top 10 reason companies outsource

1/25/13 The Outsourcing Institute

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Top Ten Outsourcing Survey

Executive Survey: The Outsourcing Institute'sAnnual Survey of Outsourcing End Users

Top 10 Reasons Companies Outsource

1. Reduce and control operating costs 2. Improve company focus

3. Gain access to world-class capabilities 4. Free internal resources for other purposes

5. Resources are not available internally 6. Accelerate reengineering benefits

7. Function difficult to manage/out of control 8. Make capital funds available

9. Share risks 10. Cash infusion

Source: Survey of Current and Potential Outsourcing End-UsersThe Outsourcing Institute Membership, 1998

Top 10 Factors in Vendor Selection

1. Commitment to quality

2. Price 3. References/reputation 4. Flexible contract terms 5. Scope of resources

6. Additional value-added capability 7. Cultural match 8. Existing relationship 9. Location

10. Other

Top 10 Factors for Successful Outsourcing

1. Understanding company goals and objectives 2. A strategic vision and plan 3. Selecting the right vendor

4. Ongoing management of the relationships 5. A properly structured contract

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5. A properly structured contract 6. Open communication with affectedindividual/groups

7. Senior executive support and involvement 8. Careful attention to personnel issues 9. Near term financial justification

10. Use of outside expertise

Source: Survey of Current and Potential Outsourcing End-Users The Outsourcing Institute Membership, 1998

Top 10 Drivers Behind Today's OutsourcingDecisions (in alphabetical order)

Accelerate reengineering benefits

Access to world class capabilitiesCash infusionFree resources for other purposesFunction difficult to manage or out of

controlImprove company focusMake capital funds available

Reduce operating costsReduce riskResources not available internally

Accelerate reengineering benefitsReengineering aims for dramatic improvements in

critical measures of performance such as cost,quality, service and speed. But the need toincrease efficiency can come into direct conflictwith the need to invest in core business. As non-core internal functions are continually put on theback burner, systems become less efficient andless productive. By outsourcing a non-corefunction to a world class provider, the

organization can begin to see the benefits ofreengineering.

Access to world class capabilitiesWorld class providers make extensiveinvestments in technology, methodologies, andpeople. They gain expertise by working withmany clients facing similar challenges. This

combination of specialization and expertise givescustomers a competitive advantage and helpsthem avoid the cost of chasing technology andtraining. In addition, there are better careeropportunities for personnel who transition to theoutsourcing provider.

Cash infusion

Outsourcing often involves the transfer of assetsfrom the customer to the provider. Equipment,facilities, vehicles and licenses used in thecurrent operations have value and are sold tothe vendor. The vendor then uses these assetsto provide services back to the client. Dependingon the value of the assets involved, this sale mayresult in a significant cash payment to the

customer.

When these assets are sold to the vendor, theyare typically sold at book value. The book value



are typically sold at book value. The book valuecan be higher than the market value. In thesecases, the difference between the two actuallyrepresents a loan from the vendor to the clientwhich is repaid in the price of the services over

the life of the contract.

Free resources for other purposesEvery organization has limits on the resourcesavailable to it. Outsourcing permits anorganization to redirect its resources, most oftenpeople resources, from non core activities towardactivities which serve the customer. The

organization can redirect these people or at leastthe staff slots they represent onto greater valueadding activities. People whose energies arecurrently focused internally can now be focusedexternally -- on the customer.

Function difficult to manage or out of controlOutsourcing is certainly one option for

addressing this problem. It is critical to rememberthat outsourcing doesn't mean abdication ofmanagement responsibility nor does it work wellas a knee jerk reaction by a company in trouble.

When a function is viewed as difficult to manageor out of control, the organization needs toexamine the underlying causes. If the

requirements expectations or needed resourcesare not clearly understood, then outsourcingwon't improve the situation; it may in factexacerbate it. If the organization doesn'tunderstand its own requirements, it won't beable to communicate them to an outsideprovider.

Improve company focusOutsourcing lets a company focus on its corebusiness by having operational functionsassumed by an outside expert. Freed fromdevoting energy to areas that are not in itsexpertise, the company can focus its resourceson meeting its customers' needs.

Make capital funds availableThere is tremendous competition within mostorganizations for capital funds. Deciding where toinvest these funds is one of the most importantdecisions that senior management makes. It isoften hard to justify non-core capital investments

when areas more directly related to producing aproduct or providing a service compete for thesame money.

Outsourcing can reduce the need to investcapital funds in non-core business functions.Instead of acquiring the resources throughcapital expenditures, they are contracted for on

an "as used" operational expense basis.Outsourcing can also improve certain financialmeasurements of the firm by eliminating theneed to show return on equity from capitalinvestments in non core areas.



investments in non core areas.

Reduce operating costsCompanies that try to do everything themselvesmay incur vastly higher research, development,marketing and deployment expenses, all of which

are passed on to the customer. An outsideprovider's lower cost structure, which may be theresult of a greater economy of scale or otheradvantage based on specialization, reduces acompany's operating costs and increases itscompetitive advantage.

Reduce riskTremendous risks are associated with theinvestments an organization makes. Markets,competition, government regulations, financialconditions and technologies all change extremelyquickly. Keeping up with these changes,especially those in which the next generationrequires a significant investment, is very risky.

Outsourcing providers make investments onbehalf of many clients, not just one. Sharedinvestment spreads risk, and significantlyreduces the risk born by a single company.

Resources not available internallyCompanies outsource because they do not haveaccess to the required resources within thecompany. Outsourcing is a viable alternative tobuilding the needed capability from the ground.New organizations, spin-offs, or companiesexpanding into new geography or newtechnology should consider the benefits ofoutsourcing from the very start.

Three major areas companies outsource

How Do You Compare?Executives on our network told us areas that

they were currently outsourcing, and what theywere considering outsourcing in the near future.Sixty percent of the executives were seniorexecutives. Almost every industry wasrepresented, from advertising and brewingthrough government and healthcare tomanufacturing and utilities. The companiesranged from small (under 499 employees) to verylarge (over 10,000 employees).

Information TechnologyThis is the fastest growing area for outsourcingtoday.

Executives are currently outsourcing:

maintenance/repairtrainingapplications developmentconsulting and reengineeringmainframe data centers

Executives are considering outsourcing:




client/servernetworksdesktop systemsend-user supportfull I/T outsourcing

Operations

AdministrationExecutives are currently outsourcing:

printing and reprographicsmailroomconsulting and training


records managementadministrative information systemssupply/inventoryprinting and reprographics

Customer Service Executives are currently outsourcing:

field servicefield service dispatchtelephone customer support


customer service information systemsfield service dispatchtelephone customer support

FinanceExecutives are currently outsourcing:

payroll processingpurchasingtransaction processinggeneral accounting


payroll processingtaxes

Human ResourcesExecutives are currently outsourcing:

relocation

workers' compensationrecruiting/staffing


consulting and training

human resource information systems



Real Estate & Physical PlantsExecutives are currently outsourcing:

Food and cafeteria servicesfacilities maintenancesecurity


facilities managementfacilities maintenancefacilities information systems

Sales and MarketingExecutives are currently outsourcing:

direct mailadvertisingtelemarketing


reservation and sales operationsfield sales

LogisticsFor any type of company that requires high level

distribution or transportation, outsourcing thesefunctions can show immediate and dramaticreturn on investment.

DistributionExecutives are currently outsourcing:

freight auditconsulting and trainingfreight brokeringleasing


warehousingdistribution and logisticsinformation systemsoperations

TransportationExecutives are currently outsourcing:

fleet management

fleet operations

fleet maintenance


fleet managementfleet operationsfleet maintenance



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top 10 reason companies outsource

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