Types of outsourcing

There are two main types of outsourcing: corporate outsourcing and so-called market outsourcing.

Corporate outsourcing

In corporate outsourcing, the role of the consulting company is not an external organization operating on the market, but a division or business unit of the corporation, holding or group, which provide services to each other.

Outsourcing acquires special relevance in the concentration of groups of profiled companies in one region.

A classic case is the formation of groups of enterprises as a result of reorganizations, separation, formation of groups of wholesalers and retailers, profiled divisions (transport, security, administrative, etc.) from the production site or the main production.

The formation of new business architecture, excluding the obvious advantages, has certain disadvantages and difficulties in organizational development.

These include the complexity of forecasting the cost of creating and launching a new organizational unit; the significant increase in the document flow; the growth of operating and transaction costs; the short terms for recruitment and selection of the management, etc.

Key criteria defining the corporate outsourcing model:

Level of organizational penetration of the contractor company (consultant) in the client’s company – the number of subordinate companies are assessed/analyzed.

Completeness of the functional scope of the outsourcing services in the client’s company – according to this criterion the quantity of the functional directions, served under an outsourcing contract (HR, technical service, IT, marketing, legal service, etc.) is considered.

Degree of homogeneity of the methods for calculating the value of outsourcing services for the client company – the homogeneity of the methods for calculating the value of services for different functional areas are studied – the methodologies can be based on estimating the value of man-hours, the value of specific material resources, the orientation towards market indicators of the value of similar services, etc.

Level of operating costs and the volume of document flow – the number of transactions of employees between the two organizations is considered, as well as the volume of document flow served by them.

Degree of autonomy of the management of the company – client from the management of the contractor (consultant) – the degree of the potential influence of the consultant on the client’s activity through the use of separate areas of management as a tool for influence (functional areas, eg management) of remuneration in HR functions).

Level and quality of cooperation between the consultant and the client – it can be considered as an integral indicator of the balance between the two companies, which depends on certain criteria.

The total level of staff and management costs.

Duration and cost of the project for development and implementation of the model – the time spent on development, coordination, and signing of the package of documents (contracts with applications, invoices, application forms, regulations, etc.), as well as the cost of work of the staff to carry out the relevant actions, including the management of the service implementation project. ” (1, p.8)

Using these criteria, the main models of corporate outsourcing can be determined:

  • marginal outsourcing model;
  • batch outsourcing model;
  • elemental outsourcing model.

Market outsourcing

In market outsourcing, the role of the company – contractor of separate services outside the client company, is taken by an external organization.

This type of outsourcing is used mainly by medium and small companies that do not belong to large groups or corporations. Reference: “What is outsourcing”, https://brightonbot.com/what-is-outsourcing/

An important question arises here: is it possible to apply the above-mentioned criteria in market outsourcing as tools for assessing the effectiveness and optimality of its models?

The answer to this question is “yes” because the proposed criteria are sufficiently universal and characterize the quality aspects of outsourcing as a type of management.

For example, such criteria as “degree of autonomy”, “level and quality of cooperation”, “level of personnel and management costs” are applicable regardless of the type of company – small, medium, or large, with a holding structure or not.

The size of the company may rather affect the change of the criterion “duration and cost of the project”.

When it comes to criteria such as “degree of autonomy” and “level and quality of cooperation”, it should be borne in mind that they correspond closely to the economic and personnel security of the company.

For “foreign” companies that are not part of a holding or group, the model of marginal outsourcing may have a less massive option of cooperation, high operating costs, a high level of “organizational penetration”, distortion of internal information.

Market outsourcing can cause serious problems: information leakage outside the company, manipulation of individual employees, and even uncontrolled write-off of assets when there is no well-functioning control apparatus. Undoubtedly, incorporate outsourcing the probability of occurrence of the described risks is lower.

Determining and choosing the optimal outsourcing model depends on the type of company and its affiliation to a group of companies or the ability to use corporate outsourcing.

Advantages and disadvantages of outsourcing

The main advantages of outsourcing are:

  • revenue and profit generation and job creation
  • the transfer of services to some countries brings more advanced
  • technologies and business practices
  • raises the qualification of the staff
  • improves its productivity
  • a professional team with experience takes care of the process
  • Many companies are not able to afford qualified and quality human resources specialists from a financial point of view, and with outsourcing, they can buy them as a service.
  • reducing the company’s costs;

Risks of outsourcing

Risks that may occur due to incorrect or formal application of outsourcing, known from practice:

  • outsourcing failure
  • expiration of know-how
  • information leak
  • disruption of other processes in the organization
  • the bankruptcy of the consultant (contractor)
  • unexpected costs
  • loss of control over the process
  • non-compliance with the contract and mutual rights and obligations
  • breach of trade secrets
  • little experience with the specific type of contracts.

The reasons leading to failure as a result of outsourcing can be:

Unrealistic goals – the contracting authority often pursues two contradictory goals: reducing the costs required for the separate functional area and increasing its added value.

Orientation to short-term problems – attempts to solve short-term problems through outsourcing also lead to short-term benefits.

Paying little attention to the added value of outsourcing – focusing on aspects of the added value of outsourcing in favor of the main business functions of the contracting authority.

The contracting authority gradually ceases to manage the relationship with the contractor.

The risks involved in taking activities out of the organization can easily outweigh the benefits of this process. They can be reduced through a consistent approach and a precise contractual agreement.