Outsourcing has grown by leaps and bounds since it was first consistently implemented as a strategic business practice in the early 90s. Within that growth, terms have developed to help facilitate understanding the complexities of moving parts of your enterprise from in-house to possibly across the globe. Familiarizing yourself with some of the most common terms and practices of outsourcing will enable you to make the best decisions for your company
Outsourcing is the most recognizable term. In general, outsourcing is the business practice of shifting tasks, processes, operations or jobs to an external company or team for a set period of time. Outsourcing is typically used as a cost-saving measure, but can also be used for finding/using specialized talent.
Offshoring is outsourcing to an external firm in a different country than where the business is headquartered. This is regarded as the highest form of cost-saving measures because it is likely to yield wages that are usually at a lower price point than where the headquarters location. Sometimes the cost-saving measure isn’t purely financial. Offshoring allows a company to hire programmers who excel in a certain speciality not found or are in short supply in their home country. Two main hurdles regarding offshoring is mitigating cultural differences, as well as, time zone differences. Without a clear communications plan, this can negatively affect the project’s timeline.
Nearshoring is a modification of offshoring. It is when a business decides to outsource work to a country that is geographical or cultural similar to the country of business origin. Given the overlap in workday or time zone in nearshore markets, this enables the business to have more direct oversight of the project.
Insourcing is when a business decides to retain work inhouse. Normally, this conclusion is reached after the company researches its costs, efficiencies and scope of work in comparison to external firms. This term is also used when services that were being outsourced return back to the organization.
Rightshoring refers to a strategy of reassessment before outsourcing. In the beginnings of outsourcing tasks of any scope would be sent out without much reflection. Rightshoring is the practice of being intentional about which projects leave HQ and which ones stay. Usually companies send out less demanding work while keeping the core components in-house using available resources.
One of the newest industry terms, smartshoring is a type of rightshoring. It is a deeper dive into effectively assessing the known resources in both onshoring and offshoring a project. Similar to multi-shoring, this strategy is useful when managing multiple outsourced functions. For example, a company has a firm dedicated to HR in China, quality assurance in India and app development in Serbia. Therefore, it has to create a strategy that will enable global collaboration and streamlined communication. This is normally implemented when a business wants to achieve the lowest cost possible while generating the maximum value of the processes.
A dedicated team is a type of work-model that involves an agreement between a business and a service provider. The provider provides a team of software engineers solely dedicated to work on the tasks or projects of the business for an extended period of time. The business can manage the team directly using one of their full-time employees or have a liaison that is also apart of the external firm at as a project manager. A dedicated team provides the same security and cohesiveness that would be expected in an in-house team.
Extended teams are utilized mostly by small and mid-size companies. It is essentially an extension of an in-house team that usually takes on non-core IT components. This is usually a long-term partnership that creates a sense of comradery with the in-house team. Responsibilities are shared between onshore and offshore teams creating more transparency. It is important to have a consistent flow of communication.
A business would implement a build-operate-transfer model when they want to open an offshore development center or create a shared service with an external firm. It is a simple three step process of building the service or center, allowing the external firm to operate it within their geographical location for a fixed period of time, and then transfer control to the parent firm. This is done with the belief that an offshore firm, that becomes a partner, can grow an outside initiative faster than an in-house team can.
Hub and Spoke Model
The hub and spoke model is just as its name entails. A company creates an offshore center (hub) that is responsible as the point of contact for the firms (spokes) that are providing the services to the company. Airlines use this model and it is moving into the IT sector. This model allows a company to be more agile because the hub’s responsibilities are centralized, while the spokes are allowed to develop individual processes they are given. For example, it a company has outsourced several competences to various firms across multiple markets in Asia, it would be wise to build a hub in China or somewhere central that can oversee development. The benefit is leveraging regional skills and language to ultimately lead to a faster turnaround time and less communication pitfalls.
Hybrid model or multi-sourcing is the outcome of smartshoring.
Information Technology Outsourcing (ITO)
ITO is a specific kind of outsourcing that solely focuses on transferring IT processes (ie. web or app development) to an external firm.
Business Process Outsourcing (BPO)
BPO is another specific kind of outsourcing that solely focuses on transferring business processes to an external firm. Usually, this involves human resources, accounting or CRM.