Outsourcing Meaning
Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity that is or could be done internally, and sometimes involves transferring employees and assets from one firm to another.
“Do what you do best and outsource the rest” has become an internationally recognized business tagline first “coined and developed” in the 1990s by management consultant Peter Drucker. The slogan was primarily used to advocate outsourcing as a viable business strategy.
Outsourcing agreements typically involves two organizations entering into a contractual agreement involving an exchange of services, expertise, and payments. Outsourcing is expected to help firms to perform well in their core competencies, fuel innovation, and mitigate a shortage of skill or expertise in the areas where they want to outsource.
Practice of Outsourcing
Outsourcing is the business practice of hiring people outisde a company to perform services that traditonally were performed within the company by the businesses on employees. Companies typically do this to save money. Since it is often less expensive to pay a third party provider than hire a full time employee. Examples of jobs that are outsourced range from customer support to manufacturing to payroll and human resource services. Many companies have eliminated their entire inhouse customer service call centers and outsourced that function to third party countries located in lower cost location. The practice of outsourcing is subject to considerable controversy in many countries. One side argues outsourcing has caused the loss of domestic jobs, particularly in the manufacturing or textile industry. However, supporters of outsourcing argue that it creates an incentive for businesses and companies to allocate resources where they are most effective and that outsourcing helps maintain the nature of free market economies on a global scale.
Models of Outsourcing
Tactical Model of Outsourcing
Tactical outsourcing refers to hiring a service provider to perform specific functions that constitute only a part of your existing business process. You retain oversight of the process, giving you more control over the process.
Examples of tactical outsourcing can be:
(1) Project Based Outsourcing: This is project based outsourcing but not process based outsourcing. If you need a work done and want to avoid the long process of building the inhouse team and organizing resources and technology.
(2) Accomodating and Augmented Staffs: If you need workers who do not intervene the management function of the business. This may be necessitated in the case of sudden task based staffing requirement or hiring of office staffs who work independently to the management function like Security Services, Sanitation and Catering Services, Incidental Support Services, Domestic Helps etc.
With tactical outsourcing, you maintain the planning process, including gathering requirements from stakeholders and designing the system that outsourced professionals will work on. This increases management overhead, but it also allows you to have more control over the process and more knowledge about what is happening. They are familiar with your processes and answer to you throughout the process.
Strategic Model of Outsourcing
Strategic outsourcing involves partnering with a service provider that provides top-down services. They handle the entire planning, control, supervision and development processes, leaving you free to focus more on other aspects of the business. Strategic outsourcing refers to hiring a firm to perform functions that constitutes your existing business process. You retain the right to quality result but delove significant rights of oversight, control and direction over the process.
A business process, business method or business function is a collection of related, structured activities or tasks by people or equipment in which a specific sequence produces a service or product (serves a particular business goal) for a particular customer or customers. Broadly speaking, business processes can be organized into three types:
- Operational processes, which constitute the core business and create the primary value stream, e.g., taking orders from customers, opening an account, and manufacturing a component
- Management processes, the processes that oversee operational processes, including corporate governance, budgetary oversight, and employee oversight
- Supporting processes, which support the core operational processes, e.g., accounting, recruitment, call center, and technical support
Key Takeaway
Tactical model of outsourcing is a contract with service provider for supply of services that constitutes only a part of business process. However, Strategic model of outsourcing is the outsourcing of a identificable business process of an entity.
Hence, it might be very important to differentiate what constitutes a business process an what does not. We can refer the following list of characteristics for a business process to identify:
1. Definability: It must have clearly defined boundaries, input and output.
2. Order: It must consist of activities that are ordered according to their position in time and space (a sequence).
3. Customer: There must be a recipient of the process’ outcome, a customer.
4. Value-adding: The transformation taking place within the process must add value to the recipient, either upstream or downstream.
5. Embeddedness: A process cannot exist in itself, it must be embedded in an organizational structure.
6. Cross-functionality: A process regularly can, but not necessarily must, span several functions.
As an example, let’s consider the hiring process of an HR department. Right from posting the job opening to onboarding the employee, there are multiple steps involved in the process. Although this can vary from organization to organization, a simple workflow might look like this:
- The HR executive posts the job update
- Multiple candidates apply in a portal
- The HR executive screens the candidates and filters the best-fits
- The selected candidates are called for the next stages of the recruitment
- The right candidate is chosen at the last stage of the recruitment
- Salary and policy negotiations take place
- The offer letter is sent and the candidate accepts
- This is then followed by a long employee onboarding process.
Let’s identify if HR function constitures a business process:
(i) Definability: The input are the jobs applied and internal staffing requirement and the output is the selection of best candidate. (ii) Order: It follows a sequence of activies ranging in various skills level. (iii) Customer: The departmetn which has the staffing requirement’s demand will be fulfilled by this function. (iv) Value-adding: Value addition through the correct staffing process. (v) Embeddedness: HR Functions works in unison with the other business functions but it cannot exist alone. (vi) Cross-functionality: HR interacts with teams from other departments and functions for selection of correct candidate in above example.
So clearly HR function constitutes a business process.
As a note: Generally support activities lack cross functionality, value addtion and definability. So some support functions may not be a business process in that meaning.
Important Distinctions
"Contract of Service" and "Contract for Service"
Generally to build a seperation between employee and contractor, it is identified whenter the contract assumes the form of employment contract or a service contract. This depends on whether it is “contract of service / employment agreement” or “contract for service / contract agreement”. The distinction betwwen “contract of service” and “contract for service” generally is based on factors like:
(i) Ability of the service provider to subcontract/delegate,
(ii) Basis of payment to the service provider,
(iii) Availability of equipment/tools at disposal to the service provider,
(iv) Assumption of the commercial risks by the service provider,
(v) Control over the work and Independence in performance.
"Contract for Service: Exclusive Labor Supply" and "Contract for Service: Others"
We have discussed above that outsourcing may be of two types: Tactical and Strategical. When an outsourcing arrangment constitutes a strategical outsourcing arrangement it is a service contract. Once an arrangement is a strageic outsourcing arrangement it cannot be viewed in exclusivity. It is a service process with its own definability, order, customer, value addition, embeddedness and cross-functionality. It is an entire process of business function.
However, in case of tactical arrangement, where the contract is exclusively for the supply of the labor who work in an arrangement of the organization (control, knowledge, deputation, supervision, direction, availability of resources) and limited responsibility of the labor provider, this will be viewed as “Contract for Service: Exclusive Labor Supply” for the purpose of Labor Regulation.
However, both tactical and strategical outsourcing arrangements are service arrangements for outsourcing organizational functions.
Labor Regulation on Tactical Outsourcing "Exclusive Labor Supply"
Labor Supply Agreements
“Labour Supply Agreements” is the term to describe the supplying of workers by a service provider to a receiving company in need of those services. From the perspective of the receiving company, it is often known as “outsourcing” where the receiving company sources from an external service provider services that is previously provided for itself as part of its core business.
The Service Contract
Bearing in mind that two parties, the “outsourcer” and the “service provider” are coming together, it is very important that the parties ensure that they draw up a proper legal document (the “Service Contract”), to ensure that they cover all difficulties which may arise in the future. A typical Service Contract will cover the following areas:
- The services to be provided;
- The charges for those services;
- The parties will need to agree a “Service Level Statement” which will detail the service expected;
- Mechanism to record the services which are being provided by the service provider and to review those records;
- The outsourcer will need to be satisfied that the service provider has the appropriate personnel who possess the necessary skill and experience to provide the services
- The outsourcer will need to be satisfied that the service provider is competent in the provision of Health and Safety standards;
- Mechanism to cover any request for an increase or decrease of the service;
- Appropriate Confidentiality provisions;
- Appropriate limitation of liability and insurance provisions; and
- Provisions to deal with instances where the service provider has failed to meet the required service level in consequence of which there must be exit mechanisms for both parties.
Regulations regarding the Contract for Service: Exclusive Labor Supply
The actual service provider under the tactical outsourcing can in substance be treated as the employee of the organization because of the nature of the control, direction, supervision, delegation, assumption of commercial risks regarding the assigned work.
Contract for service relating to exclusive supply of labor for Security Services, Sanitation and Catering Services, Incidental Support Services, Domestic Helps etc. are generally regulated by the Labor Laws of a country. The reasons Labor Laws aim to regulate these form of tactical outsourcing are:
- Generally the works subject to tactical outsourcing do not constitute a business process of the organization as a result, their unionization and bargaining power are low. Labor laws aim to strenghten their role through regulations on the outsourcing companies.
- Their placement and compensation are generally affected by unfair reasons like transfers of undertakings, change in management etc. Hence, legal intervention is necessary to uplift their position in the labor market.
- They have little to no role / participation in the management of the company.
Provision of Labor Act Relating to Contract for Service: Exclusive Labor Supply
As per Section 58 of the Labor Act 2074 the outsourced laborers can be engaged in the works other than core work of the entity. Core works of the entity refers to the works outlined in the objective of the entity and works that directly relate to such objective. However, this is only a limitation to outsouring arrangement through service contract for exclusive labor supply (“a tactical outsourcing arrangement” as discussed above). This should not be, however, viewed as a limitation on business process outsourcing (“a strategic outsourcing arrangement” as discussed above) or other forms of tactical outsourcing (others than sousourcing for exclusive labor supply).
The work for which exclusive labor supply arrangement can be entered into is is as prescribed in the Nepal Gazette. Here is a link to it.
As per the gazette, the list of work for which the employees can be availed from outsourcing companies are:
| Security Services | Security |
| Facilitating Services | Sanitation and waste management |
| Gardner for management of garden including agricultural employees | |
| Office assistant (cleaner, preparing tea/lunch or messenger) | |
| Canteen and catering | |
| Business Support Services | Driver, conductor |
| Employees required for loading-unloading, transportation of goods and store management, | |
| Employees required for repair and maintenance and technical support and consultancy, | |
| Construction employees including plumber, electrician, builder, carpenter. | |
| Domestic Help Services | Domestic employees including house maid, care giver |
Obligation of the Labor Suplier
Labor Supplier must obtain a license to operate its business. Only after the Labor Supplier furnishes the security or bank guarantee, the Labor Office or Department issues the license. Labor Supplier should provide the remuneration and other facilities to such outsourced workers. The license of the Labor Supplier can be terminated on non-payment of remuneration and other benefits. The Labor Supplier can be fined up to Rs. 25,000 for violating any regulation or directives framed under the Nee Labor Act. In case of liquidation of the Labor Supplier, the workers shall be paid the outstanding remuneration and facilities within 15 days. If the the Labor Supplier fails to make such payment, the payment shall be done from the security or bank guarantee furnished.
Obligation of the Service Receiver / Main Employeer
The Main Employer (the person providing work to the outsourced laborers) should obtain laborers from the licensee Labor Supplier. If the laborers are availed from outsourcing agency without licensed for Labor Supply the laborers are deemed to be the workers of the Main Employer. The Main Employer may engage laborers supplied by Labor Supplier entering into agreement with the Labor Supplier. The agreement should ensure that the laborers will not be provided the remuneration and facilities below the minimum remuneration and benefits prescribed in the New Labor Act. The Main Employer should regularly obtain the information if the Labor Supplier is providing such remuneration and benefits regularly. The Main Employer is required to inform the Labor Office or Department if the Labor Supplier has not provided outsourced labors the remuneration and benefits. Further, the Main Employer is required to adjust the increment if the minimum remuneration and benefits are increased in accordance with the laws.
Hait, this was a long one. Thank you for reading !