Levels, Factors and Risks of Outsourcing

The meaning of word varies sector to sector as per their application. This a combination of two English word "Out" and "sourcing". Definition of Outsourcing is also given by many experts in this sector. Outsourcing is a business process activities or mutual contract between organizations, persons to do a particular work. To reduce the process the complexity in every process, companies are outsourcing their work to another company in contract basis. Companies are outsourcing their products and services to their contractor company to anything they wants to enhance.

It may be anything like process, analysis, design, development, testing.

is a term taken over from the United States industry meaning an abbreviation of the combination of English words" Outside Resource Using". 'Outsourcing' is the transfer or delegation of the operation and day-to-day management to an external service provider. The consumer receives a service that performs a specific function embedded in his capability (Brown and Wilson,2005).

Military Outsourcing and its Evolution

Military outsourcing is the process of contracting out those tasks to private entities that were earlier carried out by military organizations.

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Militaries outsource services to become free to concentrate on military missions and activities. Outsourcing of noncore competencies is based on fact that an organization rarely can excel at more than one activities .The defence organization is no exception. Historically, concept of military outsourcing has been in vogue since the advent of militaries. Outsourcing gained corporate acceptance during 1990s. There were many skeptics who thought that relinquishing control of functions in favour of external agencies was a retrograde step.

However, sheer economic benefits of the arrangement have made outsourcing to be a significant development and buzzword in the corporate world.

Levels of Outsourcing

The economic perspective differs with levels of outsourcing from its generic expression. There are usually three levels of outsourcing (Brown and Wilson,2005):

1. Tactical Outsourcing. On the first level, tactical, the reasons for outsourcing are usually tied to specific problems being experienced by the organization. Often the organization is already in trouble and outsourcing is seen as a direct way to address problems. Typical examples of "trouble" are: the lack of financial resources to make capital investments, inadequate internal managerial competence, an absence of talent, or a desire to reduce headcount.
2. Strategic Outsourcing. Over time, as businesses sought greater value from outsourcing relationships, the goals of these relationships changed. Executives realized that, rather than losing control over the outsourced function, they gained broader control over all of the functions in their area of responsibility.
3. Transformational Outsourcing. Transformational outsourcing is third generation outsourcing. The first stage of outsourcing involved doing the work under the existing rules; the second stage used outsourcing as part of the process of redefining the corporation. The third stage, uses outsourcing for the purpose of redefining the business. Those who take advantage of transformational outsourcing recognize that the real power of this tool lies in the innovations that outside specialists bring to their customers'.

Phases of Outsourcing Process

The phases of any outsourcing process are almost similar irrespective of levels (Brown and Wilson, 2005).

1. Strategy phase. Defining the objectives and scope of the outsourcing concept and determine the feasibility of outsourcing before making the decision to proceed.
2. Scope phase. Establishing baselines and specify the service levels required of vendors. Clarifying relationships between the function(s) to be outsourced and those functions that remain in house, to include proper interfaces.
3. Negotiation phase. Negotiations proceed with the chosen vendor until a contract is drawn up and, ultimately, signed by both parties.
4. Implementation phase. This phase marks the transition from in-house provision of services to outsourcing.
5. Management phase. Throughout this phase, management of the outsourcing relationship with the vendor is done. It includes the negotiation and implementation of any changes in the outsourcing relationship.
6. Completion or termination phase. At the end of the contract period, the decision either to negotiate another contract with the same vendor or to terminate that relationship and align with a new vendor is taken and the cycle begins again.

Factors Considered for Outsourcing

Private sector and corporate concept of outsourcing suggests a critical analysis to prioritize and decide the sectors to be outsourced. This is also equally important to select the appropriate vendor to serve the organizational objective. The core value of individual organization should be restored as it would be performed by in house capacities. The concept of outsourcing in defence environment may not be in a similar posture with corporate ideas. Therefore it requires no emphasis when the question of selecting a suitable vendor comes (8th Annual Outsourcing Index,2005).

The Benefits of Outsourcing

Numerous benefits are listed in the favor of this business function in different research literatures. Few are appended below (McIvor R, Humphreys, 2009):

1. Cost Reduction. Organizations can considerably reduce cost through outsourcing. Suppliers may take on investment and development costs while sharing these risks among many customers and thereby reducing supplier costs for all customers.
2. Performance Improvement. Service providers can often achieve better performance in certain processes than can be achieved internally by the outsourcing organization. Specialist suppliers can often provide better quality than those of internal functions within the outsourcing organization.
3. Flexibility. In the past, organizations attempted to control the majority of business processes internally to eliminate the possibility of short-run service disruptions or demand imbalances in its customer markets. Outsourcing can provide an organization with greater flexibility, especially in the sourcing of rapidly developing new technologies.
4. Specialization. Outsourcing can allow an organization to concentrate on areas of the focus and achieve specialization. Specialization can also allow an organization to gain a competitive advantage.
5. Access to Innovation. In many maintenance sector there exists significant opportunities to leverage the capabilities of service providers. Rather than attempt to replicate the capabilities of service providers, it is much more prudent to use outsourcing to fully exploit the service providers' investments, innovations and specialist capabilities.
6. Freeing up Resources for Core Functions. Every organization has limits on available resources. Outsourcing permits organization to redirect resources, most often people, from noncore activities toward activities that serve the core purpose, thereby redirecting vital assets onto priority activities.
7. Shared Infrastructure. An individual organization usually has a limited ability to increase the utilization of infrastructure assets beyond its own purposes. Outsourcing enables multiple companies to split the infrastructure costs with other companies, thereby lowering their cost.
8. Improvements in Service Level. Noncore for the outsourcer is core for the vendor. The vendor focuses on reengineering and running the processes efficiently. Since it is a core activity for the vendor, he would strive to bring about improvements in the outsourced process and deliver superior quality standards. The best example is Dhaka Cantonment Military Hospital (CMH). The cleaning service of recently renovated Dhaka CMH was outsourced. As a result, there is visible change in the service level .
9. Innovation. It is expected that the vendors will strive to bring innovation to survive in the competition. By bringing innovation an individual vendor will be able to outsmart other vendor with less innovation.

The Risks of Outs ourcing

The outsourcing process involves some degree of risks as well. Some risk factors are listed below ( McIvor R, Humphreys, 2009):

1. Increase of Cost. There is few evidence to suggest that when organizations outsource to achieve cost reductions, costs do not decrease as expected and in some cases can increase. When organizations outsource to achieve cost reductions, there is normally an early anticipation of cash benefits and long-term cost savings. This happens for failure to anticipate hidden costs of outsourcing. It is important to determine why the process is being outsourced to keep the cost to minimum.
2. Supply Risk. Organizations can encounter significant risks when they use service providers for processes that they have performed internally in the past. Over dependency on a particular service provider can lead to significant risks in terms of cost, quality and service provider failure. For example, service providers may fail to achieve the necessary quality standards demanded by the outsourcing organization.
3. Loss of Skills. Outsourcing can lead to the loss of critical skills and the potential for innovation. An organization needs to maintain innovative capacity. If an organization has outsourced a number of critical services its ability to innovate may be severely diminished. This risk can become more critical when the objectives of the outsourcing company and the service provider are conflicting.
4. Data Security. The most obvious risks revolve around the access, storage and transfer of information. The outsourcing vendor may have access to some sensitive information. When Government organizations are employing outsourcing vendors this risk prevails .
5. Organizational Change Implications. Outsourcing has significant collective implications for an organization. The employees view outsourcing as a disapproval of their performance, which can often lead to further under performance. Outsourcing can lead to the redeployment of staff within the outsourcing organization or the transfer of staff to the service provider. Outsourcing has a negative impact upon the job security and loyalty of employees even when they retain their positions in the outsourcing organization. Key employees should be retained and motivated, which involves identifying employees with important skills.

Case Study of Electrical Maintenance Section -3 GE ( Army), Savar

A detail study was carried out to check the feasibility of outsourcing. To find out the prospects of outsourcing the maintenance, only a segment was selected. After discussing with the GE (Army), Savar Electrical maintenance sector -3 seemed to be the ideal segment. So, relevant data of Electrical maintenance sector-3 was collected. At present, there are 72 personnel in Electrical maintenance sector-3 of GE (Army) , Savar. The budget for this sector including pay , allowance and ration is 2,45,91,540 taka. But to outsource the same maintenance function Ideal Engineers & Technology and M/S Shelly Enterprise placed quotation price of 2,51,65,500 taka and 2,46,37,000 taka respectively. (Source: Prepared by researcher basing on data collected from GE (Army ), Savar )

Apparently, it seems that outsourcing is increasing the cost. But if the pension benefit is added with the present cost , the scenario changes. The average pension was considered and added with the present cost. Then the present cost increased to an amount of 2,72,91,540 taka which is more than the outsourcing cost. Details of calculation are shown in annex J. (Source: Prepared by researcher basing on data collected from GE (Army ), Savar )

Policy Considerations of Outsourcing Process

If outsourcing is adopted, it has to be done judiciously. It has to be practical and cost-effective. It is evident that two main guiding principles in this respect; it must not affect operational readiness and efficiency and secondly it must be economic. Operational readiness and support must never be compromised when activities are outsourced. To ensure this, the various measures to help integrate the vendors into support systems are:

1. Accountability. Clear lines of accountability must be established for outsourcing. For example, MES would retain adequate control over the outsourced vendor.
2. Competence. It is of prime importance that outsourced vendors have the skills and expertise to provide the support, especially for highly technical jobs.
3. Sustainability of Support. It must be ensured that there is sustainability of the expertise, especially when such skills are specialized and take a long time to nurture.
4. Surge Requirement. Surge capacity for emergency needs must be catered for when outsourcing is done. Otherwise,