According to the simplest definition, outsourcing is where one company engages another company to provide services that were traditionally performed in house. And there are many reasons why thousands of Australian businesses are choosing to outsource select business functions to third parties. While Deloitte’s Global Outsourcing Survey 2020 finds that cost reduction is the primary objective of outsourcing for a massive 70% of businesses – followed by 40% that say flexibility is the star attraction – the Australian Bureau of Statistics shows that more than one-in-ten Australian businesses are currently considering outsourcing to tackle growing staff shortages.
Although the concept of outsourcing and the many motivations for contracting services to a third party aren’t difficult to understand, working out the exact type of outsourcing model that’s right for your business can be another matter entirely. In fact, you’ll probably feel like you need an outsourcing dictionary to navigate the minefield of jargon.
To help you gain a better understanding of the outsourcing landscape, here’s our outsourcing glossary of common terminologies, as well as some pros and cons of the different types of outsourcing and operating models available.
Definitions: What can your business outsource?
- BPO: You’ve probably seen ‘BPO’ terminology used frequently, which refers to Business Process Outsourcing (BPO). BPO is where a company contracts standard business functions to a third party, such as front office tasks like customer service, sales, marketing and back office tasks like accounting, payroll and other general administrative duties.
Under a BPO arrangement, the third party is responsible for all activities related to the outsourced business function. Many businesses often choose to outsource more than one function to the same or different outsourcing service providers.
- KPO: Knowledge Process Outsourcing (KPO) is where a company outsources more specialised and knowledge-based business functions compared to those which might be outsourced under a BPO arrangement. In contrast to the front and back office business functions carried out under BPO, KPO requires more advanced technical or analytical skills and can include anything from market research, data analytics, legal and financial functions.
While BPO focuses on maximising volume and efficiency of tasks requiring basic expertise, KPO is about increasing a company’s value through skilled employees who have advanced training and experiences and can exercise judgment.
- RPO: A business can choose to outsource its recruitment function (either entirely or in part) to a third party under a Recruitment Process Outsourcing (RPO) arrangement. The RPO service provider acts as an extension of a company’s HR team, working either offsite or onsite, to deliver the technology or expertise needed to meet a company’s recruitment needs.
RPO differs from traditional recruitment solutions because rather than simply sourcing and placing candidates, the RPO provider assumes responsibility for all or some of a company’s recruitment process including employer brand development, workforce planning, compliance, managing candidates and acquisition strategy.
- ITO: Information Technology Outsourcing (ITO) refers specifically to the outsourcing of company IT functions and processes. ITO can be used to outsource one-off technology projects as well as ongoing IT services such as desktop support, infrastructure maintenance, software development and hosting.
The key differences between common operating models
- Traditional outsourcing: Easily the most popular outsourcing model, traditional outsourcing is where an offsite provider assumes full accountability for delivery of business function(s) outsourced under the arrangement. Performance is usually tracked and measured through a series of KPIs agreed between the company and third-party provider.
- Staff leasing: A staff leasing model gives companies more control over their outsourced operations because they retain responsibility for who gets hired and how staff are managed day-to-day. The outsourcing provider however, places staff on their own payroll and provides the facilities, technology, and other equipment and services required by staff to perform their job.
- Captive setup assistance: As an alternative to outsourcing functions to a third party, companies can engage with a consulting service to set up their own entity in their chosen location. Often referred to as shared services, companies are enabled to use and tightly manage their own facilities to provide one or several business functions with all the benefits that the specific outsourcing location may bring.
- Staff augmentation: This type of outsourcing can help companies manage peaks and troughs in workload or quickly resource themselves for additional projects. Staff augmentation is where the outsourcing company provides its own staff to work in house in the form of an external hire saving costs related to recruitment, admin, payroll, and other setup processes.
- Project-based outsourcing: This is not an ongoing outsourcing arrangement for specific business functions, but instead, where a company outsources an entire project for delivery.
- Build-Operate-Transfer (BOT): The BOT model is popular among fast growing companies who find themselves stretched and under-resourced, to quickly expand business functions. Under the model, the outsourcing company designs, builds and operates the business function before transferring operations to their client.
How do alternative location models compare?
- Offshoring: Probably one of the most common terms in the outsourcing glossary, offshoring means outsourcing business functions to a provider in another country, such as the Philippines.
- Onshoring: This involves outsourcing functions to a provider within the same country. Onshoring often occurs when a business seeks to benefit from specialised local skills and experience that they don’t have in house, or to ensure they meet security and compliance requirements in heavily regulated sectors, such as finance, health, and government.
- Nearshoring: A company might turn to nearshoring when it seeks to save costs by transferring operations to a cheaper provider but requires a geographical location closer to the business to allow for ease of travel, fewer cultural differences, or to minimise the impact of working in different time zones – among many other reasons.
- Home-shoring: Becoming increasingly common in the digital age, home-shoring involves outsourcing to remote workers who work from home, whether in the same country or overseas.
- Multi-shoring: Usually suited to large companies, multi-shoring is where business functions are performed in multiple locations. Some of the many reasons to multi-shore include safeguarding against business continuity in the face of adverse events or benefitting from the localised knowledge or unique skills of staff across multiple global regions.
Popular outsourcing offshore destinations
The number of countries offering outsourced services has been growing for many years. Unsurprisingly, each country has its own unique value proposition, whether it be to do with the specialty and experience of staff, cost-effectiveness, language proficiency, or cultural awareness. With so much growth in the global industry, now is a great time to get up to speed with some of the world’s top outsourcing destinations.
- India: With around 4 million people employed in the IT outsourcing industry, India has seen huge growth in its technology sector with many people choosing to take up studies in key digital skills. India is a popular outsourcing destination for capabilities such as app development, blockchain, AI and machine learning.
- Philippines: Outsourcing solutions have been a major industry in the Philippines for many years, which means expertise in the Australian market is easy to come by. Contact centres covering sales, technical support, and customer service are the most outsourced services in the Philippines, with cost effectiveness a major drawcard compared to developed economies. Here are seven reasons why the Philippines is often viewed as the top outsourcing destination in the world.
- Sri Lanka: With many state schools and universities and ranked highly in the United Nations Development Index for literacy, Sri Lanka’s outsourcing sector has earned a reputation for access to talent, high quality service and reliability. Strengths include, HR, finance, legal, telecommunications, insurance, data analytics and IT.
- Ukraine: The Ukraine is a fast-emerging outsourcing destination already having over 1,000 agencies offering IT services. It is known for its huge talent pool of software engineers and other niche IT skills that are harder to find in other countries.
Now you have a better knowledge of the different types of outsourcing and location models, why not take a look at the top 10 roles you can offshore to boost your capabilities and grow your margins.