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Outsourcing: How to Pick the Right Partner and Location

Outsourcing: How to Pick the Right Partner and Location
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by Sanjeev Kapoor 05 Apr 2021

Outsourcing is the process of obtaining goods and services from another company, subject to a proper contract or service agreement. It is a very popular process for the delivery of products and services in various industries, including the IT and software industries. The concept of outsourcing has been around for several decades: It originated during the 70s in the manufacturing sector when many industrial enterprises tried to increase their efficiency by hiring other companies to complete auxiliary tasks. For many years, outsourcing was mainly about reducing the cost of operations. Nevertheless, with the advent of globalization, it is also about gaining access to global talent and expertise that is hardly accessible locally.

Nowadays, the scope of outsourcing has expanded significantly: It is possible to outsource a wider range of services than in the past, including sales, IT management, software development, manufacturing, shipping, logistics and administrative support services. Moreover, a longer list of outsourcing options is available, including companies specializing in different processes and services, as well as companies operating in different countries all around the globe. India remains one of the most popular countries where services are outsourced, yet there are also competent providers in many other countries including for example Eastern European countries, China, Brazil, and Taiwan. With so many outsourcing options at hand, companies wishing to outsource services can have hard times selecting the best provider.


Outsourcing Criteria

The selection of the best outsourcing enterprise is based on a combination of the following criteria:

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  • Cost-efficiency: In most cases, this is the criterion that matters the most. This is because most enterprises turn to outsourcing in order to increase their profit margins, reduce their operational costs, and optimize labor cost. Even in cases where enterprises seek talent and expertise, they always look at the impact of the outsourcing cost on their bottom lines.
  • Track record and business reputation: To ensure that their outsourcing project will not fail, most enterprises value the track record and reputation of the outsourcing firm. Relevant information can be always found on the websites of the outsourcing firms. Nevertheless, prior to taking their final outsourcing decisions, enterprises must scrutinize the past projects of the candidate outsourcing companies. In this context, they are likely to seek for references and testimonials from other customers. Likewise, they must review portfolios and sample projects or case studies that will be made available by the outsourcing company.
  • Expertise and innovation: There are many cases where enterprises seek for expertise that they can hardly employ in-house or find in their local ecosystem. In such cases, enterprises will prioritize the expertise of the outsourcing providers, as well as its ability to innovate on the jobs leveraging past experiences and established innovation management processes. Expertise is a very important criterion for the outsourcing of IT management and software development services given the proclaimed talent gap in cutting edge technologies like BigData, Artificial Intelligence (AI), as well as in various state of the art software development methodologies.
  • Language and location: Outsourcing activities and contracts take place at a global scale. However, there are cases where companies prioritize outsourcing in certain locations and time-zones. Time-zone proximity can facilitate collaboration between providers and receivers of outsourcing services. Likewise, in some cases a common language can be factored in the outsourcing selection decision. Cultural and political factors are also considered. For instance, some countries tend to have little appreciate for software-related IP (Intellectual Property), which could complicate software outsourcing contracts.


Selection Best Practices

In most cases, more than one of the above factors are considered in the outsourcing selection process. In this direction, companies employ scoring techniques towards weighting the different factors in the final decision. Specifically, companies prioritize the importance of the various criteria by assigning relative weights to them. The latter can be used to score, evaluate, and shortlist candidate outsourcing providers. Companies can then opt to interview and evaluate more thoroughly the top three shortlisted vendors prior to taking their final decision.

Along with this scoring process, the following best practices must be considered:

  • Avoiding a price-only selection: Unless an enterprise is under extreme budget pressure, it should not decide based on cost-criteria only. This is because a wrong choice (e.g., the selection of an underperforming outsourcing company) could ultimately lead to lost time and increased costs.
  • Starting small and including concrete milestones: A progressive approach is in several cases more effective than a single contract approach. Companies had better start small, i.e., with a small assignment, towards testing the outsourcing company and creating a trusted relationship with it. This is very important when hiring a company for the first time i.e. when there is no prior trusted relationship between the company and its outsourcing partner.
  • Make IP ownership provisions: IP issues must be discussed and negotiated upfront. Failing to do so, might lead to legal disputes and IP risks at later stages of the outsourcing process. In this context, IP provisions must be clearly reflected in the outsourcing contract. The latter must be scrutinized by legal experts.
  • Create a clear and transparent project management plan: This can greatly benefit both parties, as it provides a clear roadmap for their rights and obligations as part of the execution of the outsourcing contract. Furthermore, the project management plan must reflect the payment milestones and the deliverables linked to them.
  • Identify and calculate risks: Most outsourcing projects are associated with various risks such as lack of proper expertise, as well as time or budget slippage. These risks must be identified and assessed in terms of their probability and impact on the business operations. The respective risk assessment can provide a basis for justifying that outsourcing is preferred over in-house implementation.

Overall, the selection of the right outsourcing partner can be a challenging and time-consuming task. However, it is a key prerequisite for the success of the outsourcing process. Specifically, the selection of a proper outsourcing enterprise maximizes the cost-benefit ratio of the outsourcing process, while minimizing any relevant risks. Earlier paragraphs provided some guidelines for evaluating alternative outsourcing providers. These are to be used as a basis for establishing a proven and responsible evaluation process that considers the peculiar needs of an enterprise. Enterprises can always add more selection criteria while factoring the already presented ones in different ways.

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