31/01/2015
OUTSOURCING
Outsourcing is when any operation or process that could be – or would usually be – performed in-house by an organization’s employees is sub-contracted to another organisation for a substantial period. The outsourced task can be performed on-site or off-site.
Outsourcing is currently relatively popular with both profit seeking and
not-for-profit organisations.
Essentially, a decision to outsource is likely to save some internal costs but incur additional external costs. Revenue could also change if, for example, outsourcing increased capacity. Therefore, the decision to outsource could be heavily influenced by marginal cost and marginal
revenue considerations.
WHY OUTSOURCE
It allows the organisation to focus on its core, value-adding activities
without the distraction of having to run support services. Support services can soak up both management time and financial resources and these would usually be better spent concentrating on where the business can use its resources and competences to gain competitive advantages.
Cost savings. Usually the organisations to which activities are
outsourced specialise in those activities and,therefore,are likely to
enjoy economies of scale, whether from the use of machinery or the
employment of expertise. There can be additional cost savings if a
process is outsourced to a foreign company operating in a cheaper
labour area (off-shoring).
Cost certainty. An outsourcing contract at a fixed, or closely defined
price, shifts much of the financial risk onto the provider. Costs become
more predictable.
Cost restructuring. For some types of outsourcing such as component
manufacturing, there will be lower fixed costs and higher variable costs.
If all components are bought in, then these costs are all variable. Had
the components been made in-house, there would inevitably have been
associated substantial fixed overheads.
Access to cutting edge expertise and talent. In technically advanced, fast
moving industries, it can be difficult for small companies to develop or make use of new processes. Outsourcing to a specialist company can
give access to the latest technologies.
Better quality. There can be an immediate improvement in quality if a
process is outsourced to a world-class company where the quality is
carefully defined in a service level agreement.
Risk transference. If a company perceives that one of its processes has
high risks, then this can be transferred by outsourcing to another company.
Capacity management. For example, it can be difficult for businesses to
deal with variable demand: either they run out of capacity (unhappy customers), or have (expensive) unused capacity. Outsourcing to a large
company can mitigate this problem.
EXAMPLES OF OUTSOURCING
1.Catering facilities. For example, Compass Group UK and Ireland has a
turnover of almost $3bnand its main business is providing catering
facilities for organisations such as schools, hospitals, client entertainment, businesses, and sports and leisure venues.
2.Document handling. Document handling is a serious problem for many
companies and there are often legal requirements to preserve
documents for many years. The company Ricoh offers scanning and archiving facilities (both electronic and hard copy), printing (including
folding and binding), mail room (receipt, sorting delivery and dispatch).
Increasingly, incoming documents are scanned and stored electronically.
That way, documents are instantly retrievable and can be used simultaneously by several people.
3.Technology services/IT. Because of the large investment, high specialist expertise needed and rapid technological changes, this one of the most common processes to be outsourced.
4.Accounting services. For example,receivables ledger maintenance or
wages and salaries administration.
8.
HRM. Recruitment, legal considerations (for example, complying with
equal opportunities legislation), appraisals, contracts, disciplinary,
grievance.
9.Fleet management. Purchase, maintenance and disposal of vehicles.
SA, NOVEMBER 2011, ACCA
