Outsourcing, what it is and why to use it

For a long time, companies have sought to have vertical integration for, among other reasons, to have control of all their activities. This originated large, heavy, rigid and slow industries to react to the possible changes that the environment demanded of them, in addition to maintaining high capacities, sometimes idle and with high fixed costs.

There was also on the part of these organizations the need to learn to carry out processes that were not of the CORE of the business. Today it is necessary to have very different organizations DYNAMIC, FLEXIBLE, WITH HIGHER RESPONSE SPEED AND WITH SHORTER CYCLE TIMES. This new version of business has made companies concentrate on doing what they know, identifying them and giving them competitive advantages.

outsourcing-medellin-1

Delivering to third parties what they do not know how to do, are not core activities of the company, cost a lot, change a lot or require a lot of training. This is OUTSOURCING..

This article aims to indicate what this tool is, how it is built, what advantages it has, what disadvantages it has, where to apply it, as well as to show the results of an investigation carried out in Medellín to one of the most important companies in the city, INTRODUCTION

Outsourcing, Outsourcing, Expand the company without delegating authority

These names are also known as a better way to present reengineering or achieve spectacular results by paying special attention to customers or having superior relationships with suppliers. DOING WHAT IS KNOWN TO DO AND CONTRACTING WITH THIRD PARTIES WHAT IS NOT OF THE ESSENCE OF THE BUSINESS.

Until very recently it was believed that the only supplier a company had was the one who supplied raw materials. Today, there are as many suppliers as there are processes that can be hired. Allowing outsiders to supply products that are required but that are distracting in their preparation because they do not have the ability, the resources, the capacity, the taste or simply do not want to do it.

When companies discovered that certain areas were better left to others, that if they had more skill, knowledge, experience, creativity and economic capacity to carry them out, they began to have optimal results because they concentrated on doing what was important for the business.

Initially it was believed that the benefit of outsourcing was for small companies, which due to lack of resources began to deliver their accounting, payroll, inventories and accounts receivable; what was once called SERVICE. However, larger companies saw the advantage of handing over to third parties the handling of high technology, rapidly changing technology, or those trades that implied permanent and expensive training. Also, medium-sized companies took the trouble of doing market research and hiring staff.

As you can see, the power to use OUTSOURCING is not of a certain size of company. It is applicable to any type of business that thinks big and wants to achieve better results without additional costs.

Nor can it be warned that this practice is current and that one can fall into the error of calling it FASHION, because since ancient times it was common to hire mercenaries so that they could face the enemies of a certain territory. It was also common in Europe to hire someone to cry the loved ones of a certain family, LOS PLAÑIDEROS.

It is difficult to find a doctor doing cleaning work in a hospital, much less a bank manager keeping watch.

As can be inferred, OUTSOURCING is not special for a company size or for a standard of processes, less is current and can be used for multiple purposes (reduce costs, increase liquidity, generate value etc.)

Outsourcing has begun to be noticed as an administrative practice to manage processes, recently, but with a very special context and with a strategic nature, today becoming one of the main tools to achieve competitive advantage.

Companies have understood that this is not the time to improvise or give advantages, in terms of training personnel who are not doing the things that are not essential for the company and that someone else can do it without losing secrets or advantages that they add. value. With a strategic process you can define by the business, which processes are subject to deliver to people outside the company who do it better and make a schedule that allows indicating the time when they are going to deliver it. It is therefore not the result of chance, or of moments of problems in which something is going to stop being done, so that someone else does it for the company.

NOMENCLATURE

The names that have been given to what apparently could be different kinds of subcontracts are really differences that go more to the academic field than to the practical one. Let's see some differences that have been presented between the different names that have been given to this tool

• Outsourcing

It is the approximate translation that has been made of the English word OUTSOURCING. It has been intended to mean with this, contract with third parties, the production of components of finished products or the entire finished product. Also contract services and processes both productive and services.

• Maquila

With this name, considered its origin as Mexican, it is intended to indicate the contracting of goods that are not of much added value.

• Subcontract

This word (very common in Colombia) has meant the hiring of physical parts only for production.

In the context of this writing, any word will be used interchangeably.

• Outsourcing

It then means outsourcing products and services to chosen suppliers, which become an extension of the organization's business.

It is common for processes such as:

• Administration of technology, information technology, public relations, training, market research, food and cafeteria services, etc.

Processes that are routine most of the time and that, more than being appreciated by the client, are simple support processes that are in any case required by the company and that can be strategically delivered to third parties.

At this point, we can define outsourcing as a SHOEMAN TO YOUR SHOES, or dedicate yourself to doing what you know how to do and add value and deliver the rest (Make or Buy?).

Or as “Action of resorting to an outside agency to operate a function that was previously performed within a company” (Rothery, p4)

From the list that was made previously, it can be seen that most of these processes are more classified because of how routine and simple they are, than because of another factor; This allows us to indicate that what the business should be done is what the client perceives as something that meets their wishes and expectations.

A BRIEF HISTORY OF OUTSOURCING

As indicated in the introduction to this topic, it cannot be said that it is IN THE FASHION of doing OUTSOURCING, on the contrary it is a practice that has been allowing companies to expand their results for many years.

With Henry Ford's famous black Model T car, the demand was such that its production capacity became a scarce resource and it had no alternative but to enter into subcontracting parts with third parties. The same happened in the 1920s with the development of the railroad; The demand for products in most of the companies was such that they were forced to find someone who would carry out work for them outside of it.

In the fifties after the reconstruction of Europe by the Americans, a similar phenomenon occurred, also due to excess demand over supply, but here the subcontracting was done to guarantee that some suppliers would supply the raw materials that were required. and at the right time. Contracting consulting services with third parties is also very common from this period. In the seventies, it became necessary for those who do not maintain oil resources, to reduce costs and this made them look for those who would produce goods required by the companies, for those who would produce them cheaper. We cannot ignore what was done in the sixties when EUROPE WENT TO NORTH AFRICA to look for cheap labor,the same thing that the Japanese did with East Africa and the Americans with South America. The three managed to contract with companies familiar with the environment, so that costs were reduced, contracting the production of some goods. Also at this time, with the introduction of the computer to the industry, some companies began to sell services for payroll, inventories, etc.

But it was in the eighties when the world began to see how it was more convenient to hand over certain processes to third parties than to do them the same company and the most relevant case occurs when KODAK transferred its data center and telecommunications systems to IBM.

If the reader has followed this development carefully, he may have already deduced that the progress made by OUTSOURCING, as is logical, has depended on the economic moment, and the focus has been changing. It went from being purely tactical to becoming a strategic focus. Companies today start from an analysis of their vision, their mission, their value chain and what their CORE processes should be and which ones can be subcontracted.

WHAT IS LOOKING FOR TODAY WITH THE HIRING?

Como ya se indicó desde un principio, ha habido momentos en que se ha usado la subcontratación con el ánimo de reducir costos, de asegurar por parte de un proveedor oportunamente los insumos que éste suministra, evitar la adquisición de bienes de capital altamente costosos, etc. Hoy en día se ha considerado que es bueno hacer Outsourcing para buscar ventajas competitivas y agregar el máximo valor a los clientes, entregando oportunamente a menor costo y el mejor producto, o teniendo las mejores materias primas para elaborar igualmente buenos productos. Precisamente todo lo anterior son las medidas modernas de eficiencia que según Hammer y Champy son los atributos que un cliente busca en un producto o servicio.

Recent studies have shown that what is most sought in a supplier is to try to contract with him, processes that are not from the heart of the business and from the strategic direction it is known which processes they are. It also seeks to contract those processes that involve changing and expensive high technology, as well as those that require a lot of training, or processes that also change too much.

WHAT PROCESSES NOT TO CONTRACT?

It is normal for companies to have their processes well defined and to know what functions and results they have with each one.

Worldwide, it has been established that the following processes, which have been called by some as core processes or CORE processes, are not being contracted, at least by world-class companies.

• The administrative processes where the direction that the company must have is drawn. These processes are equivalent to strategic planning, where they determine what is the north, the tactics and the priority of the organization. Likewise, which segment or segments of the market may be addressed. Administrative processes that imply management control. Especially the feedback on the fulfillment or deviation of the strategies, an activity that is also carried out by the planning process. The processes that the client considers to be the ones that add the most value. Those processes of attention to their requirements, such as attention and solution of complaints, design of their products, those that identify the company. Processes that are the raison d'être of the organization, both in the production process and in the provision of the service.In this particular case the fear is due to the loss of knowledge of the organization, processes that present high profitability.

In general, the essence of the process is not outsourced, however it is possible that the research or data collection and some routine tasks necessary for the process are outsourced.

WHAT TO HIRE?

Almost by exception all other processes are available for outsourcing, such as:

• Information technology, the most outsourced to date Management of fixed assets and investment portfolio Education, training and training Market research Payroll administration Customer support or guarantee services Manufacturing, under the modality of maquila or supplier of assembled parts. Messaging and all kinds of general business support services.

REASONS FOR SUBCONTRACTING

OF TACTICAL TYPE

• Reduce costs Increase working capital Have cash Have new resources for other applications Access new technology

OF A STRATEGIC TYPE

• Free up resources that can allow better planning of project plans Focus the company Give to other routine and support activities Share risks Approach world-class companies Serve as an enabling factor for employees Optimize the use of resources

ADVANTAGES OF OUTSOURCING

Without being the most important thing, it can be said that there is almost always a decrease in the cost of the product or service.

• As has been insisted, the most desired advantage of outsourcing today is the value it adds due to the higher quality perceived by the client. Company personnel are trained by being in contact with world-class people. Top management focuses on what is truly important for the company. It is expected that whoever is contracted knows how to make the process, product or service better, giving the customer a guarantee of a better product Allowing the use of the facilities for other purposes.

RISKS

• Not negotiating the contract that was intended, nor with who it should be Being left in the middle of the road due to failure of the contractor Loss of autonomy Lowering the morale of the groups for fear of being fired or feeling incompetent Change in the rules they make More costly the process Begin to lose information and control of the company Have clarity on the management of relationships with the supplier.

OUTSOURCING IN ANTIOQUIA

For Antioquia, the use of subcontracting is no mystery and, on the contrary, for a long time now, our land has been supporting the industry with the sale of services by specialists.

An investigation carried out to ten of the main companies, including ENCUENTRO COLOMBIANO DE FOTOGRAFIA, NAPCO COLOMBIANA, ODUPERLY, CONAVI, ISA, NOEL, SUMICOL, PERSONERIA MEDELLIN, due to their size in our environment, resulted in the following.

They have had this practice of outsourcing for more than six years, with very positive results in reducing costs and improving processes, showing some added value. They have had very specific areas where they have concentrated on hiring and the most common is the IT area. It does not differ at all in the world trend, which is where the need to deliver this entire process to third parties is most concentrated; It is followed in importance by the delivery of accounting, restaurants, human resource management, design and after-sales services. As in the primary phases of outsourcing, the companies have tried to contract, reduce costs, followed by seeking greater flexibility in the provision of services and finally making processes more efficient.

When investigating the reasons for outsourcing, the main reason was to reduce costs, as already indicated, in addition to freeing up working capital and making activities independent. The results have been so good that most hope to continue hiring and expanding coverage.

Without trying to make a total list of who are providers in Medellín of some services we have the following:

Sodexho de Colombia, Alimentar, Domesa, De la Rue, Uno A, Recover, Look Security, Security Experts, Security of Antioquia, Maquinamos, Imagen, IBM Colombia.

Below we graph the result of the investigation at the local level, from which we highlight the following conclusions:

• The most outsourced process is IT 33.33%. 55.6% of companies have been outsourcing for more than six years. 40% outsourced non-essential processes, seeking to reduce work. None hires value-added processes. The results have been good for 88.9% of those surveyed. 50% plan to continue implementing outsourced processes. The process that 40% of companies would not outsource is operations and business development. For 46.2 % Its main advantage has been the reduction in costs.

STEPS TO OUTSOURCING

1. Strategically identify the processes subject to contracting.

We have repeatedly insisted on indicating that the processes that are key to the best performance of the company are impossible for us to leave in the hands of others. An internal benchmarking process can be used for this debugging.

1. Define which are the best candidates.

Benchmarking is a great ally to be able to establish which are the world-class companies that allow defining new suppliers. Through telephone directories, yellow pages, association clubs, university professors, in short there are many sources that can help define candidates.

Through a tender you can invite those who are interested and meet the minimum requirements demanded by the company.

1. Define the requirements

We must establish what the minimum requirements are and how they will be measured.

1. Select providers.

In order not to make a mistake with the selection, you must inquire about the experience that the possible candidates show in the medium; the affinity it may have with the company, the results obtained with similar industries and avoiding the mistake of hiring with only costs as an important criterion.

1. Report

Indicate in the organization the changes that will be made to avoid problems that may arise due to lack of communication.

1. Manage relationships.

To achieve a good result, the organization must be equipped with all the human technological administrative tools and everything that allows the best relationships to exist.

LEGAL ASPECTS TO TAKE INTO ACCOUNT

When making an outsourcing contract it is important to take into account the following aspects:

• Objectives and scope of the OUTSOURCING. Obligations and responsibilities of each company. Duration of the contract. Form of administration. Mechanisms to resolve conflicts. Confidentiality clauses. Follow-up and adjustment clauses. Causes of dissolution and form.

CONCLUSION:

According to the research, companies that apply outsourcing present better levels of service, given the better performance of outsourced processes. Its culture is more conducive to outsourcing its processes, especially given a better business conception and a broader vision of the business. Your infrastructure is better prepared to take on the challenges that major business changes require.

The services contracted by Outsourcing facilitate the execution of the processes as they are more specialized in a specific area, allowing those responsible for the processes to dedicate themselves to improving their performance.

As can be seen, Outsourcing generates a competitive advantage by achieving lower costs and also a differentiation in the way of managing business.

From the work we can conclude that in our environment we are not so distant in what is contracted worldwide: computer technology, information systems, network management, intranet implementation. The purposes are the same as any world-class company FOCUS BETTER, MAKE A BETTER PROJECT PLAN, get closer to the best, better apply reengineering, although on a smaller scale, reduce costs and have better cash flow.

BIBLIOGRAPHY

• Rothery, Brian. and Robertson, Ian (1996). OUTSOURCING.. Editorial Limosa Mexico.231p.Hammer, M. Y J. Champy. (1994). Reengineering. Editorial Norma, Bogotá. 226p. Mintzberg, H and JB Quinn. (1993). Honda Motor Co. The Strategy Process, Printece Hall, New Jersey Pardo Vargas, Fernando. (1998). Outsourcing: the new customer-supplier relationship. Cinseyt, Lima, Peru Porter, Michael E. (1998). Competitive advantage. Creating and sustaining superior performance. CECSA, Mexico. 545p

Through the following video list, the information about outsourcing is complemented, its concept is expanded, it is questioned if it is good or bad and finally the advantages of its implementation beyond costs are presented.

Download the original file