Outsourcing: the essence and features of implementation in Ukraine
Tania Stohniichuk, 110i, KNEU
The world economy and business are endlessly evolving, inventing new forms and methods of organizing business processes. As a result, there is a fundamentally new method of doing business – Outsourcing. Outsourcing in the Ukrainian economy is a relatively young concept, while Western and European business is successfully practicing this type of activity.
By involving outsourcing companies in cooperation, the customer company attracts external resources, highly professional staff, information resources, experience in providing services of narrow specialization, such as: IT-service, accounting services, sales, etc. In fact, outsourcing is profitable to involve in absolutely all industries. So, let’s start with the understanding what outsourcing is.
Chapter 1. What is outsourcing?
Outsourcing is the business practice of hiring a party outside a company to perform services and create goods that traditionally were performed in-house by the company’s own employees and staff. Outsourcing is a practice usually undertaken by companies as a cost-cutting measure.
As such, it can affect a wide range of jobs, ranging from customer support to manufacturing to the back office. The practice of outsourcing is subject to considerable controversy in many countries. Those opposed argue that it has caused the loss of domestic jobs, particularly in the manufacturing sector.
Supporters say 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.
That is, companies use outsourcing to cut labour costs, including salaries for its personnel, overhead, equipment, and technology. Outsourcing is also used by companies to dial down and focus on the core aspects of the business, spinning off the less critical operations to outside organizations.
On the downside, communication between the company and outside providers can be hard, and security threats can amp up when multiple parties can access sensitive data.
Chapter 2. Understanding outsourcing.
Outsourcing can help businesses reduce labour costs significantly. When a company uses outsourcing, it enlists the help of outside organizations not affiliated with the company to complete certain tasks.
The outside organizations typically set up different compensation structures with their employees than the outsourcing company, enabling them to complete the work for less money. This ultimately enables the company that chose to outsource to lower its labour costs.
Businesses can also avoid expenses associated with overhead, equipment, and technology.
In addition to cost savings, companies can employ an outsourcing strategy to better focus on the core aspects of the business. Outsourcing non-core activities can improve efficiency and productivity because another entity performs these smaller tasks better than the firm itself. This strategy may also lead to faster turnaround times, increased competitiveness within an industry and the cutting of overall operational costs.
Chapter 3. Types of outsourcing.
The evolution of Outsourcing has led to a wide variety of Outsourcing services today. With a wide list of Outsourcing services, it is important in learning – What is outsourcing, to uncover what the different types exactly are. Therefore, in this section, types of Outsourcing will be discussed.
Professional Outsourcing includes accounting, legal, purchasing, information technology (IT), IT or administrative support and other specialized services. This is the most common area for these specific types of Outsourcing services, as there is a potentially high cost savings associated with this type of arrangement. The company pays only for services actually provided while having access to high quality resources, which significantly reduces overhead costs.
IT outsourcing, a type of professional Outsourcing, is one of the more common services outsourced today. It refers to the practice of seeking technology related resources or subcontracting outside of an organization for all or part of an informational technology function.
Companies use IT outsourcing for functions ranging from infrastructure to software development, maintenance and support.
Almost every type of business today has IT needs or at least deals with technology on some level, which makes it so commonly outsourced. A good example of IT outsourcing would be if a company outsources its IT management because it is less expensive to contract a third party to do so than it would be to build its own in-house IT team.
Multisourcing is another important term and provision of IT outsourcing worth exploring more. Multisourcing is a term that can apply to any business area, but is most commonly used when referring to IT outsourcing and IT services, as it is the blending of business and IT services from the main set of internal and external providers in the pursuit of business goals.
Multisourcing is also known to be outcome-focused, well integrated and operates in a “partner” relationship manner, which gives it better visibility into real project status information as well as little to no conflict of interests between functions.
However, multisourcing requires you to have a strategy, a network of relationships and governance as well as requires creating measurements that matter.
The practice of offshoring means having the outsourced business functions done in another country. This type of Outsourcing grew in popularity before nearshoring and reshoring did. Work is often offshored in order to reduce labour expenses.
Sometimes outsourcing is used as a strategic way to enter new markets and tap talent unavailable domestically or as an attempt to overcome current regulations within the home country that prohibit certain activities. India, Indonesia and China have emerged as dominant countries for Outsourcing offshore.
Chapter 4. Pros and cons of outsourcing.
- Cost advantages – you can get your job done at a lower cost and at better quality as well;
- Focus on core areas – outsourcing your business processes would free your energies and enable you to focus on building your brand, invest in research and development and move on to providing higher value-added services;
- Things get done fast – if you’re working with a limited number of staff members, you can get things done a whole lot quicker by passing time-consuming tasks on to freelancers or external agencies;
- You simplify work relationships – by outsourcing work, you’ll typically be able to minimize work relationships to simple, contractual arrangements.
- You lose some control – when you farm work out to external agencies or freelancers, you’re losing control of how those tasks are being monitored and performed;
- There are security risks – if you plan to outsource processes that require personal data, you could be placing the privacy of others or security of your business at risk by passing that data on to other people;
- You reduce quality control – outsourcing companies and some freelancers may often be motivated by profit rather than a job well done. That means the work you send out may come back quickly, but will lack the standard and quality that customers have come to expect from your products or services.
Chapter 5. Outsourcing in Ukraine.
The use of human resources is the basis of successful outsourcing in the world. The leading countries are India, China, which receive orders from Europe, the USA, and Japan. At the same time, there is a tendency for the USA to gradually reduce part of orders to these countries, planning to reorient to outsourcing within its own country, if possible.
In turn, Japan, on the contrary, is increasing the number of external outsourcing orders that China receives. Along with this, Japan still has a tendency to distribute a relatively small share of outsourcing orders to the foreign market, focusing in its choice on countries in the Asian region. Outsourcing of customers from European countries often involves contractors in countries of Eastern and Central Europe, China, and India.
Ukraine stably maintains its 24th place in the TOP 25 of the Global Services Location Index, GSLI, a global rating that has been prepared by the American consulting company A. T. Kearney since 2004.
At the moment, Ukraine is one of the three leaders in the concentration of certified IT specialists per capita of the able-bodied population among the main countries-suppliers of outsourcing services, ahead of the Russian Federation, Hungary, Poland and India.
Currently in Ukraine there are more than 1000 IT companies that provide outsourcing services, and each year the Ukrainian IT market is growing by at least 20%. Most orders come from English-speaking countries such as the USA, UK, Australia and Canada. The IAOP International Association has published the annual Top 100 ranking of the best outsourcing companies – The 2018 Global Outsourcing 100. This rating lists 18 companies with offices in Ukraine.
Hence, this fact allows us to say that the peak of the development of the outsourcing services market in Ukraine is ahead.
Chapter 6. Outsourcing companies of Ukraine.
EPAM. Headquartered in the USA, EPAM is a global representative of IT outsourcing in Ukraine. It launched its development centers in the country in 2005 and now delivers high-end IT solutions through branches in Dnipro, Kharkiv, Kyiv, Lviv, and Vinnytsia. The local technical staff amounts to 5,000 specialists working in financial services, healthcare, education, and other areas.
Ciklum. The company works in the field of IT outsourcing in Ukraine since 2002. Nowadays, it operates through 24 offices and development centers in Ukraine, Poland, Spain, Belarus, and Pakistan. It numbers over 3,500 team members and lists IBM, Microsoft, and Nvidia among its partners.
Finance Solutions Group. Finance Solutions Group (FSG) is an independent, specialized provider of integrated business solutions. The company was founded by practitioners with different techniques of effective business resource management and project management. The company provides outsourcing of accounting, CFO functions, personnel accounting, treasury, tax, management, financial and IFRS reporting.
Chapter 7. Outsourcing and law of Ukraine.
Outsourcing is an agreement under which the customer instructs the contractor to perform certain tasks, including part of the production process or the entire production process, the provision of recruitment services, support functions. As follows from the interpretation of the concept of outsourcing, the parties to the legal relationship are “customer” and “contractor”, which is inherent in contracts and / or the provision of services governed by the Civil Code of Ukraine.
St. 6 of the Civil Code of Ukraine stipulates that the parties have the right to enter into an agreement that is not provided by acts of civil law, but meets the general principles of civil law. St. 627 of the Civil code of Ukraine such position is revealed.
The norm stipulates that the parties are free to enter into a contract, choose a contractor and determine the terms of the contract, taking into account the requirements of the Civil Code of Ukraine, other acts of civil law, business practices, reasonableness and fairness.
Thus, the legislation allows the parties to determine the nature of the contract at its discretion and provide for work and / or services that are outsourcing.
Outsourcing has become increasingly popular over the last decade as companies grow and their needs start to get so specific, that supply for particular positions, is not easily found in the national market. This practice is most commonly used in industries where there’s either a shortage of labour for particular positions or where the cost of labour is too high.
With the rise of the technology sector and the start-up ecosystem, outsourcing has become a window of opportunity for companies to acquire and retain development talent and teams as the supply of developers is not enough to meet the demand.
Outsourcing has both advantages and disadvantages. In my opinion, outsourcing in Ukraine is quite developed, but in the future Ukraine will have more and more outsourcing companies, because Ukraine is considered as one of the best countries for IT outsourcing due to its available costs of development, high level of competence of workers and convenient time zone.