As is well known, within organizations, companies develop different processes in diverse business areas to achieve their objectives. Some companies need to focus on the most critical processes. Because of that, they invest more resources in the areas they consider most relevant for the organization’s development. As a result, some companies decide to reduce the burden of fewer core activities by subcontracting to external agents.
At the same time, companies seek to reduce costs and increase levels of competitiveness. And many choose to do so in the same way: by subcontracting external professional staff to facilitate the execution of activities. As they are agents from outside the organization, the generated costs are lower than those obtained through internal resources.
This technique allows the entry of external personnel into the organizations to carry out the tasks that the company is known as “outsourcing.”
Today’s managers running their organizations face a host of changes, which include:
- Globalizing activities.
- Growing without having to use more resources (more capital).
- Reducing costs.
- Understanding consumer tastes.
- The need to respond to threats and, above all, to opportunities.
- The aging workforce
What identifies outsourcing as a practice carried out by an organization is that a third party performs one or more functions that were previously the organization’s own. At a certain point and for various reasons, the company stops performing them and transfers them to a third party.
Many people confuse outsourcing with subcontracting, but there are essential differences between the two. In subcontracting, the company that contracts the service only determines the work, and the contractor fulfills it. On the other hand, there is an exchange of information, coordination, and, above all, trust in outsourcing.
For example, call centers are where telephone assistance is provided personally to customers. These companies can help from outside the client’s home country, India, Pakistan, Uruguay, and the Philippines. Outsourcing this service provides a competitive advantage to the organization. It is a way to reduce costs in customer service, as it is much cheaper than having an internal department responsible for this activity.
Outsourcing or subcontracting?
In the past, many considered outsourcing a way to reduce costs. Nowadays, it has proven to be a beneficial technique for the growth of companies for reasons such as the following:
- Cost reduction and control. In some cases, it is cheaper to outsource certain activities to third parties than to have the organization itself carry them out).
- Having high capacity staff.
- Allocate most of the resources and investments to the organization’s primary objectives.
- Greater efficiency.
- You will get instant access to technology but with out the need of constant invest.
- Improve response times.
- Transfer the challenge of technological innovation and evolution to the service provider.
Aspects to take into account when making an outsourcing or subcontracting contract.
The outsourcing, being a contract, acquires a legal character and is the main element between the company that requests the outsourcing services and the company that provides them. Within this contract, three dates are essential: the date the contract is signed, when the service provider will start performing its activities, and when the terms of the agreement will come into effect.
The following factors need to be considered when making the outsourcing contract:
- Establish the services to be outsourced will be your first decition.
- Determine the resources you will use in the negotiation (technical expertise, legal advice, functional management).
- Establish the start date of the contract and the end date.
- Ensure the feasibility of using external agents.
- Identify the location(s) where our partner will perform the outsourcing services.
- Determine the equipment your supplier will need to provide the services. Even if it isn’t your resposability, it could be useful consider it.
- Establish the terms of reference for the services and their level.
- Establish if our supplier will carry out the services at our facilities or their ones
- Establish whether facilities requiring a separate contract will be rented or sold to the supplier.
Method of payment.
- Establish the process for calculating payment for the service.
- Define whether any charge our partner will make for material and time.
- Establish the method of payment.
- Define whether a discount system our partner will apply for non-compliance with any of the contract terms.
If you use it correctly, outsourcing is a tool for the management of organizations brings multiple benefits.
With outsourcing, the company that hires the service can disengage from the activities that do not require its full attention to concentrate on the areas of greater importance, leaving the less relevant activities to external companies.