Outsourcing News and Tips

With the recession hit hard companies across industries and economies worldwide are under incredible pressures to cut costs and derive more value from outsourcing contracts. As a result, some of the them are studying their relationships with providers seeking to reduce service level agreements and cost of service delivery, while another are focusing on improving business models and management processes, including provider selection and monitoring of performance and coordination capabilities. The latter ones have contributed to emergence of new business practices, such as multisourcing model, where organizations engage in network partnerships with multiple suppliers, and source various components to best-in-class suppliers. This growth of various outsourcing models along with the shift in focus on cost-saving can also contribute to another trend in global outsourcing industry - freelancing, the model which soon might be considered as an alternative option to classical service contracts.

Although, freelancing model already exists more than a decade it didn't established itself as a serious competitor to service providers in a corporate level yet. However, playing in a smaller scale work playground the model proved to be a viable option by delivering good results in a best-possible delivery and cost way. Among the main reasons preventing freelancing from entering into corporate level experts indicated legal problems with contracts and payments, intellectual property problems, quality supervision, and the handling of resources. Although, freelancers can form teams with different areas of expertise for the project they still lack of processes, effective communication and quality management.

However, there is a number of good examples when companies discovered that there's often a better value for their dollar when they hire freelancers. In addition, with the recession taking away jobs for many and hours for those that are still employed, more specialists joined the ranks of freelancing marketplaces enriching their offerings of highly-qualified resources. That means that clients are able to choose for their work from an almost unlimited field of skill-sets for each specific project they need help with. On leading marketplaces, interesting projects can attract 100 and more bidders. Yes, of course there is sometimes a mess of proposals as there are providers from various parts of world with offerings considerably vary between areas with low cost of living and developed countries, in addition "some" individuals trying to mislead buyers by underestimating how long it takes to complete a project in a good quality and proposing unrealistic bids. As a result there is a risk of poorly finished or failed project.

But, as companies finally take outsourcing seriously and included outsourcing as a part of their corporate-wide strategy they are planning to focus more on all management processes spanning around outsourcing, including resource selection and monitoring of performance, coordination capabilities and optimizing processes. By investing in management and organizational capabilities companies will be more skilled in coordinating outsourcing resources which help them to mitigate freelancing risks, moreover increasing demand for one-off projects and overwhelming desire by leading freelance marketplaces to provide clients with the best service and quality warranties (e.g oDesk’s guarantees that an hour paid is an hour worked, while Guru provides safety payment through their SafePay payment service), of course for the proper commission, nevertheless can provide a good future prospects for freelancing.

At the time there are a lot of questions should be answered and a lot of things should be done for freelancing to comply with all corporate requirements, however freelancing is seemed to be a good option for small businesses and ventures with their initiatives not requiring complicated well-defining organizational and quality processes and methodologies. I decided to appeal to reliable LinkedIn community asking what option they already use or would prefer for small and mid-size project. Beating the gun, I would like to say that the question has been taken rather controversially as it conflict of interest arose, however some interesting theories were expressed by the participants of discussion. And I express my greatest gratitude to the participants of the discussion for their meaningful and valuable answers. I think in this case nothing can deliver the sense of discussion better than discussion itself, and it is my privilege to introduce the LinkedIn discussion "Outsourcing of small -mid project - Freelancer or Service Provider?" that can be found on the link below,

http://www.linkedin.com/answers/startups-small-businesses/small-business/STR_SMB/543477-19925334

Recent report by independent market analyst Datamonitor suggests that outsourcing in retail sector set to grow during the recession.

Increasing economic challenges and failing consumer spending have increased importance of operational efficiency and cost reduction in order to mitigate budget and bottom line pressures.

According to the mentioned report IT and Business Process Outsourcing will become an increasing trend in retail. The rise in demand for external service providers will be driven by the need to more efficiently generate revenue, while making cost savings across organization. As retailers forced to cut staff and inventory expenditure they will be looking to technology and services to help reduce operational costs and provide effective solutions to enhance operational efficiency under tough budgets and staff shortage.

From that perspective effective cooperation will require from service providers solid sector expertise and knowledge of demand and challenges of specific retail sectors. According to Datamonitor, retailers will expect strong partnerships that can evolve with their business. This type of relationships, in turn requires closer interaction between both parties and significant initial investment, so that provider understand the nature of business in order to work in partnership with the retail.

However, experts claim that one of the biggest hurdles for outsourcing during the recession is the industry-wide reduction of capital expenditure, and report said something about retailers are looking to change existing contracts requiring flexible payment structures and shorter contracts. Moreover, retailers complain about previous experience with service contracts, with social problems, e.g unrest caused by offshoring jobs, language barriers and lack of retail sector expertise, and expressed concerns whether benefits of outsourcing outweigh the challenges accompanied.

Although, reduced capital expenditure and previous experience could lead to a reluctance in signing new contracts within the sector, yet incredible pressures along with alarming numbers of retailers are going bankrupt will push retailers to outsource in order to improve efficiency and achieve cost reduction so that they can survive the recession. Outsourcing can help retailers to improve and maintain the customer service levels with fewer staff and smaller budget.

Brief overview on the history

During its long history originated in the 1960s IT outsourcing has made a long journey. In the early days of IT outsourcing, the focus was primarily on short-term cost reduction. Outsourcing was not much more than a traditional make-or-buy decision where clients normally dedicated projects with control and ownership clearly spelled out in a hierarchical relationships. Focusing mainly on reducing costs and extending productivity clients were concentrated on their short-term benefits without considering outsourcing providers motivation. As a result what was good for client might not necessarily be the best for outsourcing provider. This form of outsourcing is known as a conventional outsourcing or the first stage of outsourcing relationships.

However, limiting outsourcing to short-term cost cutting was then heavily criticized by many experts, who at that time already proposed the idea of strategic outsourcing. The main idea behind the concept was that the companies should concentrate their scarce resources on the company's core competentcies and strategically outsource activities which are of no critical strategic need. It was argued that companies too often just see short-term benefits of outsourcing, instead of decreasing long-term capital investments through strategic outsourcing. Strategic outsourcing gained momentum after benchmarking Japanese with Western production and supply systems, the so-called "westerniztion of kieretsu model".

With further development of information and telecommunication technologies their role became more critical for businesses and IT penetrating into core business functions and activities. As a result the number and scope of IT outsourcing projects dramatically increased and service providers begun to take a management responsibility and risks, eventually joining clients as a stakeholders in the process. Emphasis has shifted towards closer interaction and mutual trust between clients and providers, rather than pursuit of self-interest organizations have recognized that the mutual-exchange relationship in a long-term is a win-win strategy. The focus of strategic form of outsourcing lies on long-term strategic partnerships where risks and rewards are shared and where vendors can expect long-term revenues and thus are willing to invest in innovation, which will in the end be benefit the client.

This increasingly strategic importance that IT has gained for many organizations has given IT outsourcing a new direction. The focus has shifted from outsourcing IT in order to reduce costs, to forms where strategically outsourcing creates competitive advantage and fully exploits benefits of IT. Emphasis has moved from contracting out IT hardware and IT facilities towards intellectual based forms of outsourcing, to get access to expertise and knowledge of best providers complementing missing internal capabilities and skills. Instead of achieving more effeciency of just one single function at a time, outsourcing is employed to redesign complete business processes and increase value across the whole value-chain. The so-called business process outsourcing (BPO) has appeared as the main business trend and the largest IT growth sector in a last years. Along with it we can see a further development of the strategic outsourcing idea has appeared in literature - transformational outsourcing. An emerging practice transformational outsourcing aims to facilitate major and rapid organizational change, to enable the lunch of new strategies and to reshape organizational boundaries.

As a result we can see that IT Outsourcing arrangements have changed dramatically over the last couple of years. While some organizations still follow the traditional path of conventional outsourcing, many have begun to use IT outsourcing as a strategic tool to complement missing capabilities and skills, to exploit the full business potential of IT achieving business transformation.


Multi-sourcing era


As Outsourcing relationships continued to mature and clients became more sophisticated the quality aspect of outsourcing relationships and their management has been gaining increased attention. The changing structure of the IT outsourcing market and the continuously developing business models have had a significant influence on the type of outsourcing relationships. The growing complexity of IT and IT Outsourcing processes along with increasingly sophisticated customers require a different approach in establishing and managing outsourcing relationships. New types of organizational arrangements and alliances appeared, among them multiply vendor contracts (multisourcing), joint ventures or shared services. Organizations which outsource for strategic benefits are pioneering new types of outsourcing relationships with emphasis on closer interaction between client and supplier as organizations engage in network partnerships with multiple suppliers, each of which is best-in-class for the respective outsourced function. One of the key feature of outsourcing industry over the past few years is the trend away from the large end-to-end outsourcing deals. As a result we can see a growth of the so-called multisourcing trend.

Gartner defines multisourcing as a new operational model that obtains business services from multiple sources inside and outside corporate walls to obtain the best business outcomes. The main topic of the conference organized by Gartner earlier this year was " Strategic Multisourcing" or the ability of companies to work with multiple vendors for undertaking the work that is better to source to third party providers while company concentrates on its core activities.

One of the main drivers of the multi-sourcing approach is the perception that it better leverages competitive pressures. Critics of the single sourcing approach argue that sourcing out IT to a single supplier leads to the provider becoming "indispensible" making it difficult to award new project to other suppliers. Multi-sourcing contracting structure allows customer to reduce its reliance on a single provider enabling client to source various components to "best-in-class" suppliers. Experts argue that the essential value of multi-sourcing is its flexibility.

Emerging country competition is another favorable factor for development of multi-sourcing trend as competition among destinations and providers has increased and suppliers have been forced to specialize to gain market share and competitive advantage.

Although, the multi-sourcing model is still new development for many companies which requires the philosophical change on the buyer's side for many of the world's leading companies, this is not a new theme, some of them have developed and sustained outsourcing relationships with providers for over a decade now.

Its main advantages are that it allows a customer to seek best-of-breed service offerings from a range of suppliers, gives a customer more direct relationship with suppliers along with flexibility to move work from internal departments to vendors and even across providers whenever the needs arises.

And even though many experts claim that multi-sourcing is the next phase of outsourcing wave there are lots of things to do for both buyers and providers to adopt the practice, including revising management processes, overall governance structure and compensation models so that providers can add value to clients businesses and make a fair return at the same time.