Why do either? Surprise, surprise it comes down to saving money. The decision to outsource almost always is done to lower cost and often has the benefit improving quality. In finance or accounting the work is usually moved someplace with far lower costs to perform the same work. The lower costs is most often obtained by salary arbitrage. Or said more directly, having work done in a location where employees are paid far less than in the Unites States or other developed economies. Wages in India, parts of China and the Philippines, as just three examples, can be as much as ten percent of the cost of a US worker. This means that if they need to hire two employees to replace one employee in the US there is a net savings of 80% of the US wages. That is a huge incentive to move work to a low cost location.
There are two ways to move work to a low cost location, outsourcing and offshoring, and I have been involved in both.
· Offshoring is hiring your own employees in a low cost location. The primary benefit of this strategy is the control you maintain of the work, processes and systems. It also allows the new employees to have a true vested interest in the work, how it is performed and to improve it going forward. The primary con to this approach is the investment and commitment to building the capability and staff in the new location. Training can be very intense and seems to always take a bit longer than the plan originally put on paper. There are also local laws and regulations to contend with. I have been involved in offshoring work to the Philippines and India and in both cases did so without laying off anyone in the US.
· Outsourcing is hiring third party to do the work. This has been very popular and successful in the IT world due to the distinct documented processes that are needed. It also applies very well in the accounting and finance world for higher volume process oriented tasks. These include accounts payable, billing and accounts payable as examples. The primary benefit of using a third party is ability to leverage their expertise in performing the processes you want performed. Their expertise comes from doing the same or similar processes for other companies, possibly hundreds of companies. Often the third party has systems and processes already in place that your company can just adopt. This can make the transition quicker and more cost effective. But, what is the ‘cost’ to your company; it is loss of control and lack of customization. Your company will get what they already do, not what you have historically done. This is not always a bad thing, but be aware of the difference, especially if you have a very specific need. On the other hand, is your specific item a “need” or a “want”? Often, the need exist only because that is the way we have always done it.
Next time I will describe how to prepare to outsource or offshore work successfully.
There are two ways to move work to a low cost location, outsourcing and offshoring, and I have been involved in both.
· Offshoring is hiring your own employees in a low cost location. The primary benefit of this strategy is the control you maintain of the work, processes and systems. It also allows the new employees to have a true vested interest in the work, how it is performed and to improve it going forward. The primary con to this approach is the investment and commitment to building the capability and staff in the new location. Training can be very intense and seems to always take a bit longer than the plan originally put on paper. There are also local laws and regulations to contend with. I have been involved in offshoring work to the Philippines and India and in both cases did so without laying off anyone in the US.
· Outsourcing is hiring third party to do the work. This has been very popular and successful in the IT world due to the distinct documented processes that are needed. It also applies very well in the accounting and finance world for higher volume process oriented tasks. These include accounts payable, billing and accounts payable as examples. The primary benefit of using a third party is ability to leverage their expertise in performing the processes you want performed. Their expertise comes from doing the same or similar processes for other companies, possibly hundreds of companies. Often the third party has systems and processes already in place that your company can just adopt. This can make the transition quicker and more cost effective. But, what is the ‘cost’ to your company; it is loss of control and lack of customization. Your company will get what they already do, not what you have historically done. This is not always a bad thing, but be aware of the difference, especially if you have a very specific need. On the other hand, is your specific item a “need” or a “want”? Often, the need exist only because that is the way we have always done it.
Next time I will describe how to prepare to outsource or offshore work successfully.
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