Since it was first conceptualised as a cost saving mechanism in the 1970s, the process of outsourcing has evolved considerably.
Companies have come to see that there are other advantages to be realised when adopting outsourcing as a strategy for business development. The jump off point appeared to be in the mid to late 1990s when companies in Silicon Valley in the United States began exploring third party arrangements with companies in India. The Silicon Valley companies saw that by outsourcing to India not only were they able to lower the costs of operation but they also gained access to advanced developments in Information Technology.
By the new millennium, more companies were outsourcing varied services, from telemarketing to customer support. Popular destinations were India and the Philippines but other countries such as China, Poland and those in Latin America gained prominence in outsourcing.
As the process of outsourcing became prevalent, it was inevitable that its pitfalls would come to the forefront given challenges in logistics, communication and culture. Companies came to realise that outsourcing when improperly approached could haves serious repercussions to their business.
Main Advantages of Outsourcing
1. Streamline your cost of business
The number one reason companies decide to outsource is to reduce their cost of operations. Outsourcing lowers your cost by capitalising on comparative advantages and economies of scale prevalent in other regions or sectors.
It is estimated that outsourcing can conservatively generate 20% cost savings on operations. This is possible because outsourcing has a comparative cost advantage on labor.
Let us assume you decide to outsource to a company located in the Philippines. The average salary of an outsourcing agent in the Philippines ranges from $200 to $350 per month. If you add benefits, total compensation per month would be $250 to $440 per month.
This only comes out to $1.50 to $2.60 per hour compared to the minimum wage rate of $18 per hour. Without benefits, cost savings on compensation alone would far exceed 20%.
Now let’s assume labor accounts for 25% of total cost of operations. Factor in 25% mark up, an outsourcing company would charge you an hourly rate of $7.50 to $13 per hour. The rate includes power, rent, Internet, utilities and contingencies.
If you were to run operations domestically and given the same conditions, the cost per hour would be $72 per hour.
By outsourcing to the Philippines, you could save up to $65 per hour!
Since 2013, the Philippines and India have been the consensus leaders in global outsourcing.
2. Increase your level of productivity
Let’s consider the theoretical cost savings of $65 per hour by outsourcing to the Philippines. In a 7.5 hour per day, 22 days a month schedule that would translate to $10,725 per month.
But keep in mind, this is cost per head.
Assuming you outsourced your 10-man accounting department to the Philippines, your cost savings will be magnified 10 fold or $100,725!
What can you do with your cost savings of $100,725 per month?
Here are a few ideas:
- Allocate more resources to fund projects related to your core functions.
- Allocate more funds for marketing and promotion.
- Increase the salaries, benefits of deserving staff
- Introduce a career and succession planning program.
- Invest in better infrastructure
All of these will significantly improve your level of productivity.
Another way that outsourcing increases your productivity is when you delegate functions that are not your core competencies. You will be able to maximize the complete benefits and generate a larger return on productivity.
3. Improves business flexibility
By outsourcing your services, you can improve your services by taking advantage of time zone differentials.
If your company is based in the East Coast in the United States, there will be a 12-hour time zone differential with the Philippines. Let’s assume your business deals with phone subscriptions for both landline and mobile.
You can designate a shift for a group to work from 9:00am to 5:00pm EDT that is tasked to do sales, appointment setting, outbound /inbound customer support. Then designate a second group from 5:00pm to 9:00am EDT to handle digital marketing, inbound support and back office.
This way, your business will be attended to 24/7. You will not miss out on any opportunities that come your way. Most importantly, customer issues will be handled and attended to expediently.
Flexibility will also improve your level of productivity.
Consider a phone handling campaign where you designate two outsourced agents per day. The first agent will work from 9:00am to 1:00pm and the second agent will work from 1:00pm to 5:00pm.
Since each agent works only 5 hours per shift per day, they are not required to take a mandated 30 minute break. That translates to an additional hour of productive work per day. In one month, you will have 22 hours more of productive time!
Main Disadvantages of Outsourcing
1. Risk of exposure to confidential information
A few years ago, an outsourced medical transcription company made the news because of the transcribers allegedly leaked the patient records of a popular Hollywood starlet.
Trust will always become a major issue when outsourcing services because the arrangement involves sharing of confidential information.
Non-Disclosure Agreements are among the usual set of documents but enforcing it can be a logistical inconvenience. Second, there is the problem of having to deal with technology.
Information can be illegally obtained via USB, screen shots, the use of unrestricted networks or a seemingly harmless photo opportunity using a smart phone.
Almost all outsourcing companies have measures in place to prevent information theft but sometimes it is difficult to stay ahead.
For sales companies, leads are like liquid assets. A leads list is an important data base that provides the life blood for the corporation. These can be stolen and sold to another service provider.
2. Risk of conflict of interest
Before you sign an outsourcing agreement, keep in mind that the service provider may currently be managing a similar account or quite possibly, your closest competitor.
An outsourcing service provider will strive to handle as many clients as it possibly can. Even with extensive research and due diligence it may be difficult to know who their clients are.
A service provider is bound by other Non-Disclosure Agreements with clients. You cannot compel them to disclose whether they are managing your competitor or not.
There is the risk of your leads being used for your competitor. And any information you provide your service provider may be used against you without ever knowing about it.
The principle of PROTI or Potential Return on Time Invested is widely practiced in outsourcing. If your campaign is not producing returns according to PROTI, it may be terminated or sub-contracted to another party.
PROTI is one reason why clients should exercise caution when qualifying service providers based on pricing. Despite its reputation for reducing costs, outsourcing companies have become wary of commoditising their profession with bargain basement pricing.
3. Issues of Quality Control
Communication, the existence of cultural and social nuances will be significant barriers to a successful outsourcing arrangement.
It all comes down to one thing: Perception. Your idea of quality will differ from another especially if these barriers exist. And it’s not because differences in perspective are done on purpose. It’s just that both parties can possibly share the same interest but view the approach differently.
Let’s take for example Quality Assurance for diabetes health care. The difference in perception may lie in the understanding of the word ‘duress’
When transferring diabetes health care providers, the outsourced outbound agent has to secure patient information. All of these calls are recorded and reviewed by Quality Assurance personnel.
Even if all the information was accurately gathered and inputted by the calling agent, if Quality Assurance claims it was done under duress, the input would be nullified.
In an outbound set up, Quality Assurance goes through two (2) tiers. The first tier is from the outsourced service provider. The second tier is from the client’s own Quality Assurance group that retrieves the data from the portal.
When discrepancies arise, it will always be a point of contention between the client and the service provider. So while both parties want to uphold shared interest, a difference in perception can lead to conflict.
Based on numbers however, global outsourcing continues to be on an upward trend. The industry has grown exponentially since the year 2000. Given the uncertainties in the global business environment and with new regions opening up as alternative sources for business development, global outsourcing should continue its ascent in the next few years.
As a matter of fact, outsourcing has grown new branches:
- Knowledge Process Outsourcing– involves highly specialized tasks as market research, architecture, software development.
- Creative Process Outsourcing– involves tasks that require innovation and creativity such as animation, multi-media and content management.
- Legal Process Outsourcing– involves functions related to the legal practice such as case research, paralegal work, legal transcription, data security and protection.
The industry has also grown to the point that categories and distinctions have to be made. These categories include: telemarketing, back office support, customer service and digital marketing.
Outsourcing is an effective strategy during a time of economic volatility and unpredictability because it addresses both variables of the profit equation: revenues and expenses.
The key to making an outsourcing arrangement work is to qualify a strategic partner not just an outsourcing services provider. Remember that even the service provider has its own set of goals and objectives. An arrangement founded on the principle of shared values, purpose and vision will foster strong alignment and commitment to attain a shared interest.