Question

Competition among the industries resulted in increase of operational cost. Unfortunately, increased in market demand not necessarily improve the profit margin. Explain in detail five ways how you can outsource your operations.

Answer 1

Outsourcing the Operations can be due to low cost, higher efficiency, shorter turn around time or better quality provided by the Partners/Vendors than performing the Operations in-house. Whatever the reason for Outsourcing below are the different ways in which an Outsourcing can be done.

1. The Simplest method of Outsourcing is to Identify a Company which will Perform the Operations for you. Two companies create a contract to reduce the cost of operation through economies of scale and technical experience. The disadvantage with this method of Outsourcing is Loss of Control, Scope for Internal IP/Specialized knowledge being leaked to the Competitors. Detailed Due-Diligence needs to be performed before identifying the Right Partner.

2. Outsourcing Part of the Operations. In this method of Outsourcing, the key Knowledge is retained within the company. Companies own employees will have the Management and Supervisory Authority while the Outsourced company provides the required Materials and Personnel. In this method, the Supplier is primarily good at sourcing on large scale combined with the Supplier's Other customers Or could be an Offshore Supplier operating from a Low Cost Country. This is the typical model for the IT Industry. The disadvantage with this Model is the potential for cost reduction is not as high as in the earlier Model since the Key Management overheads need to be still maintained within the Company and the advantages of economies of scale will not reach 100% potential.

3. Captive Center Operations in a Low Cost Country. In this Model the company itself establishes a Subsidiary in a Low cost country and performs all the Operations. The advantage is there is no Loss of Control or risk of Internal know-how being exposed to the competition. The disadvantage is that the economies of scale and expertise of a Supplier will not exist. Cost reduction is primarily based on Location cost arbitrage.

4. Partnerships/Joint Ventures. Another method of outsourcing is to identify a Company which deals with similar kind of Businesses but is not a direct competitor. For example IBM partners with many of the Service providers who are also in the IT Industry. IBM owns the work of Management and Subject Matter expert while most of the Development, Testing etc. are done by the Partners. This creates a win-win situation for the Company and the Partners. The Disadvantage is that the Suppliers can slowly gain the knowledge of the products or Services and start selling by themselves. Such scenarios are usually avoided by having no-compete agreements with the partners.

5. Mutli-Sourcing. In this method, the operations are broken down to modules and outsourced to multiple suppliers using any one of the methods described above. This helps in getting the best of each supplier and results in high cost reduction and better quality of products or Services. The issue is with Vendor Management wherein the important factor is all the Suppliers should work in sync. Managing the Partners becomes the key issue.