The Economics Of Outsourcing

Published Date: 02 Nov 2017

For a firm to successfully outsource its customer support & sales functions, there are a number of factors that need to be addressed.

An organization that has outsourced its customer support & sales functions to an external contractor, should not abdicate itself from the responsibility from the activity that it has outsourced. In other words, there is still a need for the organization to retain overall control of its services being outsourced. In addition, the organization needs to regularly monitor the external contractor to ensure that they continue to deliver quality service and to perform at the required standard as agreed in the contract arrangement. To be able to do this, the organization must ensure that it can maintain sufficient technically competent "in house" staff to oversee the contract service agreement.

Before an organization outsources its customer support & sales functions, it is very important that it prepares a sound full cost estimate for all existing internal computer systems & infrastructure so that it can determine whether the outsourcing is cost effective. Failure to do so can be critical.

For any successful outsourcing, a good solid contract is essential. The contract should also allow for flexibility as it is difficult, in the life cycle of the contract, to predict every circumstance or cover every eventuality. Successful outsourcing should be based on partnership between the organization and the external contractor.

Outsourcing an organization's customer support & sales functions without proper consultation with employees can cause a lots of stress among staff and reduce their morale. The result may be a loss of some key technical and specialist staff from the organization. A more open and timely communication with employees can minimize this impact and uphold the staff morale. Organization can allay the fears by outlining career options and opportunities for its staff within and outside the organization and also by explaining the benefits of outsourcing to those affected employees.

The Economics of Outsourcing.

There are many reasons a company may choose to outsource its customer support & sales function. These couple of paragraphs address the two main reasons for this action

1 The conception that outsourcing is cheaper

2 The expertise required best and smooth customer support & quality sales does not exist within the company.

In the past, it was difficult to compare the cost of outsourcing a customer support & sales process against the cost of in - house process, mainly because there was no functional sizing metric agreed upon prior to the start of the contract. In all sophisticated industries cost per unit (or average cost) is an important consideration, where average cost is total cost divided by total output. The same concept can be applied to customer support & sales using function points. Total in house process cost divided by total function points is an average cost calculation. Once average cost is determined, all prospective developers, in-house and outsource, can be compared on an equal basis.

Just as important is the ability to adequately evaluate the delivered product, considering several factors: size, quality, time to market, and so on. Using functional metrics total delivered function points can be contractually agreed upon prior to the start of the contract, assuming the company contracting the customer support and sales has clearly defined the final product. This is a dramatic change in the way customer support and sales projects historically are managed. Any change in the number of total delivered function points once the project begins will impact the average cost calculation. Changes, additions, and even deletions to the customer support and sales become more expensive per unit as you move through the development life cycle. Since the consumer of the custom built customer support and sales system wants to minimize unit cost, it is therefore in their best interest to sufficiently define requirements prior to the start of the project.

The ability to compare cycle time, or time to production, is also important. Time to production is defined as total number of function points delivered divided by elapsed calendar time. The least expensive outsourcer or contractor also may be the one whose delivery date is the latest out. The buyer of the customer support and sales process must decide if quicker time to production is worth the extra expense.

The number of acceptable defects delivered per unit of size is another important evaluation metric; with higher quality comes higher process running costs. But delivering proper customer support and sales support with numerous embedded defects will be expensive to maintain and will cost more in the long run.

The considerations of outsourcing change dramatically when you view the relationship from the perspective of the outsourcing firm.

It is important to the outsourcing firm that the average unit cost for customer support and sales be kept to a minimum. Fixed-price contracts create an environment that pushes average costs lower for subsequent projects.

Outsourcing firms have a great incentive to maintain a customer support and sales: reuse of components in future projects. If this library is thoroughly tested, insuring that it is nearly defect free, and documented so it can be easily understood, it can be used with confidence to lower average costs over time.

Additionally, outsourcing firms have a great incentive to keep their staffs trained in the latest software languages, tools, products and techniques. As more outsourcing projects are undertaken, the responsibility to keep staff knowledgeable and up-to-date transfers from the in-house development team to the outsourcing firm. The outsourcing firm assumes the risk of investing in the technical staff - if their people are not trained on the latest software technologies, they cannot remain competitive with other outsourcing firms who have staffs with state-of-the-art skills. They willingly assume the risk with the expectation that these training initiatives will lower future average costs.

Unfortunately, it is still the norm in the customer support and sales process arena, and in outsourcing cases in particular, for an organization to be ignorant of the average size and average cost of a customer support and sales project. All other sophisticated industries calculate and monitor their per unit average cost. As the customer support and sales industry continues to mature, not only will it be common practice to know average costs in dollars per function point, it will be required.

" How does outsourcing effect Travel Industry ? "

Travel industry is an industry which has achieved a good amount of growth. According to the World Travel and Tourism Council calculated that tourism generated $121 billion or 6.4% of the nation’s GDP { Gross Domestic product } in 2011. Also the outbound tourism { Travels going outside country } has increased so as the companies planning there tour. There N number of small travel firms being established these days. Few even achieve the goal of hitting their target audience. Most of the service industries { not only travel firms } grow on the basis of 80:20 principal.

80:20 principal is basically retaining their 80% of the customers and hitting on the 20% of new customers. This 80% helps them achieve their targets and also sometimes achieve MOS { Margin of Safety }. And the rest 20% helps in achieving the estimated profit statistics.

Now how does OS {outsourcing} effect this system or why OS would help this system ?

The answer is OS gives a good customer service support to any travel firm which helps them to work on their 80% also the upcoming travel firms think upon investing in infrastructure and giving up that time to customer support OS helps them doing that. Also OS can bring a drastic change to their up selling and boosts up their sales. Even OS sales is also a good idea cause the travel firm need not spend a lot on the dedicated team instead they can just OS their process.

In this way any small scale travel firm can OS their process to get a good stability in the market and also generate good amount of numbers { Profit }

Outsourcing SWOT Analysis to India

 

Benefits of O2I's KPO Services

Highly qualified team holding Ph.D. or Masters degrees

Strong Scientific, Technical and Medical (STM) domain expertise

Life Sciences and Market Research focus

Everyday your business is faced with new challenges, strengths, weaknesses, opportunities and threats. The good thing is, what happens to be a threat for your competitor could turn into a golden opportunity for you. All you need to do is keep your eyes open and take the right action!

SWOT Analysis (Strengths, Weaknesses, Opportunities, Threats) is also known as TOWS analysis. SWOT Analysis is a powerful technique to throw light on your business possibilities. SWOT Analysis helps you chisel out your strategies in a more streamlined manner and create a niche in the market.

Strengths

What do people in your market see as your strengths?

What advantages does your company have?

What do you do better than your competitors?

What unique or lowest-cost resources do you have access to?

Look at your strengths in the context of the competition. If you are comparing your product with a competitor who has a large share of the market, your own large share of the market is not a strength but a necessity.

Weaknesses

What should you avoid?

What could you improve?

What are people in your market likely to see as weaknesses?

You might need to get into your customers' or competitors' shoes to check if there are weaknesses that they perceive but you overlooked. It is more an internal versus an external view.

Opportunities

Where are the good opportunities your company could leverage?

What are the interesting and promising trends you are aware of?

Opportunities could come your way through:

Changes in the technology you use

Changes in the market

Changes in government policies that are relevant to your business

Changes in your target audience such as lifestyle

Events in your industry

You can discover new opportunities by analyzing your strengths. You could also look at your weaknesses and think about the potential opportunities opening up if you eliminate your weaknesses.

Threats:

What obstacles do you face?

What is your competition doing?

Is changing technology threatening your position?

Do you have bad debt or cash-flow problems?

Could any of your weaknesses seriously threaten your business?

Are the required specifications for your job, products or services changing?

Such analysis will often throw light on the future course of action, both in terms of putting problems into perspective and pointing out what needs to be done.

Strengths and Weaknesses are internal and Opportunities and Threats relate to external factors.

O2I can conduct SWOT analysis for your competitors as well. This will enable you to pinpoint the areas where you can successfully compete with them.

Pros and Cons Outsourcing in Travel firm

Pros :

This would reduce the cost to the company

This would increase the number leads per day

This would increase the quality of customer support

Help retaining clients

Would also increase the sales { If a sales process }

Cons :

We need a dedicated team for the best service and not always possible that each and every team member would be equally skillful.

SLA’s cause cost reduction while verification if the team working on the process is not proper.

Employees don’t be stable, this seen the most in outsourcing firms.

Initial investment is high and the breakeven is of about two to three years.

Also due to data protect act testimonials and leads cannot be exchanged which would be an factor effecting to get sales process.

Popular News Articles About Outsourcing

{ http://articles.economictimes.indiatimes.com/keyword/outsourcing }

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India Inc optimistic after Obama win, but outsourcing concerns weigh

{http://profit.ndtv.com/news/corporates/article-india-inc-optimistic-after-obama-win-but-outsourcing-concerns-weigh-313011}

India Inc. has expressed happiness over the re-election of President Barack Obama despite his hard line stand against outsourcing. India's $100 billion IT services sector is dependent on the U.S. and Europe for over 80 per cent of revenues.

Phaneesh Murthy, who heads the Information Technology (IT) firm iGATE on Wednesday said the re-election of President Barack Obama is not the best news for the Indian IT industry.

Mr Murthy, who has earlier served as a director of Infosys, India's second biggest IT services exporter, said, "Congratulations to the President for pulling off a hard fought victory. Not the best news for India or the IT outsourcing industry". Mr Murthy is based in the U.S.

However, N Chandrasekaran, CEO of TCS, India's biggest software services outsourcer said he does not agree that President Obama's regime is anti-outsourcing.

"We would like to congratulate President Obama for winning a second term in office. Now the focus will be on driving economic growth, which will lead to increased prosperity and greater job creation in the US, as well as act as a catalyst for growth across the world.

Technology will play a strong role in driving the next phase of growth and Indian IT companies will have opportunity to play a significant role to partner with US companies to achieve this. This will lead to further job creation in the US and other parts of the world," Mr Chandrasekaran said in a statement.

Rahul Bajaj, chairman of Bajaj Auto said outsourcing could be a sticky issue, but overall it is a good thing that President Obama has been re-elected.

President Obama had adopted a tough line against outsourcing of jobs in the run-up to these elections, and had often said that he wanted to give tax breaks to companies that are investing in the United States. In his attacks on his opponent Mitt Romney, former Massachusetts governor, he accused him of outsourcing American jobs to countries like India and China.

Adi Godrej, chairman of the Godrej group said President Obama's presidency is a good development for India.

"Between two large economies there will be issues and concerns. Outsourcing is also a concern and I hope it will be addressed soon," Mr Godrej said on the sidelines of the World Economic Forum on India here.

Som Mittal, chairman of IT lobby NASSCOM said Indian industry is very dependent on the U.S. economy doing well. Only when economic recovery happens will the jobs come back, he added.

BPO industry veteran and former CEO of Genpact Pramod Bhasin told PTI that the issue of outsourcing was more than a plain election rhetoric.

"I think there will be greater implications as he (Obama) focusses on issues like unemployment. I just hope he remains true to free trade and all the other things that he talks about so well," he said.