OUTSOURCING- A COST EFFECTIVENESS MEASURE

General Cost-effectiveness can be expressed as the total cost of

specific border interactions (outputs) that result in particular outcomes, such as a ratio of costs to outcome, and the relative effectiveness of producing those outcomes.

Outsourcing - the practice of using outside firms to handle work normally performed within a company is a

familiar concept to many entrepreneurs. Small companies routinely outsource their payroll processing, accounting, distribution, and many other important functions often because they have no other choice.

Many large companies turn to outsourcing to cut costs. In response, entire industries have evolved to serve

companies' outsourcing needs.

General (contd) But not many businesses thoroughly understand the

benefits of outsourcing. It's true that outsourcing can save money, but that's not the only (or even the most important) reason to do it. As many firms discovered during the outsourcing "mania" of the early 1990s, outsourcing too much can be an even bigger mistake than not outsourcing any work at all.

The flat economy caused many companies into huge layoffs and subsequently outsourced functions that were better kept in-house. Wise outsourcing, however, can provide a number of long-term benefits.

Aim

To give an overview of outsourcing and cost effectiveness, benefits derived by various organizations i.e. Telenor Pak and MCB by adopting outsourcing measures.

Sequence of presentation

The presentation will be delivered in VI parts given as under Part-I

Definitions Overview of outsourcing - Lieutenant

ColonelAli Ibrahim

Part-II Process of outsourcing Reasons for outsourcing - Lieutenant

ColonelHassan

Part-III Benefits of outsourcing Competitive advantages

of outsourcing - Lieutenant Binyamin

Sequence of presentation (contd)

Part-IV Cost Effectiveness analysis The basics of CEA Cost Effectiveness measures - Kausar

Shaheen Part-V

Outsourcing and Cost effectiveness measures in Telenor Pakistan - Mohsin

Hassan

Part-VI Cost and Outsourcing

Effectiveness measures inMuslim Commercial Bank - Shehnaz

Gulzar

PART-I

DEFINITIONS AND OVERVIEW

OF

OUTSOURCING

Definitions Cost Effectiveness

An analysis of the benefits of a particular expenditure to establish whether the same expenditure could be used more effectively and efficiently, keeping the quality unchanged. Economical in terms of the goods or services received for the money spent.

Cost Benefit Analysis (CBA)The term refers both to a formal discipline used to help

appraise, or assess, the case for a project or proposal, which itself is a process known as project appraisal and an informal approach to making decisions of any kind. Under the process involves, whether explicitly or implicitly, weighing the total expected costs against the total expected benefits of one or more actions in order to choose the best or most profitable option.

Definitions (contd) Cost Effectiveness Analysis (CEA)

Cost-effectiveness analysis is commonly used in Infrastructure Asset anagement instead of a full cost-benefit analysis where the objective is to sustain the existing standard of service. The replacement or refurbishment of an existing Infrastructure Asset is a good example of this. In effect, the benefits side of the equation is held

constant at some pre-determined standard of service, and various options for providing that standard of service are thencompared, with the least-cost method identified as the preferred option.

Outsourcing.Outsourcing is subcontracting a process, such as product

design or manufacturing, to a third-party company. The decision to outsource is often made in the interest of lowering firm or

making better use of time and energy costs, redirecting or conserving energy directed at the competencies of a particular business, or to make more efficient use of land, labor, capital, (information) technology and resources. Outsourcing became part of the business lexicon during the 1980’s.

Overview Of Outsourcing It involves the transfer of the management and/or day-to-

day execution of an entire business function to an external service provider. The client organization and the supplier enter into a contractual agreement that defines the transferred services.

Outsourcing and offshoringOffshoring is the transfer of an organizational function to

another country, regardless of whether the work is outsourced or stays within the same corporation/company

Nearshoring, Noshoring, and Rightshoring.The globalization of outsourcing operating models has resulted in new terms such as nearshoring, noshoring, and rightshoring that reflect the changing mix of

locations. This is seen in the opening of offices and operations centers by Indian companies in the U.S. and UK.

Overview Of Outsourcing(contd)

MultisourcingMultisourcing is a framework to enable different parts of the client business to be sourced from different suppliers

Strategic outsourcingIt is the organizing arrangement that emerges when firms rely on intermediate markets to provide specialized capabilities that supplement existing capabilities deployed along a firm’s value chain.

PART-II

PROCESS OF OUTSOURCING

AND REASONS FOR

OUTSOURCING

Process of outsourcing

Deciding to outsourceThe decision to outsource is taken at a strategic level and

normally requires board approval. Outsourcing is the divestiture of a business function involving the transfer of people and the sale of assets to the supplier. The process begins with the client identifying what is to be outsourced and building a business case to justify the decision.

Supplier proposalsA Request for Proposal (RFP) is issued to the shortlist suppliers requesting a proposal and a price.

Supplier competition.A competition is held where the client marks and scores the

supplier proposals.

Process of outsourcing (contd)

NegotiationsThe negotiations take the original RFP, the supplier proposals,

"best and final offer" (BAFO) submissions and convert these into the contractual agreement between the client and the supplier. This stage finalizes the documentation and the final pricing structure.

Contract finalizationThis is a legally binding document and is core to the governance

of the relationship. There are three significant dates that each party signs up to the contract signature date, the effective date when

the contract terms become active and a service commencement date when the supplier will take over the services.

TransitionThe transition will begin from the effective date and normally run

until four months after service commencement date. This is the process for the staff transfer and the take-on of services.

Process of outsourcing(contd)

TransformationThe transformation is the execution of a set of projects to

implement the service level agreement (SLA), to reduce the total cost of ownership (TCO) or to implement new services. Emphasis is on 'standardisation' and 'centralisation'.

Ongoing service deliveryThis is the execution of the agreement and lasts for the term of

the contract. Benchmarking

If the terms of the contract provide for it, the provider and client may adjust the pricing based on the results of the benchmark.

Termination or renewalNear the end of the contract term a decision will be made to

terminate or renew the contract. Termination may involve taking back services (insourcing) or the transfer of services to another supplier.

Reasons for outsourcing

Organizations that outsource are seeking to realize benefits or address the following issues: Cost savings

The lowering of the overall cost of the service to the business. This will involve reducing the scope, defining quality levels, re-pricing, re-negotiation, cost re-structuring. Access to lower cost economies through offshoring called "labor arbitrage" generated by the wage gap between industrialized and developing nations. Cost restructuring

Oprating leverage is a measure that compares fixed costs to variable costs. Outsourcing changes the balance of this ratio by offering a move from fixed to variable cost and

also by making variable costs more predictable.

Reasons for outsourcing (contd)

Improve qualityAchieve a step change in quality through contracting out the

service with a new service level agreement. Knowledge

Access to intellectual property and wider experience and knowledge. Contract

Services will be provided to a legally binding contract with financial penalties and legal redress. This is not the case with internal services. Operational expertise

Access to operational best practice that would be too difficult or time consuming to develop in-house. Staffing issues

Access to a larger talent pool and a sustainable source of skills.

Reasons for outsourcing (contd)

Capacity managementAn improved method of capacity management of services and technology where the risk in

providing the excess capacity is borne by the supplier.

Catalyst for changeAn organization can use an outsourcing

agreement as a catalyst for major step change that can not be achieved alone. The outsourcer becomes a change agent in the process.

Reduce time to marketThe acceleration of the development or

production of a product through the additional capability brought by the supplier

Reasons for outsourcing (contd)

CommodificationThe trend of standardizing business processes, IT Services and application services enabling

businesses to intelligently buy at the right price. Allows a wide range of businesses access to services

previously only available to large corporations. Risk management

An approach to risk management for some types of risks is to partner with an outsourcer who is better able to provide the mitigation.

Venture CapitalSome countries match government funds venture capital with private venture capital for startups

that start businesses in their country.

PART-III

BENEFITS OF OUTSOURCING

AND COMPETITIVE

ADVANTAGES OF

OUTSOURCING

Benefits of Outsourcing Wise outsourcing, can provide a number of long-term

benefits given as under: Control capital costs

Cost-cutting may not be the only reason to outsource, but it's certainly a major factor. Outsourcing converts fixed costs into variable costs, releases capital for investment elsewhere in your business, and allows you to avoid large expenditures in the early stages of your business.

Increase efficiencyCompanies that do everything themselves have

much higher research, development, marketing, and distribution expenses, all of which must be

passed on to customers. An outside provider's cost structure and economy of scale can give your firm an important competitive advantage

Benefits of Outsourcing(contd)

Reduce labor costs

Hiring and training staff for short-term or peripheral projects can be very expensive, and temporary employees don't always live up to your

expectations. Outsourcing lets you focus your human resources where you need them most.

Start new projects quickly

A good outsourcing firm has the resources to start a project right away. Handling the same project

in- house might involve taking weeks or months to hire the right people, train them, and provide the support they need.

Benefits of Outsourcing(contd)

Focus on your core business

Outsourcing can help your business to shift its focus from peripheral activities toward work that serves the customer, and it can help managers set their priorities more clearly.

Level the playing field

Outsourcing can help small firms act "big" by giving them access to the same economies of scale, efficiency, and expertise that large companies enjoy.

Reduce risk

Every business investment carries a certain amount of risk. Outsourcing providers assume and manage this risk for you, and they generally are much better at deciding how to avoid risk in their areas of expertise.

Competitive Advantage of Outsourcing Following benefits of outsourcing can give your business a competitive

advantage. Take advantage of the cost-advantages.

Getting access to high-quality services at a cost-effective price is the biggest benefit that you can get while

outsourcing. Outsource and reap the benefits of outsourcing. See an increase in your business.

Outsourcing can help you see an increase in almost every aspect of your business. Outsource and see your organization experience an increase in every aspect with these benefits of outsourcing. Save Big.

Since you don't have to invest in infrastructure, you can also save on making unnecessary fixed investments. Outsourcing removes the burden of changing or maintaining infrastructure. You can also save on capital expenditure. Outsourcing can also help you save on training costs, because you do not have to invest in manpower

Competitive Advantage of Outsourcing(contd)

Get access to specialized servicesBy outsourcing you can get expert and skilled services. This benefit of outsourcing has been the key reason why several outsourcers opt for outsourcing.

Concentrate more on your core businessBy outsourcing all your non-core functions, your employees can be put to better use and you will be able to see a huge growth in your core business.

Make faster deliveries to customersYour outsourcing partner will be able to provide faster deliverables and you in turn will be able to make quick deliveries to your customer.

Improved customer satisfactionWith timely deliveries and high-quality services you can impress your customers. Outsourcing can help you benefit from increased customer satisfaction

Competitive Advantage of Outsourcing(contd)

Benefit from time zone advantagesOutsourcing to countries such as India has a time zone advantage. Your night will be India's day. With this advantage, your outsourcing partner can complete critical work and send it to you the next day.

Increased efficiencyAnother benefit of outsourcing is increased efficiency. Your non-core business functions will be performed efficiently by your outsourcing partner, while your core functions can be efficiently carried out in-house.

Give your business a competitive edgeOutsourcing can help your organization gain a competitive edge in the market. You can also get access to specialized services for different business processes and thereby provide your customers with best-of breed services

PART-IV

COST EFFECTIVENESS ANALYSIS, THE

BASICS OF CEA/CEM

COST EFFECTIVE ANALYSIS (CEA)COST EFFECTIVE ANALYSIS (CEA)

(CEA) is a form of economic analysis that compares the relative expenditure (costs) and outcomes (effects) of two or more courses of action.

Cost-effectiveness analysis (CEA) is a technique for selecting among competing wants wherever resources are limited.

CEA was first applied to health care in the mid-1960s

It was introduced with enthusiasm to clinicians by Weinstein and Stason in 1977:

THE BASICS OF CEATHE BASICS OF CEA

Are the relevant strategies being compared? How good are the effectiveness data? The relationship of the data with the strategy

used for the Cost effectiveness measures, would this be practically useful?

Where do the cost data come from? Who's funding the CEA? Did we get anywhere?

COST EFFECTIVENESS MEASURESCOST EFFECTIVENESS MEASURES

Outsourcing Downsizing Promoting training and development in

house training new people economically Videoconferencing or teleconferencing

instead of Traveling Internet surveys Online marketing Promoting Suggestion Plans with Rewards

Schemes E – learning

PART-V

Cost Effectiveness Measures and Outsourcing in Telenor Pakistan

TP's first solar energy BTS-Havelian

The BTS (Telecommunication towers) were previously powered by generators in the absence of commercial power availability.

The site has now been shifted to a more efficient and reliable source of energy, solar power.

Growing responsibly & requirementKeeping in mind the energy crisis and oil price escalations in

Pakistan, Solar energy is found to be one of the most efficient yet under-utilized alternate energy sources in Pakistan.

This also supports the cause of combating global warming being eco- friendly solutions, It is a noise-free, non-polluting and environment-friendly solution with no harmful or unpleasant emissions at site.

Running 24/7Running 24/7

In case of no sunlight, when the batteries get discharged, the genset takes over for a non-sunlight, non-battery period,

providing power to the site along with charging the battery. As soon as batteries are completely charged, the generator shuts

off and the system runs on batteries again. This continues till the sun appears, and thus the site keeps running 24/7.

The solar panels require zero maintenance thus nullifying the cost and time spent for maintenance purposes. Photovoltaic cells are renewable energy resources that can't be used up by use.

And the sun will not cease to shine.

Cost Effective solutionsAlready in useOther cost effective plans are: Audio/ Video Conferences instead of Traveling Call Center outsourced to TRG, 25 % prepaid information Calls Janitorial Staff, House keeping, Tea serving staff, drivers are

outsourced Car Fleet outsourced Advertising- vendor based Contractual Greeting staff

Cost Effective solutionsFuture TP may switch to Home based working

providing the employees a flexible working routine, using the internet connectivity

PART-VI

OUTSOURCING/COST EFFECTIVENESS

MUSLIM COMMERCIAL BANK

OUTSOURCING OF MCB

MCB hired Credit & Commerce Pvt Ltd as their consultant for outsourcing of their Retail Banking Division.

Address: 415-416 Progressive Plaza Beaumont Road, Civil lines, Karachi, Pakistan

Tel: (9221)-5638529-30 (9221)-5675061-64

E-Mail: creadit@cyber.net.pk go4cnc@go4cnc.com cccl@cyber.net.pk

Different Clients of CCL Citibank N.A. American Express Bank Deutsche Bank ABN AMRO Bank Standard Chartered Bank Emirates Bank International (now Standard Chartered Bank) Pak Oman Investment Company Pakistan International Airlines (PIA) WPP Marketing (pvt) Ltd Habib Bank Limited Air France MCB Bank Limited NIB Bank Limited Equant Pakistan Limited Novartis Pharma Pakistan Ltd IBM Italia

Different Projects of CCL

Support Services to Shares Custodial Depts. Reconciliation of Assets Foreign Exchange Returns Data entry of credit card applications Data entry Personal Installment Loan applications Scanning of Documents Credit Card payment processing (through dropboxes) Inward & Outward Mail Depts. Management of warehouses (Record/documents) Management of Human Resources Management of Payroll

HIRING PROCEDURE

MCB Interviews the applicant for hiring of different vacancies.

After selection of the candidate the bank sends the documents to CCL for issuance of Appointment Letter.

CCL issues the Appointment Letters to the candidate.

Grading/Salary System Of MCB SEVP 500,000 EVP 200,000 SVP 125000 VP 100,000 AVP 60,000 OG-I 40,000 OG-II 30,000 OG-III 20,000

Grading/Salary System of CCL

Grade Salary Junior Officer 8000-10000 Operation Officer 10000 - 15000 Relationship Officer 15000- 20000 Marketing Officer 10000+ Comm Department Head 25-75000

Facilities Of MCB

Medical: All employees are insured. Leave : 30 days PL, 10 days CL, 08 days SL Bonus: Now there is no fixed bonus but a

performance bonus is there. Personal Loan: Three basic salary Car Loan: Different Limits for different Grades House Loan: Different Limits for different Grades Increment / Promotion: After every three years Gratuity : Completion of 5 years of service Provident Fund: 8.33 % of Basic Salary

MEDICAL FACILITY

Every employee of the bank is insured and there are different limits of every cadre.

for example Officer Grade I’s limit is 250,000/=

Parents/spouse of the employee are also eligible for free treatment

Leave Rules Every employee is entitled for

following leave: Privilege leave 30 days

(compulsory) Casual leave 10 days Medical leave 08 days

BONUS

All the employees who showed excellent performance during the year are entitled for performance bonus. It requires the recommendation of the Line Manager/Area Manager/Regional General Manager.

PERSONAL LOAN

All the employees in need of urgency can avail the Personal Loan which is 3 basic salaries.

The interest rate of the loan is very low.

The period of the loan is 24 months.

PROMOTION/INCREMENT

The employees are considered for promotion after 3 years of service.

Every year the employee get increment.

The employees who improve their qualification also get special promotion.

PROVIDENT FUND

All the employee are availing the facility of provident fund.

The bank deducts the 8.33% of their basic salary and adds the same amount in this and at the time of separation the employees get the full amount.

GRATUITY

If any employee leaves the job after completion of 5 years of service the bank give him the gratuity.

The amount of gratuity is one gross salary for one complete year.

Car Loan Facility of MCB

Grade Entitlement of CAR VP Honda City Vario SVP Honda Civic i-VTEC (Manual)

EVP 1 Honda Civic VTi(Prosmatec Oriel)

EVP11 Honda Accord 2.4 i-VTEC SEVP Mercedes C180

kompressor

HOUSE LOAN

GRADE Entitlement SEVPII 15,000,000 SEVPI 15,000,000 EVPII 12,500,000 EVPI 12,500,000 SVP 10,000,000 VP 7500000 AV 5000,000 OG-I 4000,000 OG-II 3000,000 OG-III/CASH OFFICER 2000,000

COMPARISON OF MCB & CCL

FACILITIES MCB CCL MEDICAL YES NO P.LAON YES NO CAR LOAN YES NO H.LOAN YES NO PROMOTION YES NO GRATUITY YES NO PROVIDENT FUNDYES NO

COMPARISON OF MCB & CCL (contd)

FACILITIES MCB CCL LEAVE 48 25 INCREMENTS 3 YEARS IF CO.GETS

PROFIT LPR 90 DAYS NO INSURANCE YES NO TRAINING YES NO BONUS YES NO JOB SECURITY YES NO

Conclusion

The trend towards outsourcing has been caused by several strategic and operational influences. From a strategic perspective, some human resource departments have attempted to shift their focus and resources towards a more strategic role through the use of outsourcing. To accomplish this, human resource executives have used outsourcing to relieve their departments of some of the more mundane aspects of the function, such as those involving routine, low-value-added transactions. Outsourcing also has been used to help reduce bureaucracy and to encourage a more responsive and cost-sensitive culture by introducing external market forces into the organization through the bidding process. In addition, outsourcing has been used for political purposes, such as to reduce or control head count in human resources.