The Internet is reducing the cost of communications and interactions between companies. This is facilitating the outsourcing of tasks to other companies who can do it better and more cost-effectively. This also concentrates the company better to serving the customer through innovative offerings. Outsourcing, which was earlier limited to functions like IT, is now being extended to business processes and RD. This is also where India, which has made a good start in the outsourced software services segment, has huge opportunities going ahead.
Large companies have been outsourcing IT and telecom functions for many years to companies like IBM and EDS. Companies like Cisco have even outsourced manufacturing. In fact, a significant component of the manufacturing of telecom and networking gear is being done by companies like Flextronics and Solectron.
This is now being extended to outsourcing business functions. What companies are realising is that the Internet can facilitate communications and collaboration easily, and hence the overheads of outsourcing become much lower. In some of the internal enterprise functions, employees are interacting with these services via the Web, so the back-office work can be handed over to specialist firms. In addition, companies can also get access to best practises by using these outsourcing companies.
Goldman Sachs has identified six categories of outsourcing:
- Human resources – payroll, benefits administration, education and training, etc
- Logistics/distribution – procurement, transportation, warehouse management, and material management
- Sales, marketing, and customer service – telesales and marketing, database marketing, Web sales and marketing
- Payment services – credit/debt card processing, check processing
- Finance/accounting – accounts payable/receivable management, risk management, general accounting
- Administration – tax processing, claims processing, document management
A newer trend in recent times is the outsourcing of RD. Given India’s engineering talent, it is expected to capitalise on this. Matei Mihalca of Merrill Lynch points out four reasons for outsourcing RD in his report on “India IT Services: Software meets Hardware” (April 20, 2001):
First, time to market, which is a function of competition. In many markets, deregulation has accentuated competition. The second is cost. India-delivered services can cost as little as a third of similar solutions in the US. Three, flexibility and focus: an offshore team tends to be more focused than an internal team, plus, clients don’t need to pay for RD failures. Four, intrinsic technology trends favour more technology development outsourcing. The rise of the Internet and mobility, the convergence of voice and data, and increasing dependence on software are all fundamental shifts that amplify the need to pool RD sources wherever they may be.
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