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Rationnale for outsourcing – In the new world


Cost arbitrage used to be the key parameter which decided “go’- “no-go” standoff with regards outsourcing. Not anymore – risk pooling is the one now. Risk always comes as a reward – “age old philosophy of equity markets still hold fort – higher the risk, lower the reward and vice versa. When a firm go for risk pooling – it cuts its risk impacts (not necessarily occurrences) – but it also let go a potential higher return proposition.


Generally presence of a variable demand and introduction of new technology or a capital exhaustive initiative (generally with regards sophisticated high impact product development or mega projects) aggravate the reqirement of sharing risk.An airline manufacturer might as well – be bankrupt if it decides to do an end-to-end inhouse manufacturing and logistics under its banner. It will seriously impact the cash flow and also limit the marketing footprint of the product. Under this scenaro – 10 key parts of an aircraft can be possibly built by 10 different firms in 10 different geographies and this model is symbiotically beneficial to everyone. It is much more convinient for the poster firm of the product to penetrate new markets if it has local presence of some part of its manufacturing through a strategic business partner. It helps in generating accountability, social responsibility and goodwill as well. The product firm can harangue the fact that not only it is bringing new technology and product to a new market  - it is creating jobs and knowledge in those geographies. Market share can rise organically very much through these variations of outsourcing. Outsourcing today is not just movement of a part of supply chain to a 3rd party – the real benefits are measured in terms of its total value to all streams – sales, marketing, market share, profitability and goodwill.


Critics of outsourcing have time and again argued the compulsions to retain the core competencies and critical interfaces like HR and finance in-house along with holding on to something which potentially would be a huge competitive proposition in future. These mantras are getting challenged as practically there is no end to innovation. One breakaway technology leads to another – flexibility and maintaining a portfolio of products and services is the key. Outsourcing should never be done in a way which is not flexible, adaptable and transparent. Relationships can also be reversible. No where a perception of sorts should be cultivated of a buyer – seller relationship, it is an arrangement for mutual benefit and profitability and nothing else. At all stages of outsourcing as long as there is high level control over operation to the outsourced vendor to ensure quality – author feels no possible justification why outsourcing cannot jump to next level of “relationship”.


Key business acumen required to make a lucrative outsourcing relationship is “selection of supplier” – due diligence of the highest order is required. It need not be a quick dump of your work to the cheapest available supplier whoes credentials might be unproven. Firms run a huge risk of quality and service levels in such an arrangement. A fair amount of leverage over the outsourced company is required and some portion of the work should always be retained in-house even in the outsourced segment of work which reduces dependency, increases knowledge sharing and thus not overly dependent on the supplier. Relationship should be ideally done at initial phase of a project (product) cycle rather than in a fire fight situation.


Outsourcing has grown from mere call center to knowledge process outsourcing. We are moving fast towards marriages in form of equity stakes. A big house should never be unduly worried about taking a nominal stake in the outsourced company which will knock out all interface issues in one short and pave way for an inclusive growth.


As long as IPR issues and data protection is guaranteed – outsourcing growth can reach to unprecendted levels and no-company can live isolated from it – unless ready the take the brunt of its pitfalls. Last but not the least – nominal federal changes with regards tightening of measures with regards outsourcing is not going to help because the benefits at any cost of going for outsourcing in a planned manner will just run over any protectionist measures.


Comment from Mruthyunjaya Shankarappa
Time October 8, 2010 at 7:42 pm

Hi Prakash,

Do you really foresee a possible business chain in which the BPO partner invests in its Client and visa-versa. A good thought.


Comment from Prakash Kumar
Time November 17, 2010 at 5:59 pm

In an outsourcing model which can withstand any recessionary pressure and is a win-win for both the venor and the Client – the answer to your question is “YES”.

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