As a manager of an organization, you will often need to find ways to cut costs.

Question

As a manager of an organization, you will often need to find ways to cut costs.

One way to cut costs is to outsource by hiring another organization to perform the service. Consider the scenario below.

As a manager for the public outreach department, you realize that the current system for managing outreach issues is outdated. You would like to have a new outreach system developed using the Cloudera platform to help manage big data. However, no one in the organization has the expertise. You will have to outsource the project to save on costs and avoid management problems. Two companies have sent in a bid—one from Vancouver, Canada, and one from Mumbai, India. The bid from India was slightly lower than the bid from Canada. Compose a response that includes the elements listed below.

Define what is meant by outsourcing.

Explain how Peter Drucker’s statement about how one company’s back room is another company’s front room pertains to outsourcing. Use an example.

Summarize the management advantages, cost reduction, and risk reduction of outsourcing.

Summarize the outsourcing risks concerning control, long-term costs, and exit strategy.

Discuss which company you would outsource to and why.

Does distance matter?

Explanation / Answer

Outsourcing is a business activity wherein a certain part of internal activities is entrusted on a third party company that specializes specifically in that set of activity. This is done by the parent company to achieve efficiency in terms of cost.

Peter Drucker created a distinction in the various activities a business does into two classes, viz. “front room” and “back room”. He explained front room activities are the set of activities that support its core business whereas back room activities are the support functions. He propounded that a company should outsource all its back room to another company, which in turn becomes the front room for the new company.

There are examples abound of outsourcing in todays world. JP Morgan has a lot of its back office operations such as payroll management to Indian tech giant Tata Consultancy Services (TCS). Similarly, HSBC’s backend operations are outsourced to yet another Indian company called Wipro.

Management Advantages

With the more mundane and mediocre jobs being relegated to an outsourcing partner, a company’s middle and upper management can be more actively engaged in strategy formulation for the company. Outsourcing more often than not results in optimization of resource utilization, resulting in greater profitability.

In the given example, with the management of big data being outsourced to another firm, the department of outreach can be involved in more strategic tasks of designing various outreach programs.

Cost Reduction

Consider a lending institution which wants to have a collection team in place which can collect missed monthly payments from customers. Option one is to have an in-house team. This would mean a large workforce spread across the entire geography of the business. Greater number of employees would mean higher costs (training costs, device costs, salary, etc.). If the same is outsourced to a collection agency vendor, which already has a fleet-on-street catering to various other financial lenders, the only cost incurred by the parent company is an annual fee for the services. Clearly the second option results in more savings.

Risk Reduction

With the outsourcing vendor having gained specialization over the possible back end activities, it is less prone to committing mistakes. Compare this with the function being carried out internally, there is a possibility that errors happen.

Risk

Control over the operational aspect of the task being outsourced has to be maintained. This can be done by signing a service level agreement that clearly outlines the roles and responsibilities of the vendor. Furthermore, regular process auditing needs to be done to ensure that all the processes are being followed.

A clearly laid out exit strategy must be formulated right at the beginning of the partnership which should explain what are the obligations that the vendor has when the contract is terminated. Since an outsourcing partner may be privy to confidential information about the company, hand over of such information should be done at the parent company’s satisfaction.

In terms of response to the two possible vendors, Mumbai firm would be the obvious choice if cost was the only parameter. However, in real life, it is not.

To choose the appropriate vendor, I would look at the following

Distance Factor

The entire concept of outsourcing is created to destroy the implications of distance. With ever more robust technology and connectivity, distance is no more a restriction.

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