual needs of employee, employers and clients with instant, primarily non-human feedback/interaction. Today the primary focus of self-service is offerings by HR functions such as personal record changes, annual benefits enrollment, 401(k) modeling and changes, E-learning and some payroll related functions.[19]

But what are businesses expecting from Web self-services? "Improved overall efficiency, improved HR efficiencies, improved quality and timeliness of services to employees, help employees manage services themselves, improved managers' ability to meet HR responsibilities, lower HR operating costs, help make HR more strategic, and enhance ability to recruit and retain top talent."[20] So far these expectations have not been entirely met according to 200 executives surveyed by Towers Perrin. On average of 4.5 percent of these companies have fully achieved their goal, with an average of 47 percent partly achieving the desired results; however, the top four expectations mentioned are

near 59 percent achievement.[21] In the end the answer to meeting a large percentage of expectations will be enhanced self-service software/technology, quality outsourcing companies, and outsourcing management.

Some Keys To Successful Outsourcing

Outsourcing has evolved over the second half of the 20th Century and continues to evolve. And like any new business area, entrepreneurs have been learning the business and expanding the concept in real time, as well as the implications for the business community and the support requirements. The movement to Internet outsourcing has changed the landscape dramatically by its complexity, speed of change along with uncertainty. Recent failures and questionable practices in the Telecom, Dotcom, and Outsourcing industries have heightened some uncertainty. Today as in the past, identifying and contracting with quality outsourcing vendors is a challenge, but a manageable challenge!

Consequently, there are several major tasks confronting most companies wishing to outsource processes, products and services. They include 1) taking time to understand your business products and services and related quality/value propositions. 2) Carefully defining requirements and specifications to which vendors must adhere. 3) Establishing what you consider a fair price for the outsourcing services. 4) Conducting research and creating a qualified vendor list to whom a request for proposals will be sent. 5) Evaluating proposals, to include checking references and, if possible, observing operations at a current client's site. 6) Conducting negotiations and insuring there is a favorable termination and damage clause if problems should arise. And, 7) managing the vendor to ensure expectations are met. Consequently, the key to outsourcing success is your preparation to outsource and managing the vendor(s) relative to the requirements!

Endnotes