Outsourcing: Processing, Models, Forms, Significance, Limitations

Outsourcing Process: In this tutorial, we will learn about the process of outsourcing, outsourcing models, its different forms, signification, and limitations. By IncludeHelp Last updated : June 01, 2023

Outsourcing is a business process. This is a critical process that evolves two or more firms, deals with certain conditions which are undersigned. This article thoroughly describes the process of outsourcing, outsourcing process stages, different forms of outsourcing, and the models of the outsourcing process.

What is the process of outsourcing?

Outsourcing is a process of collaboration between two or more parties. It does not a purchasing initiative. It is mainly about the management of relationships about the services process agreement framed out to a third party. The biggest thing in the outsourcing process is to maintain and secure a trustworthy partnership than developing service standards in outsourcing efforts.

Aspects of the outsourcing process

Followings are the important aspects of the outsourcing process -

It is very important for an organization to keep the business relationship as well as the logistics during the outsourcing process.
It is important for businesses to understand when a contractual arrangement will eventually expire, and to ensure that all parties involved meet their responsibilities and stay until the contract expires.

Outsource process stages

To a good outsource process; following stages are carried out –

Establish Contact
Requirement Analysis
Pricing & Contracting
Project Initiation
Project Steady State

Different forms of outsourcing

There are several methods for outsourcing a business process, and depending on the process, one method may be good to another. There are a few different forms of partnerships depending on certain conditions between the two parties in the relationship.

The following are the different outsourcing forms:

Relocation - Relocating jobs or services to a more cost-effective position within the company's home country.
Offshore - Offshore is a term for outsourcing. Transferring work or services to third-party providers in another region.
Onshore - Onshore is a term used to describe the practice of outsourcing work, nearby company or within the nation not outside the country? In some instances, it is considered nearshore outsourcing. Nearshore outsourcing is the practice of having jobs or services done by professional staff in neighboring countries rather than in the same country.

The outsourcing process may get vary in terms of their reach. Hiring freelancers on a project-by-project basis for certain procedures, such as programming or content creation, may be acceptable. A business that outsources the entire IT department would need a long-term relationship with clearly defined specifications.

Outsourcing Models

Usually, the type of service delivered determines the ideal model for an IT service. Most outsourcing agreements have traditionally been paid on a time and materials or fixed-price basis. Contractual approaches have grown to include managed services and more outcome-based structures as outsourcing services have progressed from simple needs and services to more nuanced relationships capable of delivering change and innovation.

The following are some of the most common ways to organize an outsourcing project:

1. Time and resources

As the name implies, the customer pays to service provider according to the amount of time and materials needed to complete the task/tasks. This strategy has been used in the past for long-term application creation and maintenance contracts. This model may be appropriate in circumstances where estimating reach and requirements is difficult or where needs change frequently.

2. Fixed pricing

The price of the offer is set from the beginning. When there are stable and consistent criteria, goals, and scope, this model will work well. It can be tempting to pay a fixed price for outsourced services because it makes prices stable. It may be beneficial, but as market pricing declines over time, a fixed price remains fixed. Fixed pricing is also difficult for the vendor, who must reach service standards at a set price regardless of how much resources those services need.

3. Performance-based pricing

The customer offers financial rewards to the supplier in order to enable them to perform at their best. This form of pricing scheme, on the other hand, allows suppliers to pay a premium if their quality levels are good. Traditional pricing approaches, such as time-and-materials or fixed price, are often used in combination with performance-based pricing. When customers can define clear investments that the provider should make in order to produce a higher level of efficiency, this strategy can be advantageous. However, it is critical to ensure that the produced result adds incremental business value to the customer; otherwise, the customer will end up rewarding their vendors for work that they should be doing anyway.

4. Unit/on-demand pricing

The provider sets a fixed rate for a certain level of service, and the customer pays according to how much of that service they use. If you're outsourcing desktop maintenance, for example, the customer can pay a set fee depending on the number of desktop users you serve. Pay-per-use pricing will boost efficiency right away, and it makes analyzing and adjusting component costs a breeze. It does, however, necessitate a precise estimate of demand volume as well as a commitment to a certain minimum transaction volume.

5. Variable pricing

At the low end of a supplier's offered service, the consumer pays a fixed price, although this approach allows for some pricing to vary depending on delivering higher levels of service.

6. Cost-plus

The contract is written in such a way that the client pays the supplier for its actual costs plus a predetermined benefit percentage. A pricing strategy like this does not allow for flexibility when marketing priorities or technology shift, and it gives suppliers little motivation to perform well.

7. Gain-sharing

Pricing is based on the value generated by the provider outside of its usual obligations, but extracted from its experience and contribution. An automotive manufacturer, for example, would pay a service provider based on the number of cars it produces. For this type of contract, both the consumer and the provider have a stake in the outcome. Everyone is putting money on the line, and each stands to earn a share of the sales if the supplier performs well and achieves the buyer's goals.

8. Shared risk/reward

The provider and the consumer pool their resources to create new products, technologies, and services, with the provider sharing in the benefits over a set period of time. This model helps the supplier to think about new ways to develop the company while also spreading the financial burden between the two parties. Through sharing some of the risks with the seller, also helps to minimize some of the risks. However, effective implementation necessitates a higher degree of governance.

The significance of outsourcing

Outsourcing has many advantages for firms of all sizes and for a variety of purposes. Although many people think that outsourcing is simply a way to save money without giving many efforts to quality. IT outsourcing can be achieved in a number of ways, each with its own set of benefits and disadvantages. IT, in particular, is driving the outsourcing market, due to the advantages of an easily saleable team, lower overheads, and more agile working relationships. Although there are drawbacks, properly executed information technology outsourcing will assist companies of all sizes in getting stuff done faster and easier.

Time and cost savings are some of the most significant benefits of outsourcing. For example, in order to reduce production costs, a personal computer manufacturer can purchase internal components from other companies. A law firm could use a cloud-computing service provider to store and back up its files, giving it access to digital technology without having to spend a lot of money to purchase it.

A small business may opt to outsource bookkeeping to an accounting firm rather than employ an in-house accountant because it is less costly. Some firms find it convenient to outsource human resource services such as payroll and health care. Outsourcing, when done correctly, is a cost-cutting technique that can also give a company a competitive edge over its competitors.

Outsourcing limitations

Outsourcing is not without its drawbacks. As the scope of responsibilities increases, the risks increase. Signing contracts with other businesses will take time and resources from a company's department. When a third party has access to a company's sensitive information and then suffers a data infringe, the company faces a security threat. It is somehow similar that there would be a breakdown of coordination between the organization and the outsourced contractor, causing projects to be postponed.

Outsourcing failure is a quick decision to outsource without a strong business case. Outsourcing undertaken as a "fast fix" cost-cutting strategy rather than an investment aimed at improving capabilities, expanding internationally, increasing agility and profitability, or bolstering competitive advantage is more likely to fail.

The inherent conflict of interest in any outsourcing process is at the root of the problem. The client always wants a higher level of quality at a low cost. On the other ends, the service provider is looking for a good return on his investment. To ensure a good result for both the customer and the vendor, the entire process must be handled professionally.

References: What is outsourcing? Definitions, best practices, challenges and advice

Outsourcing – System Analysis and Design