Monday, August 11, 2014

Outsourcing

 The practice of having certain job functions done outside a company instead of having an in-house department or employee handle them; functions can be outsourced to either a company or an individual.

Outsourcing is an arrangement in which one company provides services for another company that could also be or usually have been provided in-house. Outsourcing is a trend that is becoming more common in information technology and other industries for services that have usually been regarded as intrinsic to managing a business. In some cases, the entire information management of a company is outsourced, including planning and business analysis as well as the installation, management, and servicing of the network and workstations. Outsourcing can range from the large contract in which a company like IBM manages IT services for a company like Xerox to the practice of hiring contractors and temporary office workers on an individual basis. 

 Outsourcing has become a major trend in human resources over the past decade. It's the practice of sending certain job functions outside a company instead of handling them in house. More and more companies, large and small, are turning to outsourcing as a way to grow while restraining payroll and overhead costs.

Why outsourcing?

There are many reasons why a company may choose to outsource a particular function of their business. Most managers have the end-result-in-mind that they are going to save time and/or money. Other reasons include:


Resource Shortages Relieved by Outsourcing
A particularly strong reason to outsource involves a shortage of a critical resource. This can be available employees that possess knowledge in a certain area (e.g. engineers), availability of material (e.g. petroleum or minerals) and a labor force at a level and price that will offset the cost of higher prices alternatives.


Outsourcing Provides the Ability to Concentrate On the Core Business
Some necessary, but peripheral operations are outsourced most frequently. This gives the managers the ability to concentrate on the core business issues instead of getting distracted by required, yet minor matters. A good example is a major hospital in our area that outsources its security operations to a third party company specializing in security.


Outsourcing Yields Cost Savings
The prices of labor and/or materials keep increasing and competition keeps forcing prices lower. If there is an outsourcing solution that can save your company money and overcomes the disadvantages of outsourcing, these areas should be investigated.


Outsourcing Provides Flexibility
Seasonal or cyclical demands that ebb-and-flow put varying demands on the resources of the company. An outsourcing contract could provide the flexibility needed to stabilize these varying demands. Example: A business brings in extra accountants during tax season and when being audited by the holding company that owns the business.


Reduce Overhead Costs Through Outsourcing
Some functions require a large outlay of money just to get started. This expenditure could be avoided by contracting with a third party. For example, expanding your call center’s capacity to the point where it exceeds the capabilities of your telephone system.




Common Outsourced Areas

Although many areas and functions are outsourced, here are some of the frequently outsourced areas:
  • Information Technology Functions
  • Network and Telecommunications
  • Human Resources and Insurance Administration
  • Accounting
  • Marketing
  • Security 
Outsourcing Advantages :

1. Focus On Core Activities
In rapid growth periods, the back-office operations of a company will expand also. This expansion may start to consume resources (human and financial) at the expense of the core activities that have made your company successful. Outsourcing those activities will allow refocusing on those business activities that are important without sacrificing quality or service in the back-office.
Example: A company lands a large contract that will significantly increase the volume of purchasing in a very short period of time; Outsource purchasing.

2. Cost And Efficiency Savings
Back-office functions that are complicated in nature, but the size of your company is preventing you from performing it at a consistent and reasonable cost, is another advantage of outsourcing.

Example: A small doctor's office that wants to accept a variety of insurance plans. One part-time person could not keep up with all the different providers and rules. Outsource to a firm specializing in medical billing.

3. Reduced Overhead
Overhead costs of performing a particular back-office function are extremely high. Consider outsourcing those functions which can be moved easily.

Example: Growth has resulted in an increased need for office space. The current location is very expensive and there is no room to expand. Outsource some simple operations in order to reduce the need for office space. For example, outbound telemarketing or data entry.

4. Operational Control
Operations whose costs are running out of control must be considered for outsourcing. Departments that may have evolved over time into uncontrolled and poorly managed areas are prime motivators for outsourcing. In addition, an outsourcing company can bring better management skills to your company than what would otherwise be available.

Example: An information technology department that has too many projects, not enough people and a budget that far exceeds their contribution to the organization. A contracted outsourcing agreement will force management to prioritize their requests and bring control back to that area.

5. Staffing Flexibility
Outsourcing will allow operations that have seasonal or cyclical demands to bring in additional resources when you need them and release them when you're done.

Example: An accounting department that is short-handed during tax season and auditing periods. Outsourcing these functions can provide the additional resources for a fixed period of time at a consistent cost.

6. Continuity & Risk Management
Periods of high employee turnover will add uncertainty and inconsistency to the operations. Outsourcing will provided a level of continuity to the company while reducing the risk that a substandard level of operation would bring to the company.

Example: The human resource manager is on an extended medical leave and the two administrative assistants leave for new jobs in a very short period of time. Outsourcing the human resource function would reduce the risk and allow the company to keep operating.

7. Develop Internal Staff
A large project needs to be undertaken that requires skills that your staff does not possess. On-site outsourcing of the project will bring people with the skills you need into your company. Your people can work alongside of them to acquire the new skill set.

Example: A company needs to embark on a replacement/upgrade project on a variety of custom built equipment. Your engineers do not have the skills required to design new and upgraded equipment. Outsourcing this project and requiring the outsourced engineers to work on-site will allow your engineers to acquire a new skill set.

 Disadvantages of Outsourcing
 Look at each one of the outsourcing disadvantages listed below and decide what impact that item would have on your business.
1. Loss Of Managerial Control
 Whether you sign a contract to have another company perform the function of an entire department or single task, you are turning the management and control of that function over to another company. True, you will have a contract, but the managerial control will belong to another company. Your outsourcing company will not be driven by the same standards and mission that drives your company. They will be driven to make a profit from the services that they are providing to you and other businesses like yours.
2. Hidden Costs
You will sign a contract with the outsourcing company that will cover the details of the service that they will be providing. Any thing not covered in the contract will be the basis for you to pay additional charges. Additionally, you will experience legal fees to retain a lawyer to review the contacts you will sign. Remember, this is the outsourcing company's business. They have done this before and they are the ones that write the contract. Therefore, you will be at a disadvantage when negotiations start.


3. Threat to Security and Confidentiality
The life-blood of any business is the information that keeps it running. If you have payroll, medical records or any other confidential information that will be transmitted to the outsourcing company, there is a risk that the confidentiality may be compromised. If the outsourced function involves sharing proprietary company data or knowledge (e.g. product drawings, formulas, etc.), this must be taken into account. Evaluate the outsourcing company carefully to make sure your data is protected and the contract has a penalty clause if an incident occurs.
4. Quality Problems
The outsourcing company will be motivated by profit. Since the contract will fix the price, the only way for them to increase profit will be to decrease expenses. As long as they meet the conditions of the contract, you will pay. In addition, you will lose the ability to rapidly respond to changes in the business environment. The contract will be very specific and you will pay extra for changes.
5. Tied to the Financial Well-Being of Another Company
Since you will be turning over part of the operations of your business to another company, you will now be tied to the financial well-being of that company. It wouldn't be the first time that an outsourcing company could go bankrupt and leave you holding-the-bag.
6. Bad Publicity and Ill-Will
The word "outsourcing" brings to mind different things to different people. If you live in a community that has an outsourcing company and they employ your friends and neighbors, outsourcing is good. If your friends and neighbors lost their jobs because they were shipped across the state, across the country or across the world, outsourcing will bring bad publicity. If you outsource part of your operations, morale may suffer in the remaining work force.

The Successful Vendor Selection Process

The vendor selection process can be a very complicated and emotional undertaking if you don't know how to approach it from the very start. Here are five steps to help you select the right vendor for your business. This guide will show you how to analyze your business requirements, search for prospective vendors, lead the team in selecting the winning vendor and provide you with insight on contract negotiations and avoiding negotiation mistakes.


1. Analyze the Business Requirement
 Before you begin to gather data or perform interviews, assemble a team of people who have a vested interest in this particular vendor selection process. The first task that the vendor selection team needs accomplish is to define, in writing, the product, material or service that you are searching for a vendor. Next define the technical and business requirements. Also, define the vendor requirements. Finally, publish your document to the areas relevant to this vendor selection process and seek their input. Have the team analyze the comments and create a final document. In summary:
  1. Assemble an Evaluation Team
  2. Define the Product, Material or Service
  3. Define the Technical and Business Requirements
  4. Define the Vendor Requirements
  5. Publish a Requirements Document for Approval 

 2. Vendor Search
Now that you have agreement on the business and vendor requirements, the team now must start to search for possible vendors that will be able to deliver the material, product or service. The larger the scope of the vendor selection process the more vendors you should put on the table. Of course, not all vendors will meet your minimum requirements and the team will have to decide which vendors you will seek more information from. Next write a Request for Information (RFI) and send it to the selected vendors. Finally, evaluate their responses and select a small number of vendors that will make the "Short List" and move on to the next round. In summary:
  1. Compile a List of Possible Vendors
  2. Select Vendors to Request More Information From
  3. Write a Request for Information (RFI)
  4. Evaluate Responses and Create a "Short List" of Vendors


3. Request for Proposal (RFP) and Request for Proposal (RFQ)
 The business requirements are defined and you have a short list of vendors that you want to evaluate. It is now time to write a Request for Proposal or Request for Quotation. Which ever format you decide, your RFP or RFQ should contain the following sections:
  1. Submission Details
  2. Introduction and Executive Summary
  3. Business Overview & Background
  4. Detailed Specifications
  5. Assumptions & Constraints
  6. Terms and Conditions
  7. Selection Criteria 
4. Proposal Evaluation & Vendor Selection
 The main objective of this phase is to minimize human emotion and political positioning in order to arrive at a decision that is in the best interest of the company. Be thorough in your investigation, seek input from all stakeholders and use the following methodology to lead the team to a unified vendor selection decision:
  1. Preliminary Review of All Vendor Proposals
  2. Record Business Requirements and Vendor Requirements
  3. Assign Importance Value for Each Requirement
  4. Assign a Performance Value for Each Requirement
  5. Calculate a Total Performance Score
  6. Select a the Winning Vendor 
5. Contract Negotiation Strategies
The final stage in the vendor selection process is developing a contract negotiation strategy. Remember, you want to "partner" with your vendor and not "take them to the cleaners." Review your objectives for your contract negotiation and plan for the negotiations be covering the following items:
  1. List Rank Your Priorities Along With Alternatives
  2. Know the Difference Between What You Need and What You Want
  3. Know Your Bottom Line So You Know When to Walk Away
  4. Define Any Time Constraints and Benchmarks
  5. Assess Potential Liabilities and Risks
  6. Confidentiality, non-compete, dispute resolution, changes in requirements
  7. Do the Same for Your Vendor (i.e. Walk a Mile in Their Shoes) 
 6. Contract Negotiation Mistakes
The smallest mistake can kill an otherwise productive contract negotiation process. Avoid these ten contract negotiation mistakes and avoid jeopardizing an otherwise productive contract negotiation process.

 Vendor Management Success Tips

Strategies to Strengthen Vendor Relations
Vendor management allows you to build a relationship with your suppliers and service providers that will strengthen both businesses. Vendor management is not negotiating the lowest price possible. Vendor management is constantly working with your vendors to come to agreements that will mutually benefit both companies.


1. Share Information and Priorities
The most important success factor of vendor management is to share information and priorities with your vendors. That does not mean that you throw open the accounting books and give them user IDs and passwords to your systems. Appropriate vendor management practices provide only the necessary information at the right time that will allow a vendor to better service your needs. This may include limited forecast information, new product launches, changes in design and expansion or relocation changes, just to name a few.


2. Balance Commitment and Competition
One of the goals in vendor management is to gain the commitment of your vendors to assist and support the operations of your business. On-the-other-hand, the vendor is expecting a certain level of commitment from you. This does not mean that you should blindly accept the prices they provide. Always get competitive bids.
3. Allow Key Vendors to Help You Strategize
If a vendor supplies a key part or service to your operation, invite that vendor to strategic meetings that involve the product they work with. Remember, you brought in the vendor because they could make the product or service better and/or cheaper than you could. They are the experts in that area and you can tap into that expertise in order to give you a competitive advantage.
4. Build Partnerships For The Long Term
Vendor management seeks long term relationships over short term gains and marginal cost savings. Constantly changing vendors in order to save a penny here or there will cost more money in the long run and will impact quality. Other benefits of a long term relationship include trust, preferential treatment and access to insider or expert knowledge.
5. Seek to Understand Your Vendor's Business Too
Remember, your vendor is in business to make money too. If you are constantly leaning on them to cut costs, either quality will suffer or they will go out of business. Part of vendor management is to contribute knowledge or resources that may help the vendor better serve you. Asking questions of your vendors will help you understand their side of the business and build a better relationship between the two of you.
6. Negotiate to a Win-Win Agreement
Good vendor management dictates that negotiations are completed in good faith. Look for negotiation points that can help both sides accomplish their goals. A strong-arm negotiation tactic will only work for so long before one party walks away from the deal.
7. Come Together on Value
Vendor management is more than getting the lowest price. Most often the lowest price also brings the lowest quality. Vendor management will focus quality for the money that is paid. In other words: value! You should be willing to pay more in order to receive better quality. If the vendor is serious about the quality they deliver, they won't have a problem specifying the quality details in the contract.