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Outsourcing is said to help firms to perform well in their core competencies and mitigate shortage of skill or expertise in the areas where they want to outsourcing. Outsourcing is contracting with another company or person to do a particular function. Almost every organization outsources in some way. Typically, the function being outsourced is considered non-core to the business. An insurance company, for example, might outsource its janitorial and landscaping operations to firms that specialize in those types of work since they are not related to insurance or strategic to the business. The outside firms that are providing the outsourcing services are third-party providers, or as they are more commonly called, service providers.
The process of outsourcing generally encompasses four stages:
1) Strategic thinking, to develop the organization's philosophy about the role of outsourcing in its activities;
2) Evaluation and selection, to decide on the appropriate outsourcing projects and potential locations for the work to be done and service providers to do it;
3) Contract development, to work out the legal, pricing and service level agreement (SLA) terms; and
4) Outsourcing management or governance, to refine the on-going working relationship between the client and outsourcing service providers.
Reasons For Growing Popularity In Manufacturing Sector:
The overall cost for the industry would go down. This would involve reducing the scope, increasing the quality, re pricing, re-structuring.
FOCUS ON CORE BUSINESS:
Resources like infrastructure, people, and investment are focused more towards using of core competencies. The resources are directed towards critical areas where the head of the company need to pay attention.
The growing need for quality products through contracting out the service with a new service level agreement.
Access to intellectual property and wider experience and knowledge.
Access to operational best practises that would be too difficult or time consuming to establish in-house.
ACCESS TO TALENT:
Access to larger pool of talented labour and a sustainable source of skills.
PROS AND CONS OF OUTSORCING IN TITAN
OutsourcingÂ also allows companies to focus on other business issues while having the details taken care of by outside experts. This means that a large amount of resources and attention, which might fall on the shoulders of management professionals, can be used for more important, broader issues within the company.
Specializing in what they do best is a great benefit of outsourcing. Any smart business will hire independent consultants or outsource critical functions within their business.
Business owners cannot do everything all at once and becomes very ineffective, which is why outsourcing can be a huge advantage to them. Outsourcing can allow business owners the freedom to focus on what they need to in order to keep their business running smoothly. This is extremely important in large manufacturing plants who want to increase the quality of their products.
Outsourcing allows you to hire the right person for the right job and may give you some new ideas into your business as it presents an unbiased perspective.
Every manufacturing business is looking to decrease their costs which is exactly what outsourcing can do for you. When you hire only what you need, you pay for only what you need.
Outsourcing can also give you a small advantage when trying to win customers, and other project bids. If you have "specialist" within your company that can increase quality and cost who wouldn't want to have you on their team.
Upsetting employees may be one of the major disadvantages to outsourcing. Sometimes employees feel less important and the quality of work can suffer.
You could lose money on your outsourcing investment. Every business investment has some risk and there is no guarantee that outsourcing is going to produce the quality you want, and could end up costing more money because of labour.
Business employees to some degree or another are fairly loyal to a company, but when you outsource you run the risk of having less control over what happens and less loyalty from those you have hired. The desire to "get the job done" may be lower than what you wish it to be, and the job might take a lot longer than planned, costing you more money.
Although some may argue that outsourcing can give you an edge over other companies, others might argue that it takes away your competitive edge.
Often times with outsourcing there are conflicts of interest and issues with confidentiality. It is always a good idea to have confidentiality agreements to steer clear of this problem.
For any ambitious company this would have been achievement enough. But Titan in the last decade has gone on to become the number one player in jewellery also, with a 40 per cent share of the branded jewellery market. Scoring a double first would have been exceptional by the standards of even exceptional companies, but this has not been enough for Titan. It has in the last four years successively entered the sunglasses and prescription glasses market and has become the first in the former and the second in the latter.
Even this does not appear to have taken Titan's breath away as there is one more item to add to its list of achievements. The company, which began as a manufacturer, has over the years become the country's number one speciality retailer with nearly 500 exclusive outlets taking up 600,000 square feet of floor space and doing an annual business of over Rs 3,000 crore (in terms of what the customer pays) through its own or exclusive franchise outlets.
Today, Titan straddles the entire value chain encompassing design, manufacture, distribution and customer-facing sale. What is more, in keeping with the foremost global firms which see the maximum value in brands, intellectual property and processes, outsourcing has come to play a significant role for it. Titan still remains an integrated manufacturer - the way it began in watches - but now outsourcing plays an important role in Tanishq jewellery, and the entire fast rack range of accessories is outsourced
Being the first in various fields has come to Titan almost by default as it has virtually created the field itself. There was no organised jewellery business of any consequence in the country before Titan. It is now the only brand with a truly national footprint, with the rest of the organised sector being made up of local or regional brands or players who are just in metros. Similarly, there was no organised Indian player of any consequence in the sunglasses business before Titan entered the space. And now, in the eye care business, Titan's entry has livened things up and there is keen competition.
OUTSOURCING AT TITAN
Titan began with outsourcing in 1999 with the changes in the trade policy. Titan had no option to move away from manufacturing in longer period.
Outsourcing was not just a random decision but a natural option as cost effective strategy when at that time manufacturing was costly.
Titan's entry into the clock segment in theÂ mid1990s failed badly because its clocksÂ could not face the competition from cheaper imports from China. Moreover, theÂ design of Titan's clocks was also found to be faulty. To correct theseÂ problems, the company decided toÂ stop manufacturing clocks; instead it decided to import them from HongÂ Kong.
The only input in this 'virtual manufacturing 'setup from Titan's side was in the form of design, branding and distribution. The company converted its clock plant into a plastic watch-manufacturing unit to make alarm and travel watches. Outsourcing activities were furtherÂ strengthened in the next few years dueÂ to the problems Titan was facing withÂ the gray market.
According to analysts, Titan's multibillion investments in manufacturing facilities were proving to be a real drain on its profitability in the changed industry. Moreover, since the company relied heavily on its marketing finesse than operational excellence,Â these investments were deemed to be too high. Though theÂ company had consistently posted yearly profits, in the first quarter of 1999-00, it reported a loss of Rs 52 million
By opting for outsourcing, the companyÂ could launch the watches for just Rs 250-395. If it hadÂ to manufacture the range, itÂ would have had to investÂ at least Rs 2.5 million just for the machinery to makeÂ the moulds for the watches. Similarly, the Fast rack range of digital watches was also priced inÂ the range of Rs 650Â to Rs 1500, keepingÂ in mind the target segment - youth in the 15-24 age groups. Titan could price the range so attractively because the watches were completely sourced from Hong Kong and Taiwan.
In December 2001, while the income from the watch division increased by 4%, the figure was 10% for the company as a whole. This was because Tanishq, the jewellery division had posted a 32% growth. It was clear that the company needed to work towards strengthening the watch business in order to reap the full benefits of its marketing and outsourcing efforts.
The line was extended to the digital watch market with Fas track Digital, positioned on the fashion platform. According to company sources, the success of these two watches was due to the fact that they were outsourced. By 2001, with revenues of Rs 7 billion and net profit of Rs 235 million, Titan emerged as the country's largest watchmaker with a 25% market share of the total domestic market and a 50% share among nationally recognized brands.Â
The liberalisation policy of Indian economy and the subsequent removal of restriction in import of watches in late 1990's forced Titan focus more on marketing strategies rather than on its manufacturing activities.so as to retain the competitive advantage.
IS OUTSOURCING A VIABLE OPTION FOR TITAN
According to analysts, Titan's multibillion investments in manufacturing facilities were proving to be a real drain on its profitability in the changed industry. Moreover, since the company relied heavily on its marketing finesse than operational excellence, these investments were deemed to be too high. Though the company had consistently posted yearly profits, in the first quarter of 1999-00, it reported a loss of Rs 52 million. This loss was due to the high overheads, excise duties and marketing spending in 1999-00, which increased expenditure by Rs 1.5 billion. Moreover, net profits had come down by 47% o Rs 146.4 million in 1998 from Rs 275.7 million in 1996.
Company watchers partly attributed this to the heavy investments in the manufacturing setup.
Taking into account the above factors, Titan had no other option but to settle for outsourcing. Around the same time, Titan decided to change its focus to generating more volumes rather than value. This was because the growth in the premium segment of the watch market, which was Titan's mainstay, had been below its expectations. The company wanted to build up a base in the lower value segment and extend its reach. According to company estimates, outsourcing worked out be around 30% cheaper than manufacturingÂ in-house
Another reason why Titan wanted to reduce its focus on manufacturing was the high employee costs -11.2% of its revenues in 2000. This was because in the days when the company had no other option but to manufacture, the Hosur factory had a huge worker base. In 1997 and 2000, the company entered into various wage agreements with the workers' union. As a result, even a low-skilled blue-collar worker at the company earned as much as Rs 10,000 per month. This increased overall employee costs. According to analysts, this was alarming because since 1996, Titan had neither made any fresh recruitment nor replaced close to 200 supervisory and managerial-level employees who left in the same period.
However, the biggest factor that swung the decision in favour of outsourcing was the fact that Titan was not being able to meet the onslaught of the unorganized sector for the first time. Since the company decided to focus on generating volumes from low-end mass products, it had come in direct competition with players in the unorganized market. With cheaper Chinese imports flooding the Indian market, Titan realized that the complete technology of making watches, from hand-plating technology to manufacturing cases, was easily available at prices much lower than what the Hosur factory could ever deliver. According to a former company manager, "The extra costs in the system aren't helping in differentiating the brand. Today, even unique elements of design are being easily copied at a lower cost.
OUTSOURCING AND COMPETATIVE ADVANTAGE
Outsourcing, once used mainly for downsizing and cost reductions at major corporations, should be used as a strategic tool to deliver a forceful impact on corporate growth and financial stability. By outsourcingÂ non-essentialÂ work, the corporation can free valuable resources and focus on its areas of competitive advantage. To achieve that result, the corporation must know its core competencies, the type of work within the organization, and manage the outsourcing process.
Core competency can be defined asÂ the integration of technologies, constituent skills, and the collective learning that sustains the health of the enterprise and serves as a base for the creation of new businesses in the future.Â Â These competencies form units of competitive advantage. The identified competencies (usually between five to eight ) create distinctiveness for the enterprise in the products and services as seen by the end-users, and provide differentiation from competition.Â It is a must that senior management fully understands the enterprises' competencies before undertaking strategic outsourcing for competitive advantage.
For the United States, the use of outsourcing has spread from national to global.Â For instance, in 1993, an estimated 85% of all business outsourcing was conducted in the United States for U.S. based companies. Much of the remainingÂ outsourcing activity was provided in Canada. But that situation has changed. Today, nearly half of all outsourcing is conducted beyond U.S. borders; however, much of the outsourcing is for North American companies with outsourcing experience on this continent.
In 1996 it was estimated that American companies spent roughly $100 billion on outsourcing; the projected growth rate will take that spending to $300 billion by 2001. The statistics for corporate use of outsourcing implies substantial opportunities for future growth. A survey previously done by a recognized financial institution found that while nearly 32% of the companies studied were involved in outsourcing, 68% were not.Â So this suggests there is substantial opportunity for changing the state of competitiveness of these remaining companies as well as improving the competitive state of those already undertaking outsourcing by examining the future potential of the outsourcing process.