Outsourcing in the Changing World of Business

Felix Kugel
Vice President Manpower Inc. and
Managing Director of Russia & CIS

The current economic climate is forcing organizations to think outside of the box so that they can remain competitive. One of the routes that some take is to outsource various processes in order to become more flexible and lower costs. Outsourcing, as we know, is the process of contracting out certain nonessential or noncore processes to a third-party with proven expertise in the field.

Outsourcing is a term used to describe almost any corporate activity that is managed by an outside vendor, from running the company’s cafeteria to the provision of courier services.

The history of outsourcing goes back a lot further than you may think. Ever since people have been performing tasks for employers, some duties have been performed off-site. When a member of staff didn’t have the necessary expertise to perform a certain type of work, the task was delegated to someone else who did. Over time, this practice of outsourcing led to people being trained in specific, specialized professions.

Today, outsourcing of many business functions is quite common. The number of companies taking advantage of outsourcing is growing at a phenomenal rate every year. Thus, according to the American Staffing Association, 90 percent to 95 percent of the companies in the U.S. are reported to have been using outsourcing services on a regular basis.

But why do companies outsource and what exactly should they be outsourcing? The first and most important reason why companies outsource their processes is the significant and sometimes massive cost reduction that results from outsourcing jobs, processes, etc. Outsourcing lets a company focus on its core expertise such as IT, hotels, health etc., while letting people manage other peripheral (not necessary services nonetheless) services like data entry, employee database, housekeeping, customer support, call centers and so on. By outsourcing all your noncore functions, your employees can be put to better use, thus increasing the potential of your core business. According to ASA data, around 60 percent of companies practicing outsourcing in the U.S. have reduced costs by an average of 20 percent, while some firms have saved up to 40 percent.

Banking and telecoms, the most developed sectors when it comes to outsourcing, account for about 40 percent of global outsourcing. By 2011, much accounting will be outsourced as well, in addition to a lot of verticals including mortgages, treasuries etc. The trend today is that many firms are willing to outsource parts of their core business that they think would benefit. So, with time, the use of outsourcing will become even wider and embrace more industries.

To provide professional outsourcing services new social organizations were established — for example, the Professional Employer Organization, or PEO, and The National Association of Professional Employer Organizations, or NAPEO, the largest trade association for professional employer organizations, which includes more than the 400 PEOs operating in all 50 U.S. states. The PEOs provide enhanced access to employee benefits for more than 3 million working Americans. This number has increased considerably in the past three years. NAPEO estimates that the PEO industry grew a very robust $5 billion to $68 billion in gross revenues by 2008. Thus, in developed markets outsourcing is becoming a profitable business and an increasing popular service.

As for Russia, outsourcing is a relatively new service. As a tool, it has been used by business for less than 10 years. The 1998 default made a number of manufacturing entities operating in Russia take a closer look at the advantages that are prevalent when the use of outsourcing is properly applied. It was a turning point in the use of outsourcing in Russia.

Today, when many companies are at risk, we note a growing demand for this service from markedly different business segments starting with the production industry and following through to pharmaceuticals. Companies find it profitable and cost-effective to outsource work to third parties so that they can focus more on their core functions and thus perform those more efficiently.

Interest in outsourcing from employees has been growing as well. The days of working for one employer for all of one’s working life are in the past. Some individuals may find that they are laid off from the company that they work for, and are then hired back to a contractor. More people are willing to keep up with the times and work using more flexible patterns.

Thus, it goes without saying that outsourcing will have a bright future. According to the National Outsourcing Association, the global outsource market is estimated to grow to $142 billion by 2010. With economic pressures increasing day by day, outsourcing is a viable tool to stay competitive, flexible and responsive to market changes.