Essay on Outsourcing

In an increasingly competitive, business development depends on the effective management of assets, including by the maximum concentration of resources on the core activity of the organization. However, as a rule, any organization is “burdened” with non-core but no less important services for its functioning: IT, accounting, legal department, etc. In order to successfully exist and develop without wasting resources, organization can eliminate non-core business functions to outsource. Nowadays, the popularity of outsourcing is growing and firmly entrenched in the minds of the global business community.

According to the experts of Outsourcing Institute, outsourcing of business process is an emerging view of the optimization of enterprises, with the largest increase observed in the field of finance and accounting. Statistics gathered in 1997 by the American Management Association showed that already 20% of surveyed 600 firms outsource at least some of the financial and accounting operations, and 80% – part of the administrative functions (Spring, 2010, pp.171-172).

Outsourcing is the transfer of non-core business processes to third parties. The first outsourcing services were a bit different, it was an outsourcing of personnel, ie the involvement of employees of another firm to perform some tasks. Today, outsourcing is used in various fields, but most often it is used in warehousing and logistics.

Advantages and disadvantages of outsourcing

Outsourcing has many advantages, it gives a chance to save on different resources. Organization can focus attention on the processes which are directly profitable and reduced overhead costs. Outsourcing saves training costs. Besides, it eliminates the need to increase the number of staff of the company at the expense of non-core business process. Outsourcing allows the company’s management and key employees to concentrate on their core business. With the help of outsourcing, there is a redistribution of organizational resources, previously involved in minor roles and directions. Outsourcing ensures continuous uptime (no holidays and sickness). Outsourcing is a major time savings (you can buy ready-made solutions, infrastructure). Outsourcing involves greater transparency (result matters, not the process). Changing outsourcer is easier than changing personnel. Using outsourcing, a company significantly reduces its risks (sharing them with outsourcer). Outsourcing leads to an increase in quality due to the professionals in the business, their experience in similar projects. At the same time, in addition to the obvious benefits, outsourcing has a number of “traps” or risks (Srabotic, 2012, p. 205).

Risk 1: Customer’s lack of experience of work with outsourcing on the one hand, and declared experience of the Contractor outsourcer – on the other. This problem can be solved by testing outsourcer, using recommendations and trial stages of interaction.

Risk 2: lack of standards and methodology entails difficulties of measuring the results and quality. You can avoid this by breaking the contract on the result, requirement of measurable standards.

Risk 3: lack of organizational involvement. Avoiding is possible by relaying responsibility for the process on the Contractor.

Risk 4: waiting for incredible results.

Risk 5: failure of the implementation of the project (consideration of potential and non-obvious needs of the organization). You can prepare company to the work with outsourcer in advance.

Risk 6: loss of critical business knowledge within the company (outflow of confidential information).

Risk 7: inexperience in conformity procedures. Companies need a controller in service delivery, which will assess the effectiveness of outsourcing services to the overall business strategy.

Risk 8: lack of effective project management.

Risk 9: possible reduction in productivity of its own staff (loss of motivation, assessment of changes as negative).

Risk 10: possibility of termination of the contract with the outsourcer (bankruptcy of outsourcer, returning functions inside the business). Keep in mind possible alienation, documented system or repossession.

Risk 11: unscheduled time costs – success in the interaction (active participation of the customer: functions of tasks’ producer, monitoring and acceptance of work, introduction.)

Risk 12: tax risks. There are increased risk and interest in contracts of services and the complexity of proving economic benefit (Solakivi, 2011, pp.131-132).

However, apart from “traps” of outsourcing for customers, there are “trap” for performers, ie outsourcers themselves:

1. Outsourcing contract is usually signed for a long period, and this means that there is a risk of future costs and risks, as being dependent on the customer, contractor might work for long period without profit, and sometimes at a loss.
2. Reorganization of processes within the organization may induce its management to the early completion of the contract and resubmitting maintenance of functions back to internal divisions, but in accordance with the new processes.
3. Waiting for incredible results.
4. Changing requirements (awareness of opportunities) during the execution of the contract.
5. Change of the creditworthiness of the customer with the planned resources and unsaleable unique product (Sauer, 2013, p.8).

Logistics outsourcing

Outsourcing in logistics today for many companies has become the most optimal way to solve logistical problems, such as the delivery of goods or the compilation of transport schemes. It is not possible to debug business processes in logistics without a comprehensive work of highly skilled professionals. Many companies spend considerable sums for hiring a professional to ensure coordination of transport processes, without receiving a good result. That is why currently the most rational decision in this area is considered to be a logistics outsourcing. Services of this kind allow partial or full transfer of organizing business processes to experienced professionals without hiring them to the staff of the company.

It is necessary to clarify that logistics is one of the main tools to improve business efficiency and competitiveness. Its main task is to manage the information, financial and material flow with minimum costs. It is worth emphasizing that the outsourcing services are successfully used in the logistics strategy to minimize investment in logistics, as will significantly reduce the cost of logistics business processes.

The basis of any logistics business lies in an integrated management and optimization of material flows. Therefore, personnel outsourcing allows firms to transfer the logistics function partially or completely. As a result of the release of some of the financial and managerial resources, it becomes possible to focus on core business processes. Thus, outsourcing in logistics helps strengthen the competitive advantages of the company and becomes the key to its future development.

Because of the huge number of offers on the market today, it becomes more difficult to obtain a weighty profit, doing only the development of production and marketing. Outsourcing in logistics enhances profitability by reducing costs. The reduction of logistics costs, if using outsourcing services, is just 1%, which is comparable to 10% increase in sales (Wallenburg, 2010, pp.579-581).

Recently, commercial and industrial companies are increasingly paying attention to the staff outsourcing. The reason is the increasing complexity of conditions and business technologies and the growing importance of its infrastructure components. Naturally, for many industrial and commercial enterprises logistics is not core competencies. Using outsourcing services, such organizations can fully devote themselves to the development of core activities. While the staff outsourcing, who will direct all its potential for development and improvement of logistics processes, ensures the maximum quality of the goods or services of the company.

Many logistics companies that use outsourcing of staff note that finding qualified staff to employ is difficult. The fact that outsourcing allows regular employees not to spend time on ineffective or non-core but necessary processes, provides shortening of time for product development and increase the speed of adaptation to regular changes in market conditions.

Logistics outsourcing services may include the following areas:

• Integrated logistics.
• Optimization of existing and development of new storage schemes;
• Coordination of the procurement and supply of goods, as well as its labeling, packaging, etc.
• Registration of customs documentation and freight;
• Development of optimal transport schemes;

The expediency of company’s use of logistics outsourcing:

• need to focus on what staff members can do the best (“competence concentration”), while outsourcing staff will take care of the rest;
• company’s management understands that the company needs a transformation, the concreteness of which can be determined only by organization providing outsourcing services;
• emergence of new ideas for the realization of which the company must go through some changes. Outsourcing of personnel can help in implementation;
• the need to get a more interesting experience, which can be obtained only through outsourcing staff who will inject new ideas into the company;
• need for quick and quality optimization of the logistics department, without any loss on training new employees, outsourcing will avoid decrease in the overall performance of the company;
• most effective way to transfer minor cost from permanent to variables is logistics outsource;

As practice shows, the firm that provides outsourcing services has a higher motivation for efficiency than own departments of the company. Logistics outsourcing, as in any other sphere of production, is characterized by the fact that the implementing organization has direct financial obligation for the quality of performed work.

Key benefits and advantages of logistics outsourcing:

• reduction of risks associated with the implementation of logistics processes as they are passed on to a company that provides outsourcing services;
• decrease in the percentage of capital investments, which often also go to the contractor company;
• focus on core competencies promotes the improvement of key processes and gaining additional competitive advantage.

Thus, outsourcing of staff, which will take on the implementation of logistics processes, provides a dynamic development of the company, management of which will deal only with strategic objectives. It can be concluded that logistics outsourcing has a strong potential for the development of the modern market.

Eventually, many companies come to conclusion that it is almost unreal to establish the business processes in the logistics field without the complex interaction of experienced professionals. Some companies invest huge sums on the training and hiring large number of staff responsible for the coordination of transport and storage processes, while others believe that outsourcing in logistics is the best way to solve logistical problems. In the first case, it is not always possible to achieve good results, that is why many companies prefer to transfer all or part of the business processes organization to proven professionals without hiring them to the staff (Zavrsnik, 2011, p. 520).

Classification of operators

Professionals in logistics quite often use specific terminology for judging the competence of a particular logistics operator:

• 1PL – independent autonomous logistics. Shipper independently performs all necessary operations;
• 2PL – providing traditional services of warehouse management and transportation;
• 3PL – standard list of services complemented by other operations, such as: overload, storage, handling, etc.;
• 4PL – involves integration of all the firms that are involved in the supply chain. Log provider of this class is responsible for planning, management and control of all logistics business processes of the customer, which allows reaching long-term strategic goals and expand the business of the client;
• 5PL – management of all components included in a single supply chain of products using electronic means of information processing (Hartmann, 2012, pp. 526-527).

Conclusion

Logistics outsourcing means a transfer of logistics processes to a third party. The essence of this service is to reduce the company’s costs, implementation of the supply of products through the involvement of one or more qualified professionals – logistics operators.

Logistics outsourcing services may include the following areas: integrated logistics, optimization of existing and development of new storage schemes; coordination of the procurement and supply of goods, as well as its labeling, packaging, etc.; custom documentation and cargo; development of optimal transport schemes. Outsourcing of logistics services involves transmission of professionals, as part of the functions in this area, and the full scope of authority. When choosing the optimal plan of work for involved specialists, you should take into account the possibility of a private company in organizing logistics. It should be noted that an integrated approach to outsourcing logistics is the most efficient and financially advantageous solution to cope with  various tasks in the area of procurement and supply of products.

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