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Understanding the outsourcing industry

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Outsourcing is the term given to a business that contracts a portion of its business to a third party. Typically, the third party is a specialist in the specific area their client has outsourced to them. For example, a retailer that sells apparel launch their own brand after many years of selling other brands. They have the expertise, the experience, and the operational capacity to sell, market, and distribute the apparel, but know nothing about production and manufacturing.

The cost of buying their own manufacturing plant coupled with hiring and training staff is so great in the timeframe that they need it, and the high standard which they require it to be, is a huge business risk. If the apparel does not sell very well, the financial implications could be catastrophic for the company. The best course of action, is to outsource.

The Market Size

The global market size for outsourced services was worth 82.9 billion U.S. dollars in 2013.  In fact, the industry grew year on year since the millennium. In the year 2000 the outsourced services industry was worth 45.5 billion U.S. dollars. A decade later, and the industry had more than doubled in value to 93.1 billion U.S dollars in 2010. While the industry seemed to peak in 2013 reaching heights of 99.1 billion in value, 2013 saw a decline of upwards of 15% as the market size contracted.

In terms of regional breakdown, the largest revenue shares for the outsourced services comes from Europe, the Middle East and Africa, followed by both North and South America respectively. A much smaller global revenue share comes from the Asia Pacific region.

Business Process Outsourcing (BPO)

BPO is business process outsourcing and is a stand – alone category in the outsourcing industry having generated 27.7 billion U.S. dollars globally in 2013. Considering the outsourcing services industry as a whole was worth 82.9 billion U.S. dollars in 2013, BPO accounts for almost 40% of the entire outsourcing industry outside of ITO (information technology outsourcing), which is similar to BPO, but specifically technology focused.

BPO specifically involves delegating back office internal functions, examples would be accounting, payroll or HR, in addition to front office functions, examples would be customer service, most notably in call centers, and transferring these processes to service providers outside of their organisation.

BPO is an extremely efficient way to improve an organisations efficiencies while simultaneously reducing costs. The key metric that global organisations who outsourced in 2014 looked for, was the ability for service providers to provide a track record in delivering standard operational services.

Outsourcing Sectors

There are certain sectors within organisations where the work gets outsourced more than others and these include the following:

  • 53% outsource manufacturing.
  • 43% outsource IT services.
  • 38% outsource R&D (research and development).
  • 26% outsource distribution.
  • 12% outsource to call centres.

The Benefits of Outsourcing

The reasons for outsourcing are many and varied. They include cost savings, access to expertise, saving time that is better spent in another part of the business, and access to technology that the organisation does not have. However, some of the more indirect benefits of outsourcing include; transferring risk away from the organisation, managing company capacity and alleviating distractions away from the company core processes. The overriding factor that causes companies to outsource, is the reduction and control in job costs.

Offshore Outsourcing

Offshore outsourcing is a specific form of outsourcing where a company outsources a portion of its work overseas. India consistently rates as the best country for offshore outsourcing. The reasoning around this is due to three considerations. The first is the financial attractiveness in terms of the cost to do business and employ staff; significantly less in India when compared to the western world. The second is the skillset and availability of its people where the educated have a high fluency in English and third level education. The third consideration is the business environment where India welcomes foreign investment and is politically stable.

26% of Chief Financial Officers favour India for outsourcing and 18% of Chief Financial Officers favour China. Malaysia, Thailand, Indonesia, Singapore and the Philippines are also popular offshore destinations, but Brazil is emerging as a progressive offshore destination for the future.

The downside to offshore outsourcing is that it can undermine employment in the country where the company is based. For example, jobs that are outsourced offshore rarely come back to the country of origin as the low cost of doing business is too appealing. The other danger of offshore outsourcing is the reliance on foreign relations. For example if trade talks were to break down between two countries and sanctions, hiked corporate tax rates or levies were imposed by governments, this could result in company losses.