Mr. Dimpz Blog

Why outsource or in-source?

Let's define first the meaning of outsourcing and insourcing...

Outsourcing is subcontracting a service such as product design or manufacturing, to a third-party company.The decision to outsource is often made in the interest of lowering cost or making better use of time and energy costs, redirecting or conserving energy directed at the competencies of a particular business, or to make more efficient use of land, labor, capital, (information) technology and resources. Outsourcing became part of the business lexicon during the 1980s. It is essentially a division of labor.

Outsourcing in the information technology field has two meanings. One is to commission the development of an application to another organization, usually a company that specializes in the development of this type of application. The other is to hire the services of another company to manage all or parts of the services that otherwise would be rendered by an IT unit of the organization.

Outsourcing involves the transfer of the management and/or day-to-day execution of an entire business function to an external service provider.The client organization and the supplier enter into a contractual agreement that defines the transferred services. Under the agreement the supplier acquires the means of production in the form of a transfer of people, assets and other resources from the client. The client agrees to procure the services from the supplier for the term of the contract.

Outsourcing and offshoring are used interchangeably in public discourse despite important technical differences. Outsourcing involves contracting with a supplier, which may or may not involve some degree of offshoring. Offshoring is the transfer of an organizational function to another country, regardless of whether the work is outsourced or stays within the same corporation/company.


Reasons for outsourcing

Organizations that outsource are seeking to realize benefits or address the following issues:

Cost savings
The lowering of the overall cost of the service to the business. This will involve reducing the scope, defining quality levels, re-pricing, re-negotiation, cost re-structuring. Access to lower cost economies through offshoring called "labor arbitrage" generated by the wage gap between industrialized and developing nations.

Focus on Core Business
Resources (for example investment, people, infrastructure) are focused on developing the core business. For example often organizations outsource their IT support to specilaised IT services companies.

Cost restructuring
Operating leverage is a measure that compares fixed costs to variable costs. Outsourcing changes the balance of this ratio by offering a move from fixed to variable cost and also by making variable costs more predictable.

Improve quality
Achieve a step change in quality through contracting out the service with a new service level agreement.

Knowledge
Access to intellectual property and wider experience and knowledge.

Contract
Services will be provided to a legally binding contract with financial penalties and legal redress. This is not the case with internal services.

Operational expertise.
Access to operational best practice that would be too difficult or time consuming to develop in-house.

Access to talent
Access to a larger talent pool and a sustainable source of skills, in particular in science and engineering.

Capacity management
An improved method of capacity management of services and technology where the risk in providing the excess capacity is borne by the supplier.

Catalyst for change
An organization can use an outsourcing agreement as a catalyst for major step change that can not be achieved alone. The outsourcer becomes a Change agent in the process.

Enhance capacity for innovation
Companies increasingly use external knowledge service providers to supplement limited in-house capacity for product innovation.

Reduce time to market
The acceleration of the development or production of a product through the additional capability brought by the supplier.

Commodification
The trend of standardizing business processes, IT Services and application services enabling businesses to intelligently buy at the right price. Allows a wide range of businesses access to services previously only available to large corporations.

Risk management
An approach to risk management for some types of risks is to partner with an outsourcer who is better able to provide the mitigation.

Venture Capital
Some countries match government funds venture capital with private venture capital for startups that start businesses in their country.

Tax Benefit
Countries offer tax incentives to move manufacturing operations to counter high corporate taxes within another country.

To a layman, outsourcing would seem like a waste of time and money, as well as an unneeded complication. After all, why send business abroad when the work can probably be done better right at home? To a politician, the issue of outsourcing serves as a fortified objection to taking jobs away from ‘our own countrymen’. Sympathy towards this issue may elicit a few votes, but nothing more.

But to a businessman, outsourcing is a modern day boon. Outsourcing grants businesses the freedom to dump non – core, yet important sectors of its administration on companies specializing in those very individual aspects. Thus, leaving the businessman free to wholly concentrate on those areas of the company that bring in the real moolah.

The most enticing advantage of outsourcing is the cost effective factor. Human resource and IT services in the United States or Europe are not exactly inexpensive. Let’s avoid complicated business jargon and say that outsourcing is basically an option that offers these services at a much, much lower rate i.e., a cheap but highly productive mass work force. Let us take India as an exemplary illustration.

Thousands of highly intelligent people graduate in a variety of fields each year. Almost all of them speak English better than the English, and have dreams of making big money in a short period of time. The boom of BPO’s in the last 10 years has given them a chance to realize those dreams. It provides them with the opportunity to stay close to home and earn almost as much as they would if they took up a job abroad. On an average, an individual would earn $ 300 to $ 500 per month. A small sum to an American, but an Indian would be quite happy with that salary considering the conversion rate. It’s a win – win situation for your business as well as the company you’re outsourcing to.

There is no dearth of candidates willing to suffer incessant night shifts. Due to a constant effort of having to prove themselves, you can be assured of enhanced quality and productivity at all times. The company you outsource to will always be sure to reach your targets, deliver on time, ensure stringent security and maintain a level of productivity which won’t tempt you into taking your business elsewhere. Employees are regularly evaluated and terminated if found wanting in any aspect. The entire process of recruitment and the hassles involved with finding (and sustaining) the right person for the job is taken off your shoulders.

By 2006, in addition to human resources and IT services, companies that take on offshore contracts will also offer tax preparation and back office services. Hundreds of commerce students graduate in India each year and go on to become chartered accountants in a country where there is no dearth of them. Offering these services to countries abroad would be lucrative for both parties. The most advanced security procedures will be employed in this regard.

It all comes down to the money. Let’s face it; we live in a material world. And the technical term for material is moolah. So until the day the cons of outsourcing outweigh the monetary factors (read pros), outsourcing; as a legitimate and lucrative way to do business, is here to stay.


Advantages

* High strategic flexibility

* Low investment risk.

* Improved cash flow.

* Access to state-of-the-art


Disadvantages

* Possibility of choosing a bad supplier

* Loss of control over the process

* core technologies

* "Hollowing out" of the corporation products and services.



Insourcing is the opposite of outsourcing; that is insourcing (or contracting in) is often defined as the delegation of operations or jobs from production within a business to an internal (but 'stand-alone') entity that specializes in that operation. Insourcing is a business decision that is often made to maintain control of critical production or competencies. An alternate use of the term implies transferring jobs to within the country where the term is used, either by hiring local subcontractors or building a facility.
Insourcing is widely used in an area such as production to reduce costs of taxes, labor.
Insourcing is loosely referred in call centers who are doing the work of the outsourcing companies. Companies that outsource include Dell, Hewlett Packard, Symantec, and Linksys. The callcenters and technicians that are contracted to handle the outsourced work are usually over-seas. Customers may refer to these countries as "India" technical support if they are hard to understand over telecommunications. These insourcing companies were a great way to save money for the outsourcing of work, but quality varies, and poor performance has sometimes harmed the reputations of companies who provide 24/7 customer/technical support.

Insourcing gives a company a high degree of control over its operations, which is particularly desirable if the company owns proprietary designs or processes. Insourcing can also lower manufacturing costs, but only if a company enjoys the business volume necessary to achieve economies of scale. Unlike many smaller pharmaceutical firms, for instance, Merck is large enough to afford a sales force dedicated exclusively to selling only Merck products. Finally, insourcing encourages the development of core competencies.A major part of any business strategy development effort is identifying and building core competencies—organizational strengths or abilities, developed over a long period, that customers find valuable and competitors find difficult or even impossible to copy. Products or processes that could evolve into core competencies are prime candidates for insourcing.


Advantages

* High degree of control.
* Ability to oversee the entire process
* Economies of scale and/or scope.


Disadvantages

* Reduces strategic flexibility
* Requires high investment
* Potential suppliers may offer superior
products and services.


For me, I would suggest Outsource because it is tested and proven and it offers a lot of advantages.outsourcing allows your organization to contract with the other organization which is expert on the outsourced processes..

references:

http://en.wikipedia.org/wiki/Insourcing
http://en.wikipedia.org/wiki/Outsourcing
http://ezinearticles.com/?Advantages-of-Outsourcing&id=110032