Why Do Companies Outsource?

For many managers and decision-makers, the Outsourcing opportunity is accompanied by rising bewilderment. To navigate through the uncharted topography of Outsourcing, managers will need to answer three principal questions:

  1. What is the right business model for my Outsourcing strategy?
  2. How can my organization create the right relationships?
  3. What steps must my business take to ensure we meet our business objectives?

The relationship between the outsourcing organization and the outsourcing provider is a critical factor in realizing the expanding potential of Outsourcing. With the advent of reliable, cheap global communications, the Internet, and the abundance of skilled labor forces in many developing countries, offshore service centers have become both feasible and real. Many banks and others in the financial industry have already moved IT operations abroad, and some have started business process off shoring efforts in which whole processing tasks are exported.
The power of the Internet revolution lies in the way it changes the internal structure and processes of companies. The concept of a monolithic, vertical, integrated enterprise that owns all products, services, and channels is rapidly becoming obsolete. To become more flexible in a changing business landscape, enterprises are developing a complex spectrum of outsourcing relationships, ranging from mundane payroll outsourcing to more complex business-critical services.

Consider the following:

  • Banking Industry – HSBC plans to migrate 4,000 finance jobs to India, China, and Malaysia to slash costs by 2004. Lloyds TSB, Prudential, and Aviva have already moved to Asia.
  • Insurance Industry – In 2001, Guardian Life Insurance began outsourcing IT to India. They expanded their outsourcing scope to include help desk, desktop support and disaster recovery. The result is an annual savings of $12.5 million, with no loss of productivity.
  • Automotive Industry – GM announced that it is setting up a $21 million technology center in Bangalore to carry out CAD and CAE research.
  • Investment Banking Industry – J.P. Morgan Chase is offshoring some of its stock market and equity research to India, signaling possible new arenas for the offshore outsourcing trend. The firm expects to hire Indian MBAs who will do the heavy-duty number crunching.

These examples illustrate a mega-trend: offshoring (companies establishing their own captive offshore centers) and offshore outsourcing (companies outsourcing to external vendors who perform the work overseas). Sourcing work from anywhere in the world at the best prevailing prices is now becoming a mainstream practice for a variety of business processes.

Offshoring opportunities are increasing due to the availability of low-cost, educated, English-speaking manpower, and strong computer skills in countries such as India, China, and the Philippines.

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