Global Outsourcing Risks & Rewards
Third Party Specialists Enable Clients to Focus on Core Competencies
While international outsourcing firms can save their clients million of dollars, companies should carefully analyze and design these essential third-party relationships.
In 2007, Standard & Poor’s reports that companies spent some US$150 billion on international outsourcing. Market research firm IDC sees that amount rising 65% to $250 billion by 2012.
Technology-based outsourcing is one of the fastest growing trends in international trade. However, operational outsourcing involves tradeoffs between client cost-savings and loss of control on the outsourced activities or functions.
Types of Outsourcing Service Providers
Some outside vendors take over major assets and resources including employees from a client company. These business process outsourcers assume full responsibility for one or more specific business processes that the client would otherwise perform.
The scope of this analysis is restricted to application service outsourcers who provide specialized functions for multiple clients.
Broadridge Financial Solutions
For example, Broadridge Financial Solutions is a full-service outsourcer that provides technological services for global financial services companies including banks and brokerage firms. Seven of the top ten broker-dealers in the United States outsource parts of their securities processing functions to Broadridge.
With over 45 years of experience and more than 4,200 employees world-wide, a specialized third-party outsourcer like Broadridge has a proven track record managing back-office processes for financial institutions around the globe.
Advantages of International Outsourcing
An international outsourcing firm can save the high maintenance costs and the specialized attention demanded by back-office operations like electronic securities transaction processing. Freed from the ongoing burden of daily back-office tasks, clients are able to focus on core competencies such as sales and new business underwriting.
According to third-party systems provider Cyber Futuristics, companies that outsource non-core operations also enjoy the following advantages.
- Outsourcing specialists have the technological resources, expertise and mandate to invest in new technologies that would otherwise be much more costly and risky for a client company to continuously manage on its own.
- By outsourcing to a team of technology experts, client companies access skills and training expertise not internally available while saving on human resource costs. The latter ranges from recruitment, training and performance incentives to employee group benefits.
- Ideally, highly skilled outsourcers increase their client company’s productivity while lowering costs.
Disadvantages of International Outsourcing
One of the most publicized potential disadvantages to outsourcing is poor quality control. Case in point is last year’s melamine-laced pet food crisis, caused by a Chinese outsourcer overly focused on cost-savings.
Other disadvantages include:
- Lengthy bid and negotiation processes to find an appropriate outsourcer.
- Difficulty selecting the best outsourcer for specific business needs because differences among service providers are unclear.
- Outsourcers often demand longer term contracts, which can decrease company flexibility.
- Loss of strategic alignment with client company goals once operations are outsourced.
Within the client company, fear of losing jobs to outsourcers negatively affects employee attitudes. Employee morale and motivation falls, just as company loyalty decreases.
Ways to Mitigate Outsourcing Risks
Client companies usually have a strong understanding of their own specific industry and business environment. Therefore, outsourcing experts advise firms to only outsource non-core functions that do not directly affect the products or services that the business offers.
Companies should define exactly what business processes make sense to be outsourced to a service provider. That list of processes must then be prioritized, starting with those projects that offer the highest benefits to the company at the lowest possible cost.
An outsourcing firm must be selected based on credible referrals. The selected vendor must have experience with similar businesses, and be able to provide priority service to the client’s unique and specific needs.
Outsourcing Service Level Agreements
Finally, an effective service level agreement is key to a successful outsourcing relationship. That contract must clearly define responsibilities, performance criteria, financial incentives to meet deadlines, confidentiality rules, ownership rights to new ideas and technologies as well as outsourcing termination rights.
