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Outsourcing Companies- The History

Outsourcing revolutionised industries and companies throughout Europe and the US to make the most of exploiting third world countries for their own competitive advantage to increase their markets and profits.  During the 20th century there was a model that stated large companies would “own, manage and directly control” its assets.  During the 1950s and 1960s there was a significant change with outsourcing companies looking to diversify there corporate bases by taking advantage of the economic scale. By diversifying, companies expected to protect profits, even though expansion required multiple layers of management. Subsequently, organizations attempting to compete globally in the 1970s and 1980s were handicapped by a lack of agility that resulted from bloated management structures. To increase their flexibility and creativity, many large companies developed a new strategy of focusing on their core business, which required identifying critical processes and deciding where outsourcing was a real possibility.

Initial stages of evolution
Outsourcing was not formally identified as a business strategy until 1989 (Mullin, 1996).  Although most companies were not totally self sufficient they were outsourcing work that the y had no competency internally, such as publishers purchasing there own equiptment to fulfil services. The use of external suppliers for these essential but ancillary services might be termed the baseline stage in the evolution of outsourcing. In the 1990s, the next stage of outsourcing within companies evolved.  As companies looked towords cost saving measures and resorted to outsourcing these functions necessary to run companies without effecting the core business specifically. Managers contracted with emerging outsourcing companies to deliver services such as accounting, human resources, data processing, internal mail distribution, security, plant maintenance, and the like as a matter of “good housekeeping”. Outsourcing components to affect cost savings in key functions is yet another stage as managers seek to improve their finances.

Strategic partnerships
The latest stage in outsourcing is to find companies that provide a strategic partnership.  No organisation was outsourcing there core competencies,  the parts of the company that gave them a unique selling point giving them an advantage and strategic advantages.  A definition of core competency is any function that get close to customers.  During the 1990s some companies thought outsourcing some core functions could be a good strategy, with organizations outsourcing customer services as it was an important part of there business.

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The revolutionary step for companies outsourcing came in 1989 when Eastman Kodak decided to outsource the information technology systems.  This resulted in management at dozens of major companies realising that it was not about owning the technology to get the information needed.  Instead acheiveing the results needed, which hand in hand has put more focus of building strategic partnerships with outsourcing companies to bring in more enhanced results.  Due to this radical step companies are now more focused on which outsourcing companies can provide more effective results regardless of the function being core to the business or just a commodity.

What is outsourcing
Outsourcing can be defined as “the strategic use of outside resources to perform activities traditionally handled by internal staff and resources”. Sometimes known also as “facilities management”, outsourcing is a strategy by which companies contracts out major functions to specialized and efficient service providers, who become valued business partners. Companies have always hired contractors for particular types of work, or to reduce their workload, forming long-term relationships with companies or individuals whose capabilities complement or supplement their own. However, the difference between simply supplementing resources by “subcontracting” and actual outsourcing, is that the latter involves substantial restructuring of particular business activities including, often, the transfer of staff from a host company to a specialist, usually smaller, company with the required core competencies.

Why do companies outsource
Some common reasons for outsourcing are:

  • Reduce and control operating costs
  • Allow the host companies to focus on other maybe more important projects
  • Gain access to unrestricted world-class capabilities
  • Free internal resources for other purposes
  • A function is time-consuming to manage or is out of control
  • Insufficient resources are available internally

In earlier periods, outsourcing to companies was commonly used to reduce cost or headcount. In today's world the drivers are often more strategic, and focus on carrying out core value-adding activities in-house where an organization can best utilize its own core competencies.

Main factors influencing successful outsourcing
For a successful outsourcing program some key elements are identified as

  • Understanding company goals and objectives
  • A strategic vision and plan
  • Selecting the right vendor
  • Ongoing management of the relationships
  • A properly structured contract
  • Open communication with affected individual/groups
  • Senior executive support and involvement
  • Careful attention to personnel issues
  • Short-term financial justification

Outsourcing process
There are four main aspects to a typical outsourcing program:

  • Program Initiation
  • Service Implementation
  • Final Agreement
  • Program closure

Program Initiation
At the start of any outsourcing program, there are a variety of ideas and opinions about why your companies choosing to use outsourcing as an option, what you look to gain at the end of the program, and how the program will be carried out. The Program Initiation Stage is concerned with taking these ideas and intentions and documenting them to form the basis of a draft candidate.

  • Service Implementation
    Service Implementation covers the activities required to take these ideas and intentions and develop them into a formal, planned outsourcing program and to make the transition to the outsourced service. Specifically these activities are:

    • Defining the transition project
    • Transferring staff if needed
    • Defining the Service Level Agreement (SLA)
    • Defining service reporting
    • Implementing and handing over the service
    • Implementing service management procedures

    During the hand–over phase it is imperative that continuity of service is maintained at all times, that there is no reduction in the quality of the delivery and that timescales and deadlines are not compromised.
    Final Agreement
    The draft contract produced at the Initiation stage is generally amended during negotiations and the final Contract is produced on completion of the negotiation cycle.
    Program Closure
    In order to gain maximum benefit, the program should go through a formal close down. There is no point in continuing to argue lost causes once irrevocable decisions have been taken. Staff and companies alike need to accept the new situation and move forward. However, there will be a lot of information generated during the life of the program, and this will have been stored with varying degrees of formality by the team members. This information needs to be formally filed away for future reference.

    How to decide whether to outsource
    There are no simple criteria to conduct an outsourcing versus in-house analysis. There exists many benefits relating to outsourcing to specialist companies.  Each project considered to be outsourced should be considered individually. Ongoing operational costs that may be avoided by using outsourcing companies are also a consideration. In a nut shell, outsourcing allows organizations to be more efficient, flexible, and effective, while often reducing costs.
    Some of the top advantages brought by outsourcing include the following:

    • Staffing flexibility
    • Acceleration of projects and quicker time to market
    • High caliber professionals that hit the ground running
    • Ability to tap into best practices
    • Knowledge transfer to permanent staff
    • Cost-effective and predictable expenditures
    • Access to the flexibility and creativity of experienced problem solvers
    • Resource and core competency focus

     

 

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