Offshoring relates to moving a business process by a company from one country to another. Examples of such business processes include human resources, manufacturing, software development or accounting. Outsourcing, on the other hand, relates to the movement of internal business processes to an external company within the same country. As such, a company moving a business unit to a different company in another country would be both outsourcing and offshoring. Examples include a bank with a check clearing unit having it outsourced to India from United States and a garment manufacturer with a manufacturing facility in United States having it outsourced to China.
What should Companies Outsource and Offshore?
- Outsourcing or offshoring some of the non-core processes of the business function
- Maintaining only the decision-making centers and outsourcing and offshoring all non-core processes
- Outsourcing and offshoring all processes of the business function
Examples of Outsourced Processes
- Designing
- Testing
- Manufacturing: Outsourcing manufacturing
- Purchasing: Outsourcing procurement
- Accounting services: Accounting outsourcing and bookkeeping outsourcing
- Human Resources: HR Outsourcing
- Information technology: IT Outsourcing, outsourcing software development
The key to deciding what to outsource lies in understanding all the key processes undertaken by the function, the ownership and risks of the main processes and identifying key business issues. Outsourcing relationships, after all, are all about managing risk. Companies can then associate those issues with outsourcing needs, and explore the feasibility, advantages and disadvantages of outsourcing the related business processes.
Outsourcing Business Models
- build-operate-transfer: partnering with an offshore contractor to build a shared services or offshore development center and operate it for a fixed period
- multi-sourcing: where multiple services are outsourced
- global delivery: allows vendors to spread geographically to compete amongst themselves to build better products
- hybrid: combination of one or more outsourcing business models
- global shared services: consolidation and merging of service functions into one function across business units
How to Choose an Outsourcing Business Model
- Perform a cost-benefits analysis of the outsourcing business models: check that the risk/reward ratio is good enough
- Explore the advantages and disadvantages of outsourcing to a single or multiple contractors, and whether there are synergies that can be obtained by having a single contractor operating multiple services
- Understand the change management process involved in the outsourcing business models for all the stakeholders affected by having IT outsourced to another country
- Review market capabilities when deciding what to outsource and offshore
- Decide if the company wishes to manage fewer but larger contracts instead of multiple small contracts
- Seek out value-added services such as managing supplier relationships and having it outsourced
- Ensure that service delivery and performance levels are integrated into the outsourcing business models so as to measure changes brought about by the outsourcing business models
Jo Bilson - Jo Bilson is a management consultant with interests including venture capital and entrepreneurial finance.
