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Outsourcing - An In-depth Overview

Companies from all around the globe belonging to different industries hire outsourcing services to streamline processes and reduce costs. Outsourcing is undoubtedly an effective and cost-efficient solution for facilitating internal operations. The question is, how does outsourcing actually work? What are the leading sectors utilizing this method? There are many question to be asked about this subject. The purpose of this article is to explain in simplicity the different complexities that the outsourcing method entails.


What is Outsourcing, anyway?


Outsourcing is a common work management method that utilizes third-party groups to perform internal corporate operations. In other words, hiring external services to perform internal tasks. Generally, outsourcing brings about significant changes in the conduct of companies and businesses around the world. In the past, organizations mainly chose to use this method as a means of reducing costs. Over the years, the basic idealogy has changed. Today, outsourcing is considered a relevant option in expanding the ability of an organization to deliver services in accordance with customer requirements. It is important to understand that outsourcing is not a simple process, but rather complex and requires special management from senior executives. Furthermore, outsourcing is not a justification for company layoffs, but a practical approach to achieving optimal results.


Outsourcing As a Tool For Enhancing Consumer Experience


Nowadays, many companies use outsourcing services to enhance the overall consumer experience. This is usually performed through strategic partnerships. Particularly, organizations apply outsourcing to perform core business operations, the kind that make an organization unique. A common example of this is employing an external service to perform customer service. The main idea behind this type of measure is to provide an enhanced experience to existing and potential customers. About 65% of companies that used outsourcing services in 2017 will most likely continue to do so. (Outsourcing Insight) Similarly, a 2018 statistical report shows that 37% of organizations that use outsourcing services will likely increase the amount of work transferred to the external service. (Computer Economics)


Global Outsourcing Market Value


The total value of the global outsourcing market in 2018 was approximately $85.6B. (Statista) Although this is lower than the previous year ($88.9B in 2017), this amount portrays a particularly active market. According to a graph seen in Statista's report, it can be seen that there is a consistent upward trend from 2000 to 2012, while market instability began to surface in 2013. Nevertheless, the strongest year was 2014, while the weakest was 2016.


One of the reasons for the decline in market value is the desire to bring various processes back into the organization to drive innovation. Beyond that, the integration of automation is impairing the industry. Regardless, many organizations today experience difficulty finding innovative ways to integrate enterprise automation. Efforts and aspirations to integrate automation solutions have been hit by a shortage of skilled, talented professionals. In addition, uncertainty about the future of professionals remaining from the transition to automated procedures holds implications. (KPMG) As a result, the global outsourcing market is likely to remain stable in the coming years.


The Leading Contributors to the Global Outsourcing Market Value


In 2017, approximately 1,114 deals worth $262B were signed in the global outsourcing market. About 85% of these deals originated in North and South America, 13% in EMEA, and about 3% in Asia and Oceania. Specifically, 84.2% of the deals were in the US, while 5.2% in the United Kingdom. (KPMG)


Here are some important figures from the KPMG report:

Customers preferred medium period contracts (lasting one to five years). Approximately 71% of contracts signed in 2017 belonged to this length of time.73% of contracts signed in 2017 were less than $100M.10% of contracts signed in 2017 were worth over $500M.


The Different Types of Services and Categories


Prior to delving into the deal value breakdown by sector, it is crucial to understand the different types of services and how they diffrentiate. The first type is Business Process Outsourcing, or BPO in short. The puprose of BPO is to carry out operations related to business processes in the organization. Furthermore, BPO can be divided into two main services, the back office and the front office. Typically, back office services include internal business operations, such as acquisitions and billing. In contrast, front office services typically include conduct with enterprise customers, such as operations in marketing and advertising. The second type is known as Information Technology Outsourcing, or ITO in short. The purpose of ITO is to transfer information technology related activities to external groups. A common example of ITO is software and application development. Lastly, while there is another type called Application Service Providing, or ASP in short, we will include it in the ITO category for the sake of simplicity. Outsourcing can be divided into three categories according to geographical regions:

Offshore - Use of outsourcing services from a provider located or operating outside the state. For example, an Israeli startup recruiting BPO services from a company based in India.Nearshore - Use of outsourcing services from a nearby country. For example, a startup in France recruiting BPO services from a company based in Spain.Onshore - Use of outsourcing services from a local provider, one that operates within the state boundaries. For example, a startup in the city of Tel Aviv recruiting BPO services from a company based in Herzliya.


The Operational Risks in BPO Compared to ITO


How do the operational risks of the delivery phase in each type differentiate? In order better understand this, it's best to comprehend this shared idea first: reducing costs and streamlining processes. According to a chart from E-Finance Lab in collaboration with the University of Frankfurt, it can be seen that there are four key areas that could affect the level of risk.

Growth of the BPO marketThe complexity of the processThe degree of human interactionCompetitiveness and specifity

In the digram below we can compare and contrast the characteristics in BPO compared to ITO. This can easily be done through the use of varying colors. That is, green colored blocks represent a lower level of risk in BPO relative to ITO, whereas red colored blocks represent a higher level of risk. With this in mind, yellow signifies a middle boundary whereby the operational risk is equal between BPO and ITO.


Distribution of Deals


Not surprisingly, ITO leads the list of deals in the global outsourcing market. In 2018, the global ITO market was $62B, approximately 72% of total revenue. Still, BPO's global revenue was no slouch either, totaling $23.6B. (Statista) In recent years, the BPO market has gained much needed momentum and could reach a global market value of $262.2B by 2022. (Global Industry Analysts, Inc.) In 2017, the government and security sectors led the list as ITO & BPO consumers, 29% and 39% respectively. Meanwhile, in third place is the insurance sector, with about 20% of the total value of signed deals. (KPMG)


Another key point to mention is the leading outsourced operation. In 2018, IT infrastructure maintenance was in the lead, while application maintenance and development, marketing, and industry-specific processes were not far behind.


Why Consider Using Outsourcing Services?


The main idea behind using outsourcing services is to improve the value of the organization's contribution to the customer. When done properly, an organization can gain and improved its advantages over competitors in the market. Analysis of the potential of using outsourcing services provides four significant benefits to an organization: (CiteSeerX)

As part of a strategic plan, a cost-efficient analysis accurately describes the actions that can be performed effectively, even moreso through third-party vendors, which aids managers in opportunity assessment.Effective outsourcing includes establishing and maintaining relationships with international agencies, which provides managers with awareness of vendor capabilities.Thanks to collaborations, managers learn to identify issues related to different fields and professionals.As part of developing and maintaining engagements, managers develop skills in different areas. As a result, customer satisfaction improves, costs are reduced, and more goals are attained.


Tactical and Strategic Rationales


In general, companies have chosen to outsource services to reduce costs, improve performance, and gain resources that are not available within the organization. Furthermore, outsourcing can change a fixed cost platform to a variable, whereby enabling more effective cost management. (CiteSeerX)


Tactical Rationales:

  • cost reduction

  • profit increase

  • service expansion

  • changing the cost platform

  • improving performance

  • fixing different issues


Beyond the tactical rationale, many organizations base their strategic plans around outsourcing services. Typically, strategic plans like these are usually seen in technology related companies. This is partly due to the fact that technology related companies emphasize core operations, such as engineering and development, and hire external services to perform sub-operations. By utilizing this approach, organizations are able to leverage their operability without wasting valuable time. In addition, companies that have undergone organizational changes often find that outsourcing reinforces the benefits gained from the process.


Strategic Rationales:

  • focus on core operations

  • gain international capabilities

  • risk management

  • skill aquirement

  • gain organizational flexibility

According to a 2016 report by Deloitte, 59% of companies decided to use outsourcing services to reduce costs, 57% to focus on core operations, and 47% to fight workload capacity.


Outsourcing and SMBs


Contrary to popular belief, SMBs also outsource business processes. According to statistics, about 37% of small bussineses use outsourcing, while 52% plan to integrate the service in 2019. Generally, SMBs use outsourcing services to perform technical operations, such as accounting (37%), technology services (37%), and digital marketing (34%). In addition, businesses that use outsourcing do so to drive efficiency (24%) and receive professional support (18%). Businesses with fewer than 50 employees tend to hire freelance services. The most common operations that are transferred to external services are accounting and information technology. Not far behind are digital marketing, development, human resources, and customer service. In order to maximize the success of outsourcing deals between SMBs and vendors, experts recommend setting goals and expectations. Generally, outsourcing provides many benefits to SMBs. (Clutch)


The Leading Countries In The Outsourcing Industry


Countries such as India and the Philippines are leading the outsourcing industry thanks to their financial attractiveness, people skills, availability, and familiarity with the English language. In 2017, India's IT-BPO industry generated $154B in revenue. Regardless, 40% of India's workforce will need to upgrade by 2022 to continue to provide services in line with technological developments. (Nasscom) For the BPO industry in the Philippines, 2019 will be a crucial year. As a result, the BPO industry in the Philippines is expected to jump by more than $40B by 2020. (AseanBriefing)


Conclusion


Outsourcing provides organizations and SMBs across different sectors with many benefits. The outsourcing industry will likely stabilize in the coming years due to the difficulty in finding ways to integrate enterprise-wide automation processes. Furthermore, countries like India, China, and the Philippines will continue to be major contenders in the BPO and ITO industries.

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