What is outsourcing?
Outsourcing is the practice of taking internal company functions and paying an outside firm to execute them. The outside firm may be located within the same country as the company, a neighboring country with which a border is shared (i.e., nearshoring) or a country which does not share a border (i.e., offshoring).
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Differences Between Outsourcing, Staffing and Consulting |
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Category |
Outsourcing |
Staffing |
Consulting |
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Term |
Long |
Short or Long |
Short |
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Activities |
Non-Core: "Back Office" |
Core |
Technical/Specialized |
|
Management |
External and Internal |
Internal |
External |
|
Locale |
Off Site |
On Site |
On Site/Off Site |
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Advantages |
Cost |
Neutral |
Quality |
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Key to Success |
Management |
Skill-Sets |
Ownership/Accountability |
Recent Estimates of the Outsourcing Market
The offshore outsourcing market is expected to explode, especially in India where revenues are expected to grow from $6.1 billion in 2001 to $50 billion by 2008.[1] In general, the business-process outsourcing market is expected to reach $19.5 billion by 2008.[2] A recent survey of US manufacturers noted that 66% of them have now begun to outsource product design.[3] Also, US manufacturers will increase outsourcing of business processes by 10.7% over the next year with engineering among the top three.[3] Total outsourcing in 2003 hit $350 billion with business processing outsourcing, engineering included, being one of the fastest growing segments of that market.[4]
Motivation for Outsourcing
The following chart is the result of a survey conducted by the Outsourcing Institute reflecting the reasons US companies are outsourcing internal business functions:
A recent survey of articles published on the Internet or in industry magazines highlights the advantages of outsourcing and some of the important lessons learned to avoid failure. These points are summarized below:
Outsourcing Advantages
- Cutting costs is one of the main reasons businesses embrace offshore outsourcing.[5]
- According to some estimates cost saving up to 75% can be realized especially when offshore outsourcing is utilized.[1] This is due to the significantly lower salary requirements of offshore engineers (average salary in US is $75/hr while it is only $25/hr in India).
- Access to foreign markets is a key motivator for outsourcing.[6] In other words, to keep overseas customers satisfied some operations have to be moved closer to the market.
- Because of immigration limitations, companies setup overseas operations to gain access to available skill sets[6] which are in short supply in the US.[7] Engineers in foreign countries are not only less expensive but well educated and productive.[8]
- Very few US companies produce an entire product themselves. They focus on their competencies and subcontract out the rest to achieve efficiency gains.[6]
- Savings realized due outsourcing are used to increase domestic payrolls of higher value adding positions.[6] Also, frees up capital for infrastructure investments.[3] Strategic outsourcing lets in-house engineers focus on innovative new designs while more routine work is outsourced.[3]
- Specific to offshoring is the ability to take advantage of time zone differences to provide an apparent 24/7 operation.[6] In other words, as part of a company's operation ends in one time zone it can be continued in another part of the world thereby completing a specific task earlier though not always with a reduction in the total duration of the task.
- Outsourcing is an excellent opportunity to benchmark internal processes. Outsourced work that is completed faster and/or with higher quality can be a trigger to re-evaluate internal practices.[9]
- Outsourcing enables the use of a variable resource model: with a shortage of engineers within the US, outsourcing allows manufacturers to scale their workforce to the project cycle instead of maintaining a large highly paid staff.[2]
- Rapid deployment of resources can prevent delays in bringing a product to market which can cause 25-33% loss in lifetime profitability.[2]
- Engaging engineering service providers gains access to latest technologies, processes and best practices without the need to develop or improve legacy internal systems. It also brings a pair of fresh eyes upon a client's problems.[2]
- Engineering service providers are held to higher standard of quality and accountability.[2]
- Small companies between 500 and 1,000 employees are most aggressively considering outsourcing to eliminate distraction for senior management, get access to state-of-the-art technology or to tap expertise that can't be added economically to the current staff.[10]
So, what are the caveats? The answer lies in offshore outsourcing.
References
- The Pros & Cons of Offshore Outsourcing, Katrina C. Arabe, ThomasNet.com, 2002.
- Engineering: The Last Frontier of Business Process Outsourcing, James Richmond and Scott Miller, MachineDesign.com, 2005.
- Offshore Outsourcing Is Both Inevitable and a Source of US Manufacturing Strength, Joe Costello, MachineDesign.com, 2005.
- The Numbers Game, Outsourcing Essentials, Vol. 1, No. 2, 2003.
- The China Road, Alan S. Brown, Mechanical Engineering Magazine, 2005.
- Outsourcing and American Jobs, Murray Weidenbaum, Weidenbauem Center on the Economy, Government and Public Policy Breakfast Presentations, 2004.
- Examining the US Aerospace Workforce, Aerospace America, August 2005.
- Where the Engineers Are, Alan S. Brown, Mechanical Engineering Magazine, 2005.
- Vertical Integration, Not Outsourcing, Roland Bent, MachineDesign.com, 2005.
- Outsourcing's Sweet Spot, Richard H. Gamble, Outsourcing Essentials, Vol. 1 No. 4, 2003.
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