Outsourcing and Its Impact on Business

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Table of Contents

Introduction
Hypothesis
Methodology
Issues with Outsourcing
Advantages of Outsourcing
Conclusion
References

Introduction

The company that I have chosen is a large insurance company in the United States. It supports the health care and general insurance requirements of individuals and homes on the East coast primarily. Though the business in the other parts of the country is present, its market share in the East is high and it is the market leader there. One of the major problems faced by the company is because of increasing competition and the constant pressure to reduce the premium rates. Though there is no inclination to reduce rates, there is constant pressure not to increase the rates. At the same time, there is an increased pressure on the major expenses of the company to move upwards. The company’s major expenses arise out of employee compensation and from the premises rental and maintenance. Whereas these rates have been showing consistent increase year on year, the premium rates could not be increased proportionally. In order to tackle this problem, either the quantity of business done should be increased, which the marketing is targeting, or reduce the operating cost of the company. Whereas the market conditions and aggressive marketing might again make the company give special offers, the sure way to save the cost of operation is to reduce the operating cost.

One of the methods of reducing the operating cost is by outsourcing most of the back office work which would work out to be cheaper; particularly, if the job is given to countries where the cost of manpower is about 25 to 30% of the US compensation structures, the savings worked out was phenomenal and the company could show a better annual return to its shareholders. By doing this, the company can also get more aggressive in the market and clinch a better market share resulting in the overall profitability of the company. Outsourcing had its own advocates as well as dissuaders in the company. This research looks at the possibility of outsourcing helping the company to come out of the impasse.

Hypothesis

Outsourcing would save about 40 to 50% of the cost on manpower in the company with reference to back-office processing; providing almost a matching service like the one that is currently available in-house. No major difference in the service rendered by the provider with that of the internal staff is noticed.

Methodology

The research will be carried out in the following steps:

Literature supporting outsourcing and not supporting outsourcing will be read and points on both fronts will be identified and listed.
The pros and cons of the outsourcing system will be listed.
Based on these the final decision/conclusion will be reached.

Issues with Outsourcing

Some of the major issues faced by the company if the back office is to be outsourced to a company that has a clear operating advantage and a saving of at least 40 to 50% are as follows:

The right people to process the papers are an important factor. It is very important that the company gets people who will understand the situation in a country like the US and would process the way it is done by the people in the US. This understanding of the US environment can be brought into the outsourcing partner only by repeated training and possibly after four to six months of operation (Ken Strauss 2007). Only after that would the person be able to visualize the processing in line with what is happening in the US.
Security of the information that has been transferred should not get compromised under any circumstances. In the case of the processing that was carried out inside the office of the insurance company, the chances that the information about the client was very meager. Whereas, now when the information is passed over to the people in another country, their ethical standards and practicing discipline could be different. This could result in compromising the information of their clients or their market situations which could cause deadly ramifications to the clients and to the company as a whole.
The management of people will be as per the local technology and management practices. This might also cause HR problems in the company. HR problems and such managerial issues could have repercussions in processing the work as well as in the overall performance of the company.
One of the major issues would be the time difference if any exists between the US and the processing country. This could lead to the outsourcing provider doing the job in a way that might be different from what is needed for the company. If there is any difference in processing, the same could be addressed only after one day is over. The clarity in the process might have to be much more important for the company (Tom Worthington, June 1999). There could also be a delay in processing inserted because of this time delay.
Ownership of information gained out of the processing and the skills could also go to the service provider unless otherwise it is explicitly stated in the contract of work between the two.
Safety and security of data in addition to recovery of data in case of loss of data would all have to be clearly administered. This could lead to issues that are not in line with the way the company works.

Advantages of Outsourcing

There is a number of advantages and answers to the issues that have been raised. These need to be taken care of during the planning phase of the contract and during the execution as well (Outsource Outsourcing Grp., 2006). The following advantages are noted by outsourcing:

The most important advantage noticed is the savings in the cost of processing every claim or application. This would be almost 30 to 40% of the current ruling cost of processing. This would reflect on the bottom line of the company.
Instead of losing time in processing, there is a clear possibility that the company could end up gaining time by outsourcing the job. By making use of the time difference, it is possible that the company could process all the day’s work conveniently over the night for the US and day time for the processing country. This way, by the next day most of the work would have been completed and ready for delivery. This would mean a gain of one day for the customers.
Outsourcing would certainly require the processes to be firmed up. This is good in one way. Since this would clear most of the ambiguities and personal choices during operation, resulting in better performance of the people working to the rule.
Compromise on security could happen with anyone and adequate steps need to be taken by the company and by the provider (Tom Worthington, June 1999). To this extent, the contract has to be made for the service provider. In addition to this, it is also possible that that company could also think of running an offshore back office in the target country. This would also make sure that the people who will be working on the jobs will be their own employees and they will also adhere to the stipulations of the company. This can also be looked at as a clear option available.
Such direct ownership of the back office would also ensure that the best practices of the company are carried forward to the back office. One, this would better the performance of the people in the company thereby resulting in better management (Patni 2007). Secondly, the cost for the company could still further go down over a period of time.
Selecting the right people for the processing of the papers has to be done by the concerned HR people. The company should ensure that the company processes these selection procedures in strict adherence to the rules of the company. This will ensure that the people serving the company either at the vendor location or at the company location are equally enabled.
Ownership of the information and skill gained out of the exercise could be clearly decided by the contract signed between the vendor and the company. This might not, however, have any impact on the skill gained by the vendor in processing these papers. The company if it runs its own center, then the gains thus resulting out of internal processing in the destination country, will certainly result in its own ownership and might have no relevance in this case.
The company has to specify clear processes and systems for the safety and recovery of lost data in the vendor organization. They should also ensure that this is adopted by the vendor through periodic inspection.

Conclusion

From the points raised in the previous two sections, it is clear that there are a number of negative factors and risk factors in outsourcing information for processing. However, the long-term gain the company might enjoy and the competitive advantage that it might have by outsourcing far outweigh the risks involved. However, these risks need to be mitigated using any of the methods suggested in the steps indicated in the advantages section. The research shows that there are a number of reasons to hold the hypothesis true in the current case. And therefore, the company could outsource the back-office process for their own good and profitability including the long-standing gain in the marketplace.

References

Ken Strauss, 2007, Optimizing IT Skills Management Initiatives.
Outsource Outsourcing Grp., 2006, The Outsourcing Toolkit.
Patni, 2007, BPO – Destination India.
Tom Worthington, 1999, Outsourcing the management information systems and utilising industry expertise. Web.

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