Types of outsourcing

A Third party is owned by the service provider, a local entity or part of a global group and provides
services to the clients of the service provider. As an example, let’s look at Microsoft and their service
SharePoint. Client companies rely on Microsoft’s SharePoint to leverage its technical expertise to ensure
for an optimum user experience by providing intranet portals, document & file management,
collaboration, social networks, extranets, websites, enterprise search, and business intelligence.

A Shared Service Center (SSC) is wholly owned by the mother company and provides services entirely to
affiliates and subsidiaries, or more rarely to clients of the mother company. Take for example San Miguel
Packaging Products (SMPP). SMPP provides the total packaging solution to San Miguel’s beer division.
SMPP provides SMB (SanMiguel Beer) with the bottles and cans, the crowns for the bottles, the labels
for the

bottles, even the plastic palettes or cartoons for easy transport of products. Then in similar fashion,
SMPP also works with other beverage products of San Miguel doing the same service it provides for
SMB.

Strategies for outsourcing

1. Multisourcing. This simply means contracting or using multiple vendors for fulfillment of a client’s
outsourced project. The obvious benefit or advantage to multisourcing is that the buyer or the client can
leverage the best possible benefits: technical expertise, support infrastructure, system or product
support from the host of service providers that they engage through separate contracts. One
disadvantage that can arise is the minute possibility of incompatibilities of technologies that were
intended to work together. But then again, this is easily overcome with project planning, testing,
training, and, quality assurance.

2. Crowdsourcing. This is the practice of obtaining needed services, ideas, or content by soliciting
contributions from a large group of people, and especially from an online community, rather than from
traditional employees or suppliers.

Take for example a game developer who releases a beta version of a game for public testing. To test and
evaluate a product, they invited people to see and test it as they finalize the product. It would have been
an added cost to company to hire professionals so as an alternative, they invited people to see and test
the software.

3. Onshoring. Also termed onshore outsourcing, onshoring simply means that the vendor or service
provider is based in the same country as the client company. The San Miguel Beer and SMPP is a good
example of onshoring.On the plus side, onshoring allows immediate response due to the nearness of the
service provider. For instance, product designers in the same country can respond to market feedback
quickly. Local contractors also have same market knowledge, culture, language, communication style;
thereby minimizing culture issues.
On the minus side, there is the risk that the contractor's staff may not be as trained as those hired by the
company. There is also the risk of higher attrition given that the staff members do not see themselves as
employees of the client company. They may also be less motivated to deliver quality.

4. Nearshoring. This refers to the transfer of business to a nearby country,often sharing the same
border. In this setup, both parties expect to benefit from one or more of the following dimensions of
proximity: geographic, temporal (time zone), cultural, linguistic,economic, political, or historical linkages.
A good example would be US outsourcing the business to Mexico. Other than the labor being cheap, it
would be easier for the business to manage their offices in Mexico since its location is just beside their
country.

Variability in most instances implies a certain degree of uncertainty that is something uncontrollable. As
future managers and business owners, uncertainty, unpredictability and uncontrollability in your
business operations are terms that can cause you a significant amount of discomfort.

5. Offshoring. In this arrangement, the vendor and the client are in different countries in different time
zones. For instance, a retail firm in Italy may outsource the manufacturing of their garments to Manila
for some reasons.However, they may need to train some Filipinos about their culture and language for
better communication. Transporting the garments and coordinating from Manila to Italy would also
incur additional cost. Offshoring or Offshore Outsourcing is the most popular form of outsourcing. It
main advantages are the following: • Allows company to focus on core business • Fast ramp-up/down at
reasonable cost • Opportunity to expand into new areas cost effectively

What to outsource

Before moving to this topic, let us define these 2 things first: (1) Core Activities-TasksProcesses,

and (2) Non-core Activities-Tasks-Processes.

Let us use Reebok as an example. Reebok is an athletic company that creates and designs sports
apparels. Keeping that in focus, Reebok management chose to outsource its administrative Human
Resource (HR) functions. In doing so Reebok’s total back-office or support manning head-count is
significantly lean.

KFC is an American brand and Jollibee is proudly Pinoy. Despite the differences in their countries of
origin, both companies closely protect their chicken recipes.

Different cellphone companies use Android as the preferred operating system on their smart phones.
Google is the developer of Android. Despite using the same operating system, there are clear differences
in product development and manufacturing processes between brands, which makes certain brands
more durable and attractive than others.

Core activities-tasks-processes

are essentially what the company is known for, is what you are bringing home, is what you are paying
for, or how the company makes its money. Core activities are the “bread and butter” of the business –
the moneymakers of the company. These activities, tasks, or processes are therefore not outsourced. In
our example, the core activity of Reebok is to create and design sports apparels. In the case of KFC and
Jollibee, their recipes are their core activities-tasks-processes. In the case of the mobile companies using
Android for operating system, their product development is what differentiates them from each other
and would therefore comprise their core process.

Below are examples of Core Activities-Tasks-Processes that are not outsourced:

 • Design

 • Product Development

 • Process

 • “Recipe”

For non-core activities-tasks-processes, let us look at Reebok again. Reebok needs a Human Resource
Department to support their internal operations but this indirectly affects the fulfillment of their value
proposition to their customers. HR is important to the

company but it is not their “bread and butter.” It is also a process wherein the tasks can be clearly
defined and therefore be easily understood and performed by others outside the company

Non-core activities-tasks-processes

 are therefore well-defined/documented, standard outputs, which can be outsourced. Below

IT Development: programming, documentation, unit and integration testing, implementation of new

An activity, task, or process has to be well defined before it can be outsourced. If a process or task is well
defined, it would be easy for others to do it. If you want somebody else to cook adobo for you, which
would approach would be easier to follow:

(1) Tell the other person to cook Adobo the way you cook it or

(2) Give specific instructions to follow on how you cook Adobo? Of course, the detailed instruction
would be easier to understand and undertake.
Typically outsourced activities-tasks-processes

1. Business Process Outsourcing (BPO). This involves the outsourcing of entire

business process components; e.g., HR, payroll, accounting, financial, etc. In

Table 2, Reebok is just one of the companies that got the services of other

companies to do its HR functions. Shell SSC, Deutsche, Knowledge Services,

Coca-cola Bottlers Business services are companies that offer HR services for

other companies. The same goes for the two other examples. These will only be

possible if there is a clear definition of tasks or processes.

2. IT Outsourcing. These are the typically outsourced IT services:

- IT Technical Support

- IT Application Development

- IT Application Management

- Data Center operations

- Software as a Service (SaaS)

- Cloud (On-line Storage) Services

Accenture, Chartis, Chevron, and HP are examples of IT service providers

3. Support function/ services. Examples of such services are:

- Cafeterias

- Copy centers

- Security

- Janitorial Services

- Trucking/ Shipping

- Building Maintenance
4. Routine activities or activities that can be automated at larger centers.

Here are some examples:

- Small banks outsourcing check processing to larger banks, riding on ATM base of multi-bank network

- Small vendors using Amazon.com as data center, marketing, and payment

processing platform

- Banks using common/multi-bank core banking services of large technology providers

5. Seasonal Requirement/s. These services are only required in certain times, periods, or occasions.
One day 50 employees needed; next day only 10 are needed Christmas hires to handle additional
volume of transactions Temporary extension of operating hours to accommodate foot traffic

Another example for Seasonal Requirements is a call center that takes call for flower orders and delivery
would have their peak and off-peak season. To accommodate calls during events such as Christmas or
Mother’s day, they would hire more people ONLY for that season. For employees being hired, they
would sign a contract, which is short term. After the season, their contracts are up. But these people’s
record would be kept as reference and they would be priority hires the next time the company needs
more personnel.

6. All Part-based Activities.

These are activities that are routine, scheduled, with little uncertainty.

- Automobile assembly

- Electronics assembly

- Packaging solutions

- Handicrafts or garments for mass production

The automobile assembly is good example of All Part-based Activities. The main

car company may have their names on the product but some of the parts are

actually done by other manufacturers especially if the car company doesn’t have

the capacity to produce certain car parts.

Key technologies that support outsourcing

Technology is a very important tool in outsourcing, especially so that in many cases the client, the
service provider, and the consumers are all separated from each other by space and time. These tools
empower a workforce that increasingly needs to conduct parts of its business functions virtually. These
tools help the organization given that some companies may not be in the same country where the
service provider is located.

The technologies enable sharing of files, conducting meetings, doing presentations, and many more

Business cycle for an IT-BPM company

1. Business processing Engagement. This stage refers to the process of establishing the client and
service provider relationship, the formulation of the IT

BPM Contract, including the contract financials, and complying with the requirements implemented by
the regulatory agencies.

2. Managing Outsourcing Transitions. This is the process of transitioning of tasks from a client to a
service provider to achieve a successful business relationship.

3. BPO Operations Management. This is the process of managing the following operational areas:
performance management, metrics and reporting, professional development, quality monitoring and
analyzing, productivity monitoring and control, and continuous improvement initiatives.

4. Issues Management and Critical Situation Control. This refers to managing the continuity of the
business by maintaining the uninterrupted availability of all key business resources required to support
essential business activities.