Risks and Benefits of Outsourcing IT for Small Companies

Posted on May 2, 2011 by mike

Outsourcing benefits not only large corporations but small companies as well. SMEs that lack expertise on certain areas can outsource these jobs to contractors to get the job done without spending considerable sum of money.

Each company has its own information technology needs which may not be totally addressed by ready-made software packages. SMEs that have to integrate one software tool to another need skilled programmers to do so, which could be a prohibitive factor given the scarcity of professionals.

Many small companies that lack in-house IT expertise find it attractive to outsource system design, implementation and maintenance to offshore to BPO firms in India or Philippines. Cost savings, access to technical expertise, and economy of scale translate into more profits and productivity. Combining offshore outsourcing and open-source software can cut the cost of software development by 50%-75%. The benefits of outsourcing are also seen in hardware maintenance, which includes scheduled check-up of routine server and networks. Hardware failure and data loss can be mitigated through outsourcing.

Although the benefits far outweigh the risks, it is better to anticipate for the potential implications of outsourcing. Small companies should be able to oversee remote operations and deal with differences in time zones and culture. Also, the liabilities of third parties can be difficult to identify in a complex outsourcing set-up. Unwanted competition may result when the outsourcing firm takes advantage of intellectual property rights or trade secretes of its clients.

Risk management all boils down to careful planning and informed decision making. Outsourcing has long been proven to work for small companies. Choosing the right information technology contractor is the key to make it work.

What SMEs Should Consider Before Outsourcing

What to Outsource. Think twice before outsourcing your business’ critical processes. Non-strategic operations like payroll and back-office support are examples of non-strategic operations that can be outsourced to streamline your organizational operations.

Quality over Price. Choosing the cheapest vendor without considering quality of service is the surest way to fail. Most of the time, BPO firms that charge more for the same service are likely to provide better customer service and meet quality standards.

Expertise. Looking at specialization is a good way to distinguish between two equally good providers. Make sure that the fields of expertise of a prospective contractor are in line with your IT needs.

Latest Technology. The rapid pace of technological change adds to the burden of maintaining an IT system.  Choose a BPO firm that use cutting edge programming languages and software tools to make your IT systems as modern and easy to maintain as possible.

Transfer of knowledge. Choose a BPO firm that can provide technical training to your in-house staff, especially if you’ll be outsourcing a short-term project like software development and integration.

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Benefits of Outsourcing: Lessons from ATM Banking

Posted on April 30, 2011 by mike

For banks, the benefits of outsourcing come in various forms. From customer service to IT management, bank-related operations become more efficient and scalable through outsourcing. The financial benefits of outsourcing make it attractive for banks to let go of more activities in an effort to contain cost and remain competitive. ATM outsourcing is becoming a trend as more banks struggle to reduce their expenses to recover from the recent recession.

Outsourcing automated teller machines not only reduces operational costs, it also frees up more corporate assets to be used in core business activities like fund management and lending operations. It also makes it easier for banks to upgrade cash dispensers and install software upgrades.

Banking costs have been increasing throughout the recent years. As more banks try to expand their ATM network locally and abroad, the need for cost-reducing alternatives has gone strong. Dove Consulting reported that banks were losing $242 per month on each off-site ATM. From 2001 to 2003, off-premise ATM revenues dropped by 11%. Despite the critical role of ATMs in delivering banking services, they are increasingly becoming a financial burden due to the increasing cost of maintenance and day-to-day management.

ATM banking is predominantly technical in nature, so the manufacturers themselves are in better position to efficiently run and maintain these machines. Banks do not always have the in-house expertise to do software upgrade and troubleshooting, whereas automated teller machine makers have the staff who can both maintain and upgrade equipment, thus cutting down the overall expenses.

Reduction in the cost of compliance and elimination of upfront investments are also among the major financial benefits of ATM outsourcing. Companies will assume the responsibility of complying with electronic banking regulations, thus reducing the risk associated with electronic banking. Also, under outsourcing contracts, banks will no longer have to allocate capital for machine acquisitions and off-site space rentals, as these will be shouldered by the ATM company.

ATM companies have a positive outlook for the outsourcing market. Laze Lancaster, President of ATM USA, said that her company is taking a simplified approach to outsourcing by providing a full range of cash dispensers and related services while allowing for custom bank branding. ATM USA machines carry the exclusive logos of the institutional clients, a big step in terms of ATM industry’s brand management practices. As ATM technologies and services keep on advancing, banks will see more reasons to shift to outsourcing to replace their traditional and inefficient ATM management set-up.

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Weighing the Costs and Benefits of Call Center Outsourcing

Posted on April 30, 2011 by mike

The costs and benefits of offshoring depend on various factors, including the geographic location of contractors, skill requirements, scope of service, management system and range of operational planning. To better understand the rewards, risks and cost of offshoring, let’s look at the success story of a multinational company that outsourced its customer contact process.

In case of Siemens ROLM, offshoring customer contact process has been proven effective in running an efficient aftermarket sales campaign. Siemens worked with an offshoring agency to run an on-site call center that aimed to drive after market sales for its move/add/change (MAC) product lines, without the costs associated with traditional marketing channels.

Catering to mid-tier clients, the contact center aimed to manage leads, minimize the lost income from third-party encroachment and improve relationship with customers. The contact center not only met but exceeded the sales and lead targets. In the end, the product line became more marketable. Contacting more 2,800 customers every month, the call center met 116% of the target leads. It generated more than $4.2 million in MAC sales and gathered leads worth as much as $1 million.

The cost of outsourcing was far below what the company would have spent if it relied to field salesmen alone. The initial cost of setting up teleservices to gather leads and provide sales support paid off. But there is something equally important as the financial benefits of outsourcing, particularly call center outsourcing. By offshoring its telemarketing functions, Siemens’ sales representatives could concentrate on face-to-face contact with customers without bothering about sales support and lead generation. This increased the overall productivity of the sales group.

The experience of Siemens proves that outsourcing specialized functions is worth the risks. Sometimes, companies need to get rid of old practices to pave the way for organizational change. Similar cases proved that offshoring customer contact functions speeds up implementation and even delivers betters results compared with in-house call center operations.

Taking advantage of the expertise of third-party contact center operators is a lot better than starting from a scratch. This is the main reason why outsourcing gives added value to customer service. In some aspects of business operations, BPO companies know more than in-house staff do. The benefits of outsourcing not only come in the forms of cost savings and economy of scale. Companies that are experimenting with new business solutions can tap on the extensive experience of outsourcing companies to better manage risks and costs.

This doesn’t mean that the risks of offshoring should be undermined. Not all outsourced processes meet the expected target. In the end, a company may end up spending more on outsourcing expenses if a wrong contractor is chosen. Also, a company should be ready to make some investments to support its offshoring partners. Sometimes, companies have to invest also on communications facilities, training and customer management system.

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Drawbacks of Outsourcing Information Technology

Posted on April 28, 2011 by mike

The following drawbacks of outsourcing information technology jobs are based on  a study of outsourcing deals made between 1992 and 2000, which revealed a 36% failure rate. Nevertheless, success stories on IT outsourcing showed that such risks could be managed to exploit the benefits of outsourcing. Companies that lack awareness on the unpredictability of outsourcing outcomes are more likely to be caught off guard when these issues arise.

System failure, security breaches and lack of data integrity result into unreliable system-generated information. Poor IT systems can drive a company out of business or expose it to lawsuits and sanctions due to non-compliance with regulations.

Risks are inherent in any IT set-up, but a major change like offshoring can increase the chance of system failure. Risks in IT operation are particularly high when it is outsourced. Problems arise when the client and its outsourcing company follow different policies and processes. The risk of system failure is further aggravated by lack of a reporting system that allows clients to identify operational   problems.

In some offshoring arrangements, the in-house IT personnel and intellectual property of the client are shared or completely transferred to the offshoring company, thus weakening the IT capability of the client. In this situation, the client loses its knowledge capital which could affect its ability to manage itself effectively.

The client will also struggle in developing the new management skills needed to oversee the outsourcing contract. It may take time for the client to effectively govern and monitor its remote IT operations. The lack of management team with relevant experience could prevent the company  from making necessary changes and coming up with the right decisions.

Meeting client standards is often a contentious issue that can take a considerable period of time to be settled. Because each organization has its own operating environment, standards may differ at some extent. Clients that intend to fully exploit the benefits of outsourcing may impose a 100% compliance rule which is impractical for the IT outsourcing company in the short run. Bridging the gap between clients’ expectations and the actual output of the service provider is made more challenging by disagreement over the priorities of IT operations. In most cases, failure to meet the client-defined standards is mainly due to the inability of the outsourcing company to outline IT objectives, understand major needs and develop performance metrics at the start of the contract.

The unanticipated costs of outsourcing can prompt clients to cancel their contract. Lack of preparation can lead to a very costly transition. Other reasons behind unanticipated costs are lack of common understanding on price structure of the service and the use of subjective metrics in measuring performance and incentives.

The best way to address these drawbacks of outsourcing information technology jobs is to develop a comprehensive outsourcing plan. Key objectives, requirements and standards should be defined and clearly communicated to the outsourcing provider. A contingency plan should also be put in place to minimize the cost of failure.

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Outsourcing Benefits Patients in Rich Countries

Posted on April 28, 2011 by mike

The financial benefits of medical outsourcing can save millions of Western patients from life threatening conditions that are impractical to treat in their homeland due to high cost of medical care. The passage of universal health care in the US will make health care more affordable by giving everyone access to a medical health plan, however, it doesn’t change the brute fact that health care providers and insurers themselves are struggling with the high cost of medical treatments. Renee-Marie Stephano, president of the Medical Tourism Association, expects wider health care coverage in the US, yet foresees strong demand for offshoring medical processes to better serve the under-insured.

The cost benefits of offshoring have made a big difference in improving the accessibility of health care for middle-class patients. Outsourcing is gradually making an impact on health care delivery in rich countries by promoting competition. The huge difference between US and overseas medical costs can even exceed 70%. For instance, a hip replacement surgery costs at least $40,000 in the US, compared with $7,000 overseas. Total spinal disc replacement and heart valve replacement cost more than $100,000 in the US, whereas overseas medical providers will charge $8,000-$13,000 for the same procedures. As a result, several HMOs are outsourcing medical treatments to foreign hospitals.

Many large corporations fund the health insurance of their employees. Recently, a number of self-insured businesses introduced medical tourism in their employee health plans to maximize their insurance benefits at the most affordable price. Employers are seen as the main driving force behind medical outsourcing since they decide which health care provider should attend to their employees. As medical costs remain a huge concern for the industry, more HMOs are expected to consider offshoring. Health economist Uwe Reinhardt of Princeton University compares the trend with what happened to the US automative industry when Japan dominated the market.

US health care providers are beginning to acknowledge the implications of outsourcing for their business. Some local hospitals feel the need to offer discounts on operations booked during days when the operating rooms are underutilized. Others are outsourcing some operations to cut costs. Aside from medical transcription, claims processing and IT management, hospitals are also outsourcing some of their medical jobs such as diagnosis.

Telemedicine is gaining popularity among hospitals. Outsourcing benefits are beginning to catch the attention of hospitals faced with shortage of local radiologists, expensive radiologist fees and growing specialization in diagnostic imaging, which have made medical outsourcing an attractive option. The low cost of outsourcing telemedicine not only improves access to urgent diagnosis, but also reduces the risk of wrong diagnosis.
Outsourcing brings experienced medical specialists within the reach of health care providers and patients. As more HMOs, insurers and hospitals look up to outsourcing to improve health care delivery, more patients can afford quality heath care.

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Benefits of Outsourcing to Increase With Government Support

Posted on April 11, 2011 by mike

The economic benefits from the outsourcing industry are enticing governments to provide incentives to BPO investors. The Philippines and India are in close race to dominate the global outsourcing market, and both governments offer tax breaks to encourage BPO investments.

BPO start-ups in the Philippines enjoy a six-year tax break.  Industry advocates are calling for the extension of the tax break, citing the growing competition from other countries. A study by IBM showed that the Philippines has surpassed India’s call center industry in terms of manpower size and revenues, but globalization is opening up doors for new competitors. China, Vietnam, Sri Lanka and South Africa are being eyed as major BPO destinations of the future. KenCall EPZ Ltd. marked East Africa’s entry into the call center industry. Mauritius is keen on attracting IT companies by developing more infrastructures aimed at BPO firms, while Egypt offers one of the most competitive wage rates.  South Africa is also offering tax breaks and capital reimbursements, allowing start-up firms to recoup 20%-30% of their capital expenditures in three years. South Africa has the greatest potential to rival today’s BPO hubs given its large population of native English speakers and lower attrition rate.

Amid the growing competition, the Philippine government is using more means other than tax incentives to support the local industry. Special economic zone designations were extended to BPO buildings, thus eliminating import duties on office equipment and reducing red tape. The government also actively supports call center training to sustain the growth of the industry. An estimated 40,000 youths have taken government-sponsored training in English communications.

The benefits of outsourcing to Philippines lure even the country’s competitors in India. The Philippine call center industry has lower attrition rate compared with India. Unlike India’s call center hubs, the BPO zones in the Philippines have sufficient supply of electricity and better modes of transportation. As a result, several Indian and American firms diversified or transferred their entire operations in the Philippines. For instance, 24/7 Customer, an American call center firm, started its Indian operation in 2000 before setting a branch in the Philippines five years later. Now, its Philippine workforce stands at 4,000, compared with 3,000 in India. Although India produces more IT graduates, the Philippines is catching up. The Philippines has 38,000 IT graduates every year and the software industry sector has grown steadily despite the shortage of experienced software engineers.

The economic benefits from the outsourcing industry will encourage more BPO-friendly policies in the Philippines, India and other countries. Tax incentives, grants and vocational training make BPO a more sustainable and profitable business in the Philippines. Government involvement will help reduce attrition rate, control the cost of outsourcing  and attract more talents.

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The Philippines vs India: Which Offers the Most Outsourcing Benefits?

Posted on March 22, 2011 by mike

To get the most out of outsourcing benefits, companies have to choose the right location. The Philippines and India share a lot of similarities in terms of being a competitive BPO destination, but the Philippines is poised to dominate in certain sectors, says Vector BPO.

India’s large pool of IT professionals is the main driving force behind its robust outsourcing industry. India earned its reputation as the center of information technology outsourcing in the word. The country is one of the nations with the largest IT workforce, thanks to its national educational system that puts a lot of emphasis on science and mathematics. To date, there are about 500 software firms operating in India.

As outsourcing continues to penetrate a growing number of industries, the availability of IT professionals is no longer the primary factor to consider when selecting a BPO location. Multinational companies are eager to fully take advantage of the benefits of outsourcing, that’s why many are breaking ties with Indian contractors as soon as they spot better outsourcing opportunities in the Philippines.

During the recent years, the Philippine BPO industry has been claiming a growing percentage of the global offshoring market which is currently dominated by India. The Philippines is increasingly becoming a better place to outsource call center and back-office jobs, mainly due to its closer cultural ties with the West, better English conversational skills and lower wages.

Cultural Affinity With the West

Since the American colonization in the 1940s, the Filipinos have been using English in their everyday lives. The influence of American culture on the Filipinos is evident in the local mass media, corporate world and the arts. Cinemas are dominated by Hollywood films, while the radio and television networks regularly broadcast Western shows and music. Retail goods like clothing, apparel and foods are also heavily influenced by American tastes.  It’s no wonder that Filipinos are in a better position than Indians in conversing with Americans. On the other hand, Western culture is not as pervasive in India as it is in the Philippines. Although Hollywood films have their fair share of local patronage, Bollywood dominates the local cinemas. Also, certain cultural and religious practices in India directly clash with American ways of life.

English Proficiency

Filipinos from all economic and social backgrounds use English as their second language. English is also India’s second language, but it is not as widely practiced as in the Philippines. For instance, many Indian advertisements are printed or broadcast in local dialects.

Lower Salaries and Price Levels

The average salary of India-based call center employees is $6K, compared with $3K for their Filipino counterparts. The salary gap tells much about the costs and benefits of outsourcing in the Philippines relative to India.  IBM also cites lower inflation rate as one of the strengths of the Philippine outsourcing industry.

Tax Incentives

The Philippine government gives more tax incentives to BPO companies, adding up to the financial benefits of outsourcing. The Philippines’ 8-year tax holiday obviously contributed to higher net profit margin of BPO companies, estimated between 11%-21%, compared with 13%-16% in India, according to Orbto.

Given the talents, cost advantages and Westernized culture of the Philippines, more American BPO companies are expanding their operations in the Philippines. A research conducted by IBM showed that the Philippines already displaced India as the top provider of business support functions such as business process outsourcing and shares services. (Source: AsiaOne.com)

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Risks and Benefits of Outsourcing HR Functions

Posted on March 22, 2011 by mike

Human resource outsourcing has evolved considerably throughout the years. From being a mere provider of temporary staff, recruitment agencies have now  become critical business partners that deliver specialized staffing services and reduce HRM costs while improving personnel management in general.

It was in the 1970s when human resource outsourcing  gained a prominent role. The boom in the IT industry created a big demand for programmers more than what the labor market could provide. IT firms resorted to HRM outsourcing and even paid a lot to agencies to fill their vacancies.  Early human outsourcing involved a paid service whereby companies could obtain a list of prospective employees working with their competitors. Today, recruitment process outsourcing is increasingly becoming an integral part of comprehensive HRM outsourcing solutions which also include manpower retention, compensation and benefits administration and training.

HRM outsourcing benefits both large and small companies. Large corporations can improve efficiency by delegating payroll management to outsourcing firms. Even small companies find it economical to partner with HRM contractors for recruitment purposes. Data from the Everest Research Institute showed that small businesses believe in the cost benefits of outsourcing human resources. By partnering with outsourcing firms, small companies do not have to hire special recruitment staff.

Although BPO firms provide huge financial  benefits to corporations, the risks of human resource outsourcing should not be ignored.

  • Cost. Working with external HRM partners could lead to unforeseen increases in cost. As manpower demand increases, the cost of outsourcing could grow as well. New government regulations could prompt outsourcing firms to increase their cost to ensure compliance.
  • Effect on Employee-Employer Relationship. The human resource department of the organization is the primary intermediary between its workers and the management. Personnel services are the major priority of HR-oriented organization, thus hiring the wrong contractor can severely damage employer-employee relationship.  Some employees may feel alienated when dealing with third-party HRM providers. There are many job applicants who prefer to apply directly at the company of their choice rather than go through staffing firms.
  • Delays. If an outsourcing provider is serving several clients, getting something changed or corrected may take several days. Payment disputes, errors in employee records and other urgent concerns are harder to deal with if an HRM outsourcing provider is involved. Outsourcing can impact employers’ access to information and ability to make urgent decisions.
  • Legal liability. Employee file management and corporate record keeping are heavily regulated in some countries. Large companies that are exposed to considerable legal risks need to find a human outsourcing provider that can protect, manage and maintain personnel records like transaction slips and medical records. Partnering with BPO firms with poor data security system and inefficient record keeping practices merely increases the risk of outsourcing.

Quality and legal issues are a major concern in every type of outsourcing. The risk of outsourcing human resource functions can be minimized by developing an oversight system to ensure consistency in the operations of the in-house HR department and the contractor. Lack of preparation in choosing an outsourcing provider can result into violations of labor law, unfit candidates being hired or employee benefits being mismanaged. Studies on the risks and benefits of outsourcing should be balanced to avoid unrealistic goals and zero return on BPO investments.

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Outsourcing Benefits During Recession

Posted on March 22, 2011 by mike

Although the recent economic recession had negative impact on the business of several BPO providers, there are still irresistible benefits of business outsourcing during such a hard time. Recession ironically created demand for some BPO services. Companies that laid off several employees resorted to outsourcing to continue their operations in smaller scale.

A survey by Odesk, an online marketplace for outsourcing services, showed that smaller businesses were taking advantage of the cost benefits of outsourcing, saying that they would continue outsourcing jobs despite the economic downturn. More than 40% of the 600 respondents said they planned to outsource more. Seven percent cited layoffs as the main reason, while 35% would resort to outsourcing because they couldn’t afford to hire full-time staff. Almost 30% planned to outsource certain works for the first time. Despite the global economic slowdown last year, 14.6% of the respondents said they had resorted to outsourcing, while 14.5% partnered with contractor who would otherwise be unemployed or severely hit by the recession.

The financial benefits of offshoring are hard to ignore during recession. During the onset of the recession, the demand for outsourcing actually increased, according to a survey conducted by InfoWorld. The survey asked more than 200 outsourcing firms, including Atos Origin, IBM, Accenture and Infosys. Around 40% reported that the demand for their services was higher despite the economic slowdown.

Demand was particularly stronger in European countries than in North America. Sixty four percent of European respondents reported seeing increased demand for their services, compared with 25% among American providers. However, the negative effects of recession were undeniable, with 38% citing it as the major reason that prompted their client to defer outsourcing efforts. The survey also revealed that outsourcing was becoming increasingly focused on delivering quick return on investment, thus replacing long-term action plans to improve business processes.

The term ‘over-outsourcing’ has become a buzzword during recession, especially in the U.S. As struggling companies take advantage of the financial benefits of human resource outsourcing, some American economists attribute the slow recovery of the local economy to the lack of domestic jobs. Some Americans have negative sentiments on outsourcing as it takes away jobs from them. On the other hand, there are also some economists who think that the economic benefits of business outsourcing will also be enjoyed by rich economies as well. They argue that although low-wage countries are creating more BPO jobs at the expense of the rich countries, this practice will help industrialized countries run a more efficient economy by prompting them to focus on high-value services that are not easy to outsource.

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