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Arrangements that abound in the outsourcing world

FINANCIAL STANDARD
By | February 2nd 2010

By Prof Ndede Amadi

Business process outsourcing (BPO) is the act of giving another organisation the responsibility of running what would otherwise be an internal activity or task.

A company outsources to cut costs by taking advantage of economies of scale offered by a third party, who does similar work for many other companies.

If the outsourcing arrangement is between companies in different countries, cost savings can be realised because of lower labour costs, thanks to different standards of living in the different countries.

Because the outsourcing company has to relinquish control over outsourced component of the business, outsourcing is often reserved for the non-critical and non-core tasks of the business.

The ‘outsourcing’ concept has been predominantly applied in the information technology (IT) field relative to other fields.

In the field of IT, outsourcing has two meanings.

One is commissioning the development of a software application to another organisation (usually a company that specialises in the development of this type of application. The other is hiring of the services of another company to manage parts of the services that otherwise would be rendered by an in-house IT unit.

Customer service

But outsourcing can also refer to non-technical services, such as handing over the telephone-based customer service department to a third party. In some cases, the entire information management of a company is outsourced, including planning and business analysis, and as the installation, management, and servicing of the network and workstations.

Outsourcing can range from the large contract, in which a company like AccessKenya manages IT services for a company like Safaricom, to the practice of hiring contractors and temporary office workers on an individual basis.

BPO outsourcing takes different terms and definitions, depending on the geographical location of the buyer of outsourced services and the supplier of those services.

Onshore Outsourcing (also called domestic outsourcing) refers to outsourced services between two companies in the same country (e.g. AccessKenya and Safaricom).

Homesourcing (also known as homeshoring), is an onshore outsourcing arrangement, and refers to "the transfer of service industry employment from office-based to home-based employees with appropriate telephone and Internet facilities". It is best thought of as a combination of outsourcing and telecommuting.

Near shore outsourcing

Nearshore outsourcing refers to tasks outsourced to suppliers outside the country, but on the same continent. For example, if a Kenyan company such as Bata were to outsource some of its activities to a Tanzanian company. Some of the benefits of Nearshore Outsourcing include geographical proximity, which means that travel and communication logistics are easier and less expensive. Other advantages include commonalities between the cultures in the two countries.

When two companies in two different continents are involved in an outsourcing relationship, the correct term to use is Offshore Outsourcing. Offshore outsourcing is common between developed countries such as the US, the UK, and Canada, and developing countries which have both political stability and lower labour costs or tax savings, such as in India and Philippines.

However, developing countries may find themselves disadvantaged in offshore outsourcing, due to substandard infrastructure, among other reasons. However, the advent of high-speed Internet connections made it outsourcing possible in any part of the world.

Originally, the concept of BPO was associated with manufacturing firms that outsourced large segments of their supply chains. In the contemporary context, however, the term is primarily used to refer to the outsourcing of services.

In this new context, BPO is typically categorised into back office outsourcing, which includes internal business functions such as human resources, finance, and accounting; and front office outsourcing, which includes customer-related services such as contact centre services

—For enquiries please contact the author at [email protected]

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