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A brief history of outsourcing Mar 15, 2019

Business processing outsourcing is an efficient approach to subcontracting both regular and important business-related operations to external vendors.

Outsourcing has been used for decades of course, with contractors, sub contractors and freelancers a relatively common occurrence in many large and small companies.

In fact, formal outsourcing goes back further than you might think. With faster transport options during the industrial revolution, businesses in the 19th century shifted the manufacture of goods to countries with cheaper labour. Britain, in particular, made use of its empire, and businesses utilised factories on the subcontinent for textile manufacturing and salt production.

It is thought that the term “offshore outsourcing” was coined in a paper published in 1937 by the economist Ronald Coase.

In the 1960s, American car manufacturers started outsourcing assembly programs to Mexico and by the 1970s, many bulk consumer goods such as electronics and vehicles were manufactured overseas, particularly as shipping routes opened up and cargo costs came down. The developing economies of East Asia were the main drawcards for European and US-based companies, including countries with low paid but skilled labour such as Taiwan, South Korea, Japan and Malaysia.

Service outsourcing has always tended to be at a much smaller scale, with architects, engineering and insurance companies opening their doors to serve multiple clients, including other, larger companies or government departments.

During the 1980s, computer companies started outsourcing other services such as billing, accounting and word processing. This second stage of outsourcing, for more skilled “white collar” jobs, grew exponentially during the telco boom of the 1990s. Services outsourced included data processing, billing and customer services. The software sector was the first to transfer significant employment to offshore locations; “The rapid dissemination of the Internet, the transnational networks set up by immigrants…and the liberalization of emerging market economies created the conditions for a major burst of outsourcing in the 1990s”[1].

Earlier in the history of outsourcing, cost efficiencies were the most common reason to utilise offshore outsourcing. This is still vital, but today the drivers are often more strategic. Companies have started focusing on their core competencies and outsourcing non-core functions, for which they had no or low resources internally.

More formal, structured and organised outsourcing has been predominantly used by the big end of town. According to a survey conducted by the consultancy firm Bain & Company, 82% of the largest companies in Europe, Asia and North America have some type of outsourcing agreement in place.[2]

However, anyone can outsource for services at any time to make them more competitive in the local and global market. There is a lot of flexibility that comes with implementing offshore outsourcing. First, it allows companies to properly allocate their time and resources to core projects. Another great advantage is the opportunity for the company to access the newest technological resources and strategies from across the globe. Offshore outsourcing also allows for companies to conduct larger-scale projects that they may not have had the resources to do on their own [3].

Starting or increasing your process outsourcing – either offshore or locally – requires preparation and you should consider the following:

  • Do you have a sufficient business case?
  • How well does your systems support distributed working?
  • Will your team be ready to manage a remote provider?
  • Will you be able to train your own team’s demand management skills and can you instruct your outsourcing partner about your requirements?[4]

For smaller organisations, an outsourcing provider makes more sense than attempting to find a dedicated offshore company amongst the many options available.

If you are thinking about outsourcing, whether onshore or offshore, and not sure where to start, send us a note at SBA Business and we will arrange a consultation.

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