Emerging Modes of Business - Part 3

Objectives
After going through this lesson, the learners will be able to understand the following:
● Concept of Outsourcing
● Nature of Outsourcing
● Scope of Business Process Outsourcing
● Types of Business Process Outsourcing Services
● Need for Outsourcing
● Concerns over Outsourcing
● Knowledge Process Outsourcing
● Types of KPO services
● Smart Card
● Applications of Smart Cards
● ATM

Contents Outline
● Concept of Outsourcing
● Nature of Outsourcing
● Scope of Business Process Outsourcing
● Types of Business Process Outsourcing Services
● Need for Outsourcing
● Concerns over Outsourcing
● Knowledge Process Outsourcing
● Types of KPO services
● Smart Card
● Applications of Smart Card
● ATM
● Summary

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Outsourcing: Concept
Outsourcing is yet another trend that is radically reshaping
business. It refers to a long-term contracting out generally the
non-core and of late even some of the core activities to captive
or third party specialists with a view to benefitting from their
experience, expertise, efficiency and, even investment.

Nature of Outsourcing
This simple definition leads one of the salient features of the concept that are not peculiar to
an industry/ business or country, but have become a global phenomenon.

Outsourcing involves contracting out: Literally, outsourcing means to source from outside
what you have hitherto been doing in-house. For example, most companies have so far
appointed their own sanitation staff for maintaining neatness, cleanliness and overall
housekeeping of their premises. That is, sanitation and housekeeping functions were being
performed in- house. But of late, many companies have started outsourcing these activities,
i.e., they have entrusted outside agencies to perform these activities for their organisations on
a contractual basis.

Generally non-core business activities are outsourced: Sanitation and housekeeping

functions are non- core for most organisations. Of course, for municipalities and sanitation
services providers, these activities comprise the core of their business activity. Housekeeping
is a core activity for a hotel. In other words, depending upon what business a company is in,
there will be some activities that are central and critical to its basic business purpose. Other
activities may be regarded as secondary or incidental to fulfilling that basic purpose. The

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purpose of a school, for example, is to develop a child by means of curricular and
co-curricular activities. Clearly, these activities comprise the ‘core’ activities. Running a
cafeteria/canteen or a bookstore is a non-core activity for a school.
As the organisations venture to experiment with outsourcing, they may initially outsource
only the non- core activities. But later on, as they become comfortable with managing
interdependencies, they may start getting even the core activities performed by the outsiders.
For example, a school may tie-up with some computer training institute to impart computer
education to its students.

Processes may be outsourced to a captive unit or a third party: Think of a large

multinational corporation that deals in diverse products and markets them to a large number
of countries. A number of processes such as recruitment, selection, training, record and
payroll (Human Resources), management of accounts receivable and accounts payable
(accounting and finance), customer support/grievance handling /troubleshooting (marketing)
are common to all its subsidiaries operating in different countries. If these processes could be
centralised and parcelled out to a business unit created especially for this purpose, this would
result in avoidance of duplication of resources, realisation of efficiency and economy’s
performance of same activity on a large scale at one or a few select locations, thereby
resulting in substantial reduction in costs. Clearly, therefore, if the task of performing some
activity internally is sufficiently large, it may be beneficial for the firm to have a captive
service provider, i.e., a service provider set up for providing services of a given kind to only
one firm. General Electric (GE) is, for instance, the largest captive BPO unit in India for
providing certain kinds of services to the parent company in the United States as well as to its
subsidiaries in other countries. Or else, these processes may be parcelled out to third party
service providers who operate independently in the market and provide services to other
firms too.
The hired party service providers are the persons/firms which specialise in some processes
such as Human Resource Management (HRM) and provide their services to a wide base of
clients, cutting across industries. Such service providers are called ‘horizontals’ in the
outsourcing terminology. Else, they may specialise in one or two industries and scale up to
doing a number of processes from non-core to core. These are called ‘verticals.’ As the
service providers mature, they move simultaneously horizontally and vertically.

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The most important reason underlying the use of outsourcing is to benefit from the expertise
and experience of others. Institutions like schools, companies and hospitals can outsource the
cafeteria activity to the catering and nutrition firms for whom these activities comprise the
core or heart of their operations. The idea of outsourcing is valuable as you tend to gain not
only in terms of their expertise and experience and the resultant efficiency, but it also allows
you to limit your investment and focus attention to what your core processes are.
Little wonder that outsourcing is fast becoming an emerging mode of business. Firms have
started increasingly outsourcing one or more of their processes which can be more efficiently
and effectively carried out by others. What qualifies outsourcing as an emerging mode of
business is its increasing acceptance as a fundamental business policy and philosophy, as
opposed to the earlier philosophy of ‘doing it all by yourself ’.

Scope for Outsourcing

Outsourcing comprises four key segments: contract manufacturing, contract research,
contract sales and informatics
The term outsourcing has more popularly come to be associated with IT -enabled services or
Business Process Outsourcing (BPO).
Business Process Outsourcing (BPO) is a subset of outsourcing that involves the contracting
of a specific business task, such as human resources and customer service, to a third- party
service provider.

BPO is normally divided into two categories:

● Back Office Outsourcing: It includes outsourcing of internal business functions such
as billing or purchasing.
● Front Office Outsourcing: It includes outsourcing of customer related services such as
marketing or technical support.

Business Process Outsourcing (BPO) that is contracted outside a company’s own country is
sometimes called ‘Offshore outsourcing’.
BPO that is contracted to a company’s neighbouring country is called ‘nearshore
outsourcing’.
BPO that is contracted with the company’s own country is called ‘onshore outsourcing’.

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Types of Business Process Outsourcing Services
Principal Outsourcing Services can be categorized as follow: -
● Financial Services
● Advertising Services
● Courier Services
● Customer Support Services

In fact, an even more popular term is ‘call centres’ providing customer -oriented voice based
services. About 70 per cent of the BPO industry’s revenue comes from call-centers, 20
percent from high-volume, low-value data work and the remaining 10 per cent from higher-
value information work. ‘Customer Care’ accounts for the bulk of the call center activities
with 24 hrs × 7 days handling of in-bound (customer queries and grievances) and out-bound
(customer surveys, payment follow-up and telemarketing) traffic.

Need for Outsourcing

Necessity, they say, is the mother of all inventions. This can be said to be true even in case of
the idea of outsourcing. As discussed in the introduction to the chapter, global competitive
pressures for higher quality products at lower costs, ever demanding customers, and emerging
technologies are the three major drivers causing a rethink or re-look at business processes.
These may be regarded as factors responsible for the continuing emergence of outsourcing as
a mode of business. In fact, today outsourcing is being resorted to not out of compulsion, but

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also out of choice. Some of the major reasons (and also benefits) of outsourcing are discussed
below.
● Focusing of attention: You may be good at doing so many things in academics and
extracurricular activities, yet you would be better off by focusing your limited time and
money on just a few things for better efficiency and effectiveness. Likewise, business
firms are realising the usefulness of focusing on just a few areas where they have distinct
capability or core competence, and contracting out the rest of the activities to their
outsourcing partners. You are aware that, in order to create utilities or value, a business
engages in a number of processes, viz., purchase and production, marketing and sales,
R&D, accounting and finance, HR and administration etc. Firms need to define or
redefine themselves. They, for example, need to consider whether they would like to be
called a manufacturing or marketing organisation. Such a way of delimiting the scope of
business enables them to focus their attention and resources on select activities for better
efficiency and effectiveness.
● Quest for excellence: You are aware of the benefits of division of labour and
specialisation. Outsourcing enables the firms to pursue excellence in two ways.One,
they excel themselves in the activities that they can do the best by virtue of limited
focus. And, they excel by extending their capabilities through contracting out the
remaining activities to those who excel in performing them. In the quest for excellence,
it is necessary not only to know what you would like to focus on, but also what you
would like others to do for you.
● Cost reduction: Global competitiveness necessitates not only global quality, but also
global competitive pricing. As the prices turn southwards due to competitive pressures,
the only way to survive and profitability is cost reduction. Division of labour and
specialisation, besides improving quality, reduces cost too. This happens due to the
economies of large scale accruing to the outsourcing partners as they deliver the same
service to a number of organisations. Differences in prices of factors of production
across the countries are also a factor contributing to cost reduction. For example, India is
a preferred destination for global outsourcing of Research and Development,
manufacturing, software development and IT enabled services (ITES) because of large
scale availability of required manpower at lower costs.

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● Growth through alliance: To the extent you can avail of the services of others, your
investment requirements are reduced, others have invested in those activities for you.
Even if you may like to have a stake in the business of your outsourcing partners, you
profit from not only the low-cost and better quality services provided by them to you but
also by virtue of a share in the profit from the overall business they do. Therefore, you
can expand rapidly as the same amount of investible funds result in creation of a large
number of businesses. Apart from financial returns, outsourcing facilitates inter-
organisational knowledge sharing and collaborative learning. This may also explain the
reasons why the firms today are outsourcing not only their routine, non-core processes,
but also seeking to benefit from outsourcing such strategic and core processes as
Research and Development.
● Fillip to economic development: Outsourcing, more so offshore out- sourcing, stimulates
entrepreneurship, employment and exports in the host countries (i.e., the countries from
where outsourcing is done). In India in the IT sector alone, for example, there has been
such a tremendous growth of entrepreneurship, employment and exports that today we
are the undisputed leaders as far as global outsourcing in software development and
IT-enabled services are concerned. Presently, we have 60 percent of the $150 billion (1
billion = Rs. 100 crores) global outsourcing share in the informatics sector.

Concerns Over Outsourcing

It will not be out of place to be aware of some of the concerns that outsourcing is besieged
with.
● Confidentiality: Outsourcing depends on sharing a lot of vital information and
knowledge. If the outsourcing partner does not preserve the confidentiality, and, say,
for example, passes it on to competitors, it can harm the interest of the party that
outsources its processes. If outsourcing involves complete processes/products, there is
a further risk of the outsourcing partner starting up a competitive business.
● Sweat-shopping: As the firms that outsource seek to lower their costs, they try to get
maximum benefit from the low-cost manpower of the host countries. Moreover, it is
observed that whether in the manufacturing sector or the IT -sector, what is
outsourced is the kind of components or work that does not much build the
competency and capability of the outsourcing partner beyond the skills needed to

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 comply with a rigidly prescribed procedure/ method. So, what the firm that go in for
outsourcing look for is the ‘doing’ skills rather than development of the ‘thinking’
skills.
● Ethical concerns: Think of a shoe company that, in order to cut costs, outsources
manufacturing to a developing country where they use child labour/women in the
factories Back home, the company cannot do so due to stringent laws forbidding use
of child labour. Is cost cutting by using child labour in countries where it is not
outlawed or where the laws are ‘weak’, ethical? Similarly, is it ethical to outsource the
work to countries where there exists wage-discrimination on the basis of sex of the
worker?
● Resentment in the home countries: In the course of contracting out manufacturing,
marketing, Research and Development or IT -based services, what is ultimately
contracted out is ‘employment’ or jobs. This may cause resentment back in the home
country (i.e., the country from which the job is being sourced out) particularly if the
home country is suffering from the problem of unemployment.
● The aforementioned concerns, however, do not seem to matter much as global
outsourcing continues to flourish. As India emerges as a global outsourcing hub, the
industry is forecast to explode at exponential rates.

Knowledge Process Outsourcing (KPO)

● Knowledge Process Outsourcing (KPO) is a form of outsourcing that involves the

contracting of knowledge intensive business processes that require specialized domain
expertise to a third-party service provider.

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 ● KPO is an extension of BPO. In KPO, the work assigned to a KPO vendor is based
on knowledge and information whereas work assigned in BPO is basically
process-oriented.

Types of KPO Services

Knowledge Process Outsourcing provides its services in the following fields:

● Research and Development

● Legal services
● Medical Services
● Advanced Web Applications
● Business and Market Research
● Training and Consultancy
● Pharmaceuticals and Biotechnology
● Writing and Content Development
● Intellectual Property Research
● Animation and Design
● Business and Technical Analysis

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 ● Learning Solutions

Smart Card
● A Smart Card is a device that includes an embedded integrated circuit (I.C.) that can be
either a secure microcontroller or equivalent intelligence with internal memory or a
memory chip alone.
● It provides identity documentation, authentication, data storage and application
processing.
● The IC of Smart Card is used for storing data and it can be used with a smart card
reader.

Applications of Smart Cards

● Telecommunication
● Metro cards
● E-Commerce

● Banking
● Medical and Health Insurance Cards

ATM
● ATM stands for Automated Teller Machine
● An ATM is an Electronic telecommunication
device that enables the customers of a financial institution
to perform financial transactions, particularly cash
withdrawal, without the need for a human cashier, clerk
or bank teller.

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 ● On most modern ATMs, the customer is identified by inserting a plastic ATM Card
with a magnetic stripe or a plastic card with a chip that contains a unique card number
and some security information such as expiration date or CVV.
● Authentication is done by customer by entering a personal identification number
(PIN)

Summary
The two trends of e-business and outsourcing are reshaping the way business is and will be
conducted. Interestingly, both e-business and outsourcing are continuing to evolve, and that is
why these are referred to as the emerging modes of business. India is riding high on the
global outsourcing business and has gained considerably in terms of employment generation,
capability building and contribution to export and GDP.

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