Outsourcing – Importance, Types and Nature


Concept of Outsourcing

Outsourcing means engaging the services of an external vendor or agency to manage, deliver or operate certain business activities which could otherwise be performed within the organisation. In the outsourcing agreement, there are two parties the client company which wants to outsource a business process, and the vendor or external provider which designs, manages, controls and provides the service to the company on a recurring business. For example, a manufacturer may outsource the advertisement of his products to an ‘ad agency’. It is the ad agency which would plan and execute the advertisement campaign in consultation with the client. Similarly after activities may also outsourced for better quality and to achieve economy.

Business Process Outsourcing (BPO)

Outsourcing a business process like payroll accounting or customer relationship management to a professional service provider is known as “Business Process Outsourcing.’ The service provider is called a BPO company which manages the assigned business process according to pre-defined measures of performance.

knowledge Process Outsourcing (KPO)

KPO means outsourcing of knowledge-based operations to a service provider on a contract basis. A firm may transfer the performance of knowledge-related activities to a specialized firm at an agreed amount or consideration. Thus, the firm can concentrate on its core activities and have the benefit of the performance of knowledge-related activities by the highly skilled staff of the KPO firm. In KPO, the work assigned to a KPO vendor is based on knowledge and information whereas work assigned in BPO is basically process-oriented.

Importance of Outsourcing

  • Focus on Core Activities: The business can concentrate on its core activities better by outsourcing services such as advertising, financial, courier and customer support services to outside agencies.
  • Ensuring Smooth Operations: Outsourcing of routine activities enables the firm to conduct its operations smoothly. For instance, el outsourcing agencies can enable the firm to deliver mail, maintain plant and machinery, transport of staff, etc.
  • No Blocking Up of Capital: The business firm need not make the fixed investment in creating the infrastructure for providing various facilities.
  • Freedom from Labour Troubles: Outsourcing of services means no addition to the existing staff of the firms. The staff of the outsourcing agencies are not the employees of the firm. Thus the firm will avoid labour problems such as slow work, stoppage of work, strike, etc.
  • Expansion of Business: A business firm can concentrate on its growth strategies and outsource subsidiary services to outside agencies which are specialists in their respective fields.
  • Business Success: Outsourcing to a service provider who is a specialist in the field adds to the success of the business firm and lowers the chances of risks.

Types of Outsourcing Service

  • Financial Services: Big companies require to obtain several financial services from outside or external sources(i.e, outsourcing) because they don’t possess the infrastructure and capability to perform such services.
  • Advertising Services: All big firms need to advertise their goods and services which require specialized handling. They can outsource this assignment to advertising (ad) agencies. Ad agencies help their clients in preparing the advertisement budget, advertisement programme and advertisement copy. They prepare ad films, documentaries, and other promotional material on behalf of their clients. They also help the clients in choosing the ad media such as TV, radio, newspaper, hoarding, etc.
  • Mail Service (Courier Service): Courier service involves the delivery of letters, documents and small parcels from one place to another through private operators known as couriers or courier companies. The reasons for the popularity of courier service are as under : (i) Courier service is faster and more efficient as compared to the postal service. (ii) Courier service is cheaper as compared to the postal service. (iii) Courier service is quite reliable.
  • Customer Support Services: In the present-day competitive environment, every business must take care of the grievances/complaints of the customers and do the needful to please them. There are two options as regards the provision of customer support services, namely, (i) creation of customer support services department within the organisation, or (ii) entering into an arrangement with an outside agency to provide after-sales services on behalf of the organisation.