Outsourcing: Challenges, Opportunities and Best Practices

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SIG University  Certified Sourcing Professional  (CSP) program graduate Jigar Mistry shares the potential benefits and opportunities that can arise from outsourcing.


At the current time, it is challenging to find an organization that performs all its core and non-core business in-house. Outsourcing business activities became standard across industries irrespective of their size or work area.  

There is a high chance that was answering services of any banking, insurance, technology, and an external organization handles many more. Most large-scale construction of tunnels, bridges, or roads for public or private players is dealt with by contractors who are masters of their field. Even research and development activities of automobile companies or even defense sectors have adopted outsourcing for their critical tasks.

We will look into the nature of outsourcing projects in terms of relations management, the advantages/ disadvantages of outsourcing, and best practices for collaboration.

Advantages

  1. Expertise: The organization can leverage the expertise of other players with extensive experience and resources and know how to perform certain activities. They don’t have to chase to keep up with advances and focus more on their core activities which contribute more towards the company’s strength.
  2. Cost Benefits: Offshore outsourcing can provide excellent cost reduction and competitiveness. Also, the overhead cost is significantly decreased since the organization does not have to maintain the operation internally.
  3. Speed: Competitive pricing can mean more resources for the exact cost. This will help speed up the work. The price for one call center employee in the US can be used to appoint three or more employees in a low-cost country. This will help lower TAT and happy customers.
  4. Flexibility: Organizations are less constrained by their policies and work freely by utilizing the resources and capabilities of other providers. This also benefits scalability for smaller organizations.
  5. Innovation: The organization that is also a veteran of their field can provide many innovative ideas/ processes which can significantly benefit the customers, which can result in exceptional performance, customer retention, etc.

 

Disadvantages

  1. Coordination: Coordination of professionals from different organizations can be challenging for outsourced activities; incredibly close collaboration is required. The situation can worsen in case of tight deadlines, adjustments, or cultural differences.
  2. Locked In: For specialized services with fewer competitors and higher dependence on a supplier, buying organizations can find themselves in a Locked In the position where switching costs and resources are much higher. Confidentiality can also play a significant role where business secrets, personally identifiable information, etc., are involved.
  3. Control: Since the work is outsourced, the provider shares the command. Suppose the provider fails to deliver in terms of time or KPI. In that case, this can seriously hamper the performance of an organization.
  4. In addition to the above, the political environment can play a significant part in the long-term feasibility of the project, and it is had to control either by the organization or the provider.  
  5. Time zone and cultural differences in the case of offshore projects

Now to overcome disadvantages and maximize advantages, we will look into some of the best practices that can be followed.

Best Practices

Definition: The coordination of two organizations is complex. This can add to the trouble if the expectations need to be clarified. An alert organization will draft the contract so that all the work is well-defined. Having clear and measurable KPIs instead of a vague statement will only create confusion, rework, and a lack of trust between the organizations.  

Criteria for measurement also needs to be defined; for example, measurement unit (miles/ kilometers), terminologies, and procedures must be established for collaboration.

A project manager needs to be appointed who is well versed in practice outsourced and can predict failure points in advance and address them before it happens.

Conflict Management:  Effective conflict management can increase performance, and if handled well, it can ensure the success of the engagement.

Setting rules need to be a top priority in the initial phase of engagement. This will ensure a clear vision and path forward for the attention. This will create satisfaction from both ends, and value can be extracted.

An escalation mechanism needs to be in place to expedite the resolution of any problems. Time limits need to be set, and the issue must be raised to the senior management level upon passing the timeline.  

Training and Team-Building:  To succeed in the project and to align the value and expectations, organizations should collaborate for the training and team-building efforts.

This will help the buyer organization to expect the performance required by the nature of work and customer satisfaction.

Teams of outsourcing organizations need to be educated on the methodology and work culture of the buyer organizations.

A top-down approach can be utilized where senior level management of both organizations sit together and work out on the path going forwards, challenges, and opportunities and then needs to be trickled down to the subsequent levels.

Side-by-side working needs to be encouraged from time to time, enabling direct interaction to coordinate activities, problem-solving, and team bonding.

Review and Status update:  A mechanism for performance assessment needs to be incorporated. This will provide timely resolutions of problems, performance gaps, and working relationships between both organizations.

Celebrations must be part of engagement when performance is exceeded and milestones achieved, which will help strengthen the bond.  Also, contracts must encourage innovations and push the boundaries instead of being locked within certain limits. Contractors need to be prompted for continuous encouragement, which incentive-based contracts can enable.


The  Certified Sourcing Professional (CSP) Program  is a 10-week course that focuses on the hard and soft skills of sourcing, including strategic sourcing and outsourcing methodologies, as well as best practices in negotiations.

Jigar Mistry

Jigar Mistry

Senior Supply Chain Specialist, CDK Global

Having 11+ years of experience as part of procurement and sourcing function. Currently with CDK Global as part of Sourcing Team from last 3.5 years as well as working with mining client of <strong style="font-size: 14px">Infosys BPM </strong>for 2 years. Sr. Sourcing engineer, looking after machined components and raw materials with NCH Corporation as Sourcing Engineer to enable contract manufacturing in India for Bath Products.