Outsourcing

Outsourcing involves contracting with outside companies for services that an enterprise could provide for itself, but chooses instead to seek savings and efficiencies in utilizing a third party's resources. Outsourcing has evolved from simple cost management to a strategic tool, according to a 2003 survey titled "Outsourcing From Strength" by business intelligence firm Cutting Edge Information, Durham, N.C. Cutting Edge found that 89 percent of companies surveyed said they view outsourcing as a vital part of their strategic planning to improve performance. The survey also states that: "The combined rise of the Internet and outsourcing has led to a new type of company: the 'Virtual Company,' which focuses solely on core competencies, outsourcing every conceivable service to providers with expertise on those areas."

BPO

Typically, companies that are looking at BPO are hoping to achieve cost savings by handing the work to a third party that can take advantage of economies of scale by doing the same work for many companies. Or the cost savings can be achieved because labor costs are lower due to different costs of living in different countries. In exchange for the potential cost savings, the company outsourcing the work must relinquish control over an aspect of their business, which explains why BPO is often reserved for non-critical, non-core type of work. In most cases, the fee structures of outsourcers are significantly lower than the direct costs of employing internal processors. Frequently, a 40 to 60 percent reduction in personnel and processing costs is achieved.

Offshore Outsourcing

According to estimates from the Gartner Group research company, by the end of 2004, one in 10 IT jobs at U.S. IT companies and one in 20 at non-IT companies will move offshore. Said Matthew Slaughter, Dartmouth College's associate professor of business administration: "[IT work] will move offshore faster because it's easier to ship work across phone lines and put consultants on airplanes than it is to ship bulky raw materials across borders and build factories and deal with tariffs and transportation."

Sunil Mehta, vice president of the National Association of Software and Service Companies (Nasscom) in India, estimates that U.S. companies will save up to $11 billion in 2004 by outsourcing to India and that India will purchase $3 billion in high-tech imports from the United States in that time.

"The primary benefit to moving IT offshore is cost, and the only thing that's holding it back is building up the capabilities offshore to do the work," says Ron Hira, chairman of the R&D policy committee with the U.S. branch of the Institute of Electrical and Electronics Engineers (IEEE), a nonprofit research and advocacy group. "So unless you could come up with a way that markedly advances U.S. workers productivity so that they could produce a higher-quality product faster than they do today, there is no economic incentive to keep the work here."

The trend toward offshore outsourcing has only just begun. Indeed, in a survey by CIO Magazine, 67 percent of respondents did not begin offshore outsourcing until after 2000. According to Gartner, offshore outsourcing is just beginning to hit the mainstream, with 80 percent of companies saying they will discuss it in 2004. The biggest cause of U.S. job losses since 2001 has been the U.S. economic downturn. The offshore shift of many IT jobs is also a factor. By some estimates, there are more IT engineers in Bangalore (150,000) than in Silicon Valley (120,000).

Meta Group estimates that at least one-third of new IT development work for big U.S. companies is done overseas, with India the biggest site. And India could start grabbing jobs from other sectors. A.T. Kearney Inc. predicts that 500,000 financial-services jobs will go offshore by 2008. U.S. state governments are increasingly using India to manage everything from accounting to their food-stamp programs. Even the U.S. Postal Service is taking work there. Auto engineering and drug research could be next. By 2008, forecasts McKinsey, IT services and back-office work in India will swell fivefold, to a $57 billion annual export industry employing 4 million people and accounting for 7% of India's gross domestic product.

Outsourced Bookkeeping and Financial Services

Small businesses are now benefitting from a growing trend among large corporations who have found significant savings and business advantages in outsourcing their bookkeeping. Books are the heart of any business. Without accurate financial data, business owners can't know where they've been and can­t analyze their business trends to know where they are going and what areas to focus on.

Small businesses and non-profit organizations are skilled at providing their products and services, but managing an accounting department is not part of their core competencies. As a result, processing their financial records costs many small companies much more than it should (typically 25-40% more)

Outsourcing some or all of their basic bookkeeping and accounting functions to a professional helps business owners avoid both inaccurate balances and employee "headaches" such as help wanted ads, training costs, absenteeism, and fringe benefits like vacation time, sick days, 401Ks and medical insurance.Outsourcing frees business owners to concentrate on building their businesses, instead of doing the books or managing a bookkeeper.