Outsourcing is a very diverse topic, and there are many different outsourcing options and outsourcing service providers to choose from. Companies are telling TEC that they need a clearer picture of outsourcing, its potential benefits, and common pitfalls. They want examples of different types of outsourcing and advice on whether outsourcing is right for them. This primer addresses these questions. In addition, TEC is launching a research initiative into outsourcing and launching the Outsourcing Evaluation Center to help companies in their journey towards outsourcing, whether they are outsourcing for the first time or the fifth.
A CEO sits in his office one day, and begins to wonder about his company . . . His number one competitor sells its products and services for lower prices than his company, is able to provide 24-hour customer service, and lately has been offering a slew of innovative new products. The CEO has read his competitor's annual report, and noted that they were profitable again this year. The competitor's revenues are the same as the CEO's company, but its costs are lower. Meanwhile, the CEO's company is unable to raise prices, can't afford to offer 24-hour customer service, and the competitor is starting to take market share at every turn. And, by the way, the CEO's company lost money again this year. The CEO continues to ponder . . . "Both companies have similar transaction volumes. How does my competitor do it? Why are they able to offer lower prices, better service, and do it profitably?"
Meanwhile, Wall Street is demanding that the CEO's company become profitable . . . Now!
What is the CEO going to do? How is the CEO's company going to reduce costs so it can be profitable, and begin to invest more capital in research and development, sales, and marketing?
The first step this CEO takes is to hire away one of his competitor's senior managers to learn all of his competitor's secrets. Once the new manager is on board, the CEO questions the manager to find out how his competitor is doing so well. The answer is baffling . . . he learns that its executives aren't more educated than his team, it doesn't spend any more money on marketing activities, and its existing products are not any better. Each company has about the same number of sales people, they get mentioned the same number of times in trade articles, and they look similar in many respects. Only one thing seems to be different . . . all of the competitor's non-core activities are outsourced, and sixty percent of its remaining staff is located offshore, in either India or China!
The CEO vows to learn more about outsourcing and offshoring.
In the English language (and most likely in other languages), "outsourcing" is a relatively new term. A 1967 edition of Merriam-Webster's Seventh New Collegiate Dictionary does not carry a listing for "outsourcing," but a recent check of Merriam-Webster's Online Abridged Dictionary (http://webster.com/home.htm) found the following entry:
Main Entry: out�sourc�ing
Pronunciation: -"sOr-si[ng], -"sor-
Function: noun Date: 1982 "The practice of subcontracting manufacturing work to outside and especially foreign or nonunion companies"
Though the term is relatively new, the concept of outsourcing has been around for a long time.
Since 1982, the term outsourcing has evolved to include all parts of the enterprise, not just manufacturing. In many ways, outsourcing is a synonym for sub-contracting. Literally any activity that is performed by a company can be, and probably has been, outsourced.
Outsourcing is not the same as Offshoring
Today, when a company contracts work from another company, it is called outsourcing. Outsourced work performed locally (i.e. in the same country) is called "onshore outsourcing". Outsourced work performed in other countries that are in roughly the same time zone is called "nearshore outsourcing". For the United States, nearshore would include Mexico, Canada, and many Caribbean Islands. Outsourced work that is performed in countries that are many time zones away or a long distance away is called offshore outsourcing. Examples of offshore locations for the U.S. include China, India, Singapore and South Africa.
A CEO sits in his office one day, and begins to wonder about his company . . . His number one competitor sells its products and services for lower prices than his company, is able to provide 24-hour customer service, and lately has been offering a slew of innovative new products. The CEO has read his competitor's annual report, and noted that they were profitable again this year. The competitor's revenues are the same as the CEO's company, but its costs are lower. Meanwhile, the CEO's company is unable to raise prices, can't afford to offer 24-hour customer service, and the competitor is starting to take market share at every turn. And, by the way, the CEO's company lost money again this year. The CEO continues to ponder . . . "Both companies have similar transaction volumes. How does my competitor do it? Why are they able to offer lower prices, better service, and do it profitably?"
Meanwhile, Wall Street is demanding that the CEO's company become profitable . . . Now!
What is the CEO going to do? How is the CEO's company going to reduce costs so it can be profitable, and begin to invest more capital in research and development, sales, and marketing?
The first step this CEO takes is to hire away one of his competitor's senior managers to learn all of his competitor's secrets. Once the new manager is on board, the CEO questions the manager to find out how his competitor is doing so well. The answer is baffling . . . he learns that its executives aren't more educated than his team, it doesn't spend any more money on marketing activities, and its existing products are not any better. Each company has about the same number of sales people, they get mentioned the same number of times in trade articles, and they look similar in many respects. Only one thing seems to be different . . . all of the competitor's non-core activities are outsourced, and sixty percent of its remaining staff is located offshore, in either India or China!
The CEO vows to learn more about outsourcing and offshoring.
In the English language (and most likely in other languages), "outsourcing" is a relatively new term. A 1967 edition of Merriam-Webster's Seventh New Collegiate Dictionary does not carry a listing for "outsourcing," but a recent check of Merriam-Webster's Online Abridged Dictionary (http://webster.com/home.htm) found the following entry:
Main Entry: out�sourc�ing
Pronunciation: -"sOr-si[ng], -"sor-
Function: noun Date: 1982 "The practice of subcontracting manufacturing work to outside and especially foreign or nonunion companies"
Though the term is relatively new, the concept of outsourcing has been around for a long time.
Since 1982, the term outsourcing has evolved to include all parts of the enterprise, not just manufacturing. In many ways, outsourcing is a synonym for sub-contracting. Literally any activity that is performed by a company can be, and probably has been, outsourced.
Outsourcing is not the same as Offshoring
Today, when a company contracts work from another company, it is called outsourcing. Outsourced work performed locally (i.e. in the same country) is called "onshore outsourcing". Outsourced work performed in other countries that are in roughly the same time zone is called "nearshore outsourcing". For the United States, nearshore would include Mexico, Canada, and many Caribbean Islands. Outsourced work that is performed in countries that are many time zones away or a long distance away is called offshore outsourcing. Examples of offshore locations for the U.S. include China, India, Singapore and South Africa.
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