What is meant by outsourcing

According to Collins English Dictionary (2009), “outsource” is defined as

1. To subcontract (work) to another company,

2. To buy in (components for a product) rather than manufacture them.

However, in recent years, “outsourcing” has increasingly come to mean the subcontracting of services, rather than manufacturing, to another company, and more specifically IT and other so-called “back room” services, i.e. those services which do not directly involve the customer, such as accounting, human resources, data processing, etc. The practice of outsourcing these services has come to be known as “business process outsourcing”, and together with IT services the industry is generally referred to as the IT BPO sector.

 

The history of outsourcing

What is remarkable is that whereas in 1989, just over 20 years ago, no such industry existed, by 2009 the global IT BPO and shared services industry had grown to such an extent that it was generating revenues of US$110 billion per annum.

The obvious reason for this phenomenal growth is that the industry mirrors the growth of information technology (IT) itself, the way computer software and its applications have come to change the way all companies operate and do business. Technology has created the means and the method for working faster, more economically, and more efficiently, and one of those methods is to subcontract elements of a business which are not the main concern of the enterprise.

In the 1990s companies began to focus more on their core business while outsourcing those functions not necessarily related to their core business. Whereas outsourcing initially referred to the use of services by another company but typically in the same country as the client company, increasingly, with the advance of online technical support, outsourcing relates to the procurement of services in another part of the world, typically where these services can be provided at a much cheaper cost to the client company.

 

The cost factor

Typically, companies go offshore with their outsourcing requirements because of differences in currency rates and the accompanying saving to the client company. Salaries in the developing world are far below those in the developed world: For example, employees in the Philippines earn roughly half of what their counterparts with the same qualifications and experience, doing the same work, earn in the United States and Australia.

The cost benefit also percolates through to other expenses, such as office rental, training and overheads. The result is that the direct operating cost per full-time employee for English voice-based work in Manila in 2010 was between $15 000 and $16 000 per annum, whereas the direct operating cost for a full-time employee doing the same work in the United States was between $70 000 and $72 000 per annum (Source: Business Processing Association of the Philippines, International Outsourcing Summit 2010). This is a cost saving approaching 80%.

 

Government incentives and a business-friendly environment

Besides the cost factor, there are also other benefits for companies who opt for business process outsourcing. Incentives offered by the governments of countries providing outsourcing services have also made going offshore more attractive to companies of the developed world. The Business Processing Association of the Philippines (BPAP), for example, has developed the IT-BPO Road Map 2016 specifically to attract more investors through incentives such as tax breaks. The Philippines Export Zones Authority (PEZA) provides for incentives such as exemption from import duties and taxes on imported equipment and raw materials, a deduction equal to 50% of training expenses, and the option to pay only 5% tax on gross income earned in lieu of all national and local taxes.

 

Greater expertise in certain fields

Over the past two decades the IT BPO sector has built considerable expertise in its areas of specialization. The Philippines, for example, has emerged as the world leader in voice-based business process outsourcing, the so-called call centre or contact centre operators. They have achieved this position through the excellent English skills of their workers, combined with the cultural disposition towards customer service and hospitality. Over time this has translated into the development of expertise and a real advantage in this field.