Outsourcing and Offshoring are Loaded Terms

To outsource or not - it's a serious business decision. But the problem is that words carry baggage, and none more so than the word 'outsource'.

What does it actually encompass? This reality was brought home to me recently at an advisory board meeting of a young venture. The venture enables smaller -companies to set up cost-effective -operations abroad. Its business model blends recruitment, serviced office space and a locally registered company that acts as the legal employer, dealing with the local complexities of tax and employment law.

The venture's typical customer recruits the team, houses them in (segregated) serviced office space and is charged a single monthly fee covering all costs, including salaries. In legal terms, the recruited employees are employed by the venture. In all other practical terms they are the customer's employees, as they are directly managed as such.

A business-relevant model? Yes, on all indications, as the venture's initial 18 months has seen 18 UK small and medium enterprises set up shop at its lead centre in India, employing well over 200 staff between them. Outsourcing? Not really, as the recruited employees are in effect the customer's employees, tightly integrated into the customer's wider operations.

The customer keeps control of their intellectual property and its development. Office space is rented (outsourcing?) and HR services (recruitment, payroll and employment regulatory assurance) are paid for (outsourcing?).

The baggage issue was raised in the advisory board discussion because the initial response of many CEOs/CIOs to this business model is that it is outsourcing - and with that assumption come all the historic concerns about outsourcing, such as loss of control. Yet seen in a different light - a set of services that enable you to assemble a new team abroad, to grow and manage directly - then the baggage associated with outsourcing drops away.

You will notice I have used the word abroad. What motivates a company to become a customer of this young venture? The ability to access resources that are in short supply in the home market, and at prices that are significantly lower than those that rule in the home market.

Offshoring, surely, you say. Indeed, but people tend to link offshoring with outsourcing - and in my experience 'offshoring' is a word that has taken root primarily in the IT industry. The wider manufacturing and process industries usually talk of 'overseas operations' and 'contract operations'.

Why is this important? Because as the IT industry creates and delivers its 'offer', we need to think more clearly about the essence of that offer. The historic baggage associated with words such as outsourcing and offshoring is increasingly getting in the way of a more rational commercial exploration and discourse.

For example, consider a business that uses Google Gmail for its email, and Salesforce.com's online on-demand services for its customer relationship and sales management. Is it outsourcing? In a way, yes, but not in the classic 'outsourcing as facilities management' sense, as neither Google nor Salesforce take over any of the business's assets (software, network, hardware) or its business's employees under TUPE provisions. It is outsourcing in the sense of external sourcing, perhaps better described simply as sourcing.

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