Outsourcing, a way to gain productivity
We increasingly hear from the business world concepts such as “business process outsourcing”, “offshore outsourcing” or “BSO.” What do these terms mean? Why should a businessman take heed?
A recent article in The New York Times Magazine tells a story of two Columbia University Economics professors that decided to apply business techniques to their lives. They outsourced certain tasks that they did not enjoy. For example, they hired a chef to cook their weekly meals, they paid a person to download their CD collection to computers and they even hired someone to go through their photo albums to select “the best” pictures.
What the professors were trying to do here was to replicate practices that are increasingly resonating in the business world, known as business process outsourcing, offshore outsourcing, BPO or BSO. What do these terms mean? Why should a businessman take heed?
Business Services Outsourcing -BSO- or Business Process Outsourcing -BPO- is a practice where a company engages another to carry out certain specialized tasks, hence reducing general costs. For example, a technological firm may decide to hire another company to receive calls and assist customers with respect to its products or outsource to a legal firm the research required to bring cases before the courts.
Three researchers from the University of San Pablo -Giao, Oliveira Junior and Vasconcellos-, report that currently “clients are demanding more advanced products, services with shorter delivery times and lower prices. To respond to these needs, corporations are focusing on their core competencies and are using technology outsourcing providers to help them improve their productivity, develop new products, carry out research and development activities, reduce business risks and manage operations more effectively.”
Clients are demanding more advanced products, services with quicker delivery times and lower prices The researchers explain that outsourcing can be performed “inshore”, in other words, within a same country or “offshore”, when the company engages a foreign company to carry out these tasks.
According to the case described in the New York Times article, the key to why these companies are resorting to outsourcing lies in the principle of comparative advantages, one of the most basic and oldest concepts in economics. “As introductory econ students all learn, it explains why countries and companies ought to outsource the production of lower-value goods and services, even if they can produce them more efficiently themselves.
Even if you’re faster and more effective than everyone else at a given task — fighting with the cable company, say, or folding your socks just so — you still might be better off if you pay someone else to do it for you. Why? Because there is an opportunity cost for every hour consumed by these tedious, nonproductive tasks; there exists some higher-value activity you could be spending your time on instead,” consider the professors that applied these business techniques to their daily lives.
The equation is simple: for a university professor earning hundreds of dollars an hour it is more advisable to concentrate efforts in profitable tasks and leave the other more simple tasks – such as washing dishes, ironing – to others, for which he will pay much less. The same occurs with companies deciding to outsource services.
According to an empirical study by Business Technology Labs, companies delegating their services obtain more benefits than those that don’t. The study shows that by outsourcing and offshoring savings can range from 25% to 40% and improve talent and market access. Another case study –this time from Massini, Perm-Ajchariyawong and Lewin (professors from the University of Manchester and Duke University)-, is consistent with these findings and prove that companies in the US and Europe have implemented offshoring strategies by looking beyond costs to address other strategic issues, such as: talent pool access, integrating offshoring as part of the global corporate strategy and exploiting specific country advantages.