Issues of Development of the Outsourcing Market in Georgia

Giuli Keshelashvili Candidate of Economic Sciences Assistant Professor Iv. Javakhishvili Tbilisi State University

Historically, outsourcing, as a type of agreed relationship and commercial activities appeared in 1962, when EDS, firm of Ross Perrot the successful businessman, through cooperation with General Motors, achieved 40% economy per annum.

At that time Perrot could not event imagine that outsourcing would become so widespread in the sectors of economic activities and would be able to generate great income. Outsourcing was extensively disseminated in the nineties, when the companies have clearly seen its advantages. In questioning conducted by Yankelovich Partners in 14 countries 63% of respondents stated that they have used outsourcing and they have transferred under the management of the outsourcers one or more non-core functions and 84% of them were satisfied by the work of the outsourcer companies.
Outsourcing is English term and means use of the external sources. It implies transfer of the internal functions and processes of the own company to the external companies with the responsibility for fulfillment of such processes. As early as in seventies, the famous marketing professional, guru, Fillip Coulter used to say: “always let someone else do something for you which they can do better and cheaper”. In result, outsourcing of services is much cheaper for the company and the level of services is much higher, than conducting of non-specialized activities by own capacities. Therefore, the company management uses outsourcing, when they need to maintain competitiveness and reduce the costs. Size of costs reduction depends on the type of outsourcing and varies from 10% to 50%.
Up to the end of 2001 it was accepted that outsourcing could be used only in IT sphere. Later, the activities of the outsourcing companies included marketing, book-keeping, legal and consulting services, logistics, HR management, enterprise safety etc. Outsourcing is not a common relation between the customer and implementer, it is a partnership. It is clear that the primary thing is gaining of the client’s trust and further – building of the business relations.
By the functions delegated to the specialized companies. Each type of outsourcing (functional, operative, resource) is divided into the following classes:
· Agreement on full outsourcing, where the contract implies transfer of the staff and assets into the disposal of the service providing form;
· Agreement on partial outsource, where the most part of the departments remain at client’s disposal;
· Agreement on joint outsource where both parties are the partners in commercial activities;
· Agreement on intermediate outsourcing, where the company has high level professionals and transfers its subdivisions to the third party for management;
· Agreement on transformational outsourcing, where the client company completely transfers the subdivision activities to the service provider form. Transformational outsourcing differs from the complete one as the personnel and assets are not transferred in full. Upon completion of the project the control function returns back to the client.
The companies opt to outsource not only for updating of the processes, but for the purpose of improvement of the business as well. High level managers making decisions on outsourcing commence to work according to the ambitious strategic program. Outsourcing programs are supervised by the owners or top managers. Business is related to the rapid changes and its transformation requires transfer of certain processes to the companies specialized in this sphere,
There are used two types of outsourcing: common production outsourcing and entrepreneurial outsourcing. The former implies establishment of the new company for development of business relations, where the personnel and resources are transferred to the common enterprise. The purpose of this scheme is not only improvement of the quality of the transferred work but also production of the goods and services which, further, will be sold to the third party. Entrepreneurial outsourcing is applied where the producing company makes decision to transfer the production of the intermediate goods to the external company. It is also possible to sell its own subdivision to the other company and further relations with it within the scopes of outsourcing.
Outsourcing of the business operations is widespread as well. Such outsourcing is transfer of the non-core business processes to the external company (e.g. – personnel management, book-keeping, logistics, marketing, advertising etc.). As the functions outsourced by the firm to the other company differ, the cooperation forms are different as well.
Operation of the outsourcing companies commence with execution of the agreement. The agreement may be one-time, where the service is provided only once and further it is not required any more (e.g. software or local network design, building repair works etc.) and multiple, where he service implies long-term relations between the client and implementer (e.g. introduction of the informational system or advanced technologies). In such cases the work is divided into the stages and each stage may be covered by separate agreement. It is also possible to make one basic agreement and execution of the separate acts upon completion of each stage. it is also possible to make permanent agreement. This occurs where the external company undertakes certain part of production or management. In such cases the agreement has time limits, with the possibility of its automatic extension. Any combined option is available as well: if in the conditions of permanent partnership the outsource company fulfills the objectives arisen in the course of work, the terms and conditions of each objective should be agreed as well.
Advantage of outsourcing is decrease of the cost price of the outsourced functions. The outsourcer performs these functions at lower costs as it is specialized in this sphere. Positive result of specialization is improved quality and reliability. It is clear that the outsource company has gained the experience in dealing with the certain issues, it has the highly qualified personnel as well. It is significant to outsource not basic but non-core functions. This allows the companies to focus their attention on the main goals, concentrate on satisfying the requirements of the clients and development of the technologies. Outsourcing provides additional resources to the company with respect of establishment of the new companies or expansion of the networks. Positive results of the outsource strategy include: reduction of the operation costs, concentration on the core activities, creation of the variable costs structure, introduction of the advanced technologies, increase of the pace of market entry, improvement of service quality etc.
Outsourcing is the universal business instrument. Its specific feature is outsourcing of the certain organizational functions to the implementer. The functions could be transferred as wholly also partially, as well as for long or short term. In outsourcing it is significant to identify the operations and processes outsourcing of which would be most beneficial for the firm.
Outsourcing has its negative aspects as well: loss of control function over certain part of the own recourses, decrease of the quality in case of fulfillment of the outsourcer not in good faith, what results in undermining of the company’s image. Such problems are characteristic for the underdeveloped markets, where, by the reason of low level of competition the outsourcer is the monopolist and does not care about the quality of work, being sure that the client can not fond any other service provider. Nevertheless, the companies, who practice outsourcing, find that the use of such services lead to reduction of 40-50% of costs.
At a time of practicing outsourcing, the probability of being swallowed up by the other company decreases. If there is real danger of attack from the side of raider company the following protection strategy could be applied: the company continue its operation as a holding so that one company owned the assets and the other was engaged in production; the third provided procurement of the raw materials; the fourth – sale of the end products; the fifth one – provided personnel and technologies for each of them. If such relations between these five firms are based on the outsourcing agreements, the goals of the raider company could not be actually achieved.
The negative aspect of outsourcing is the danger of information disclosure and appearing of the new competitors, who will make advantage of the experience of the client company. Though, this risk could be reduced through making agreements with several outsourcer firms. At this time the costs increase is expected and therefore, it is necessary to engage the outsourcers with good image and who are the reliable partners. The agreement should give maximal consideration of the risk reduction and control instruments, provide for staged payment in accordance with the work implementation schedule.
Outsourcing, similar to consulting, sharing of the gained experience is of great significance. Poor success of the outsourcing activities in many cases is caused by low level of cooperation culture from the side of clients. Development of such culture is possible through adequate distribution of functions in agreement. Securing of stable quality of the outsource work is possible when the outsourcer has the standard services and provides services to great number of clients. The services always differ, with respect of quality. Certainly the outsourcers attempt to take into consideration the client’s requirements, though there is no outsourcer, who would make high quality and cheap decisions at one time.
Outsourcing dynamically develops in the world. In this respect, the leaders are India, China, Israel, Ireland, Russia and Ukraine have achieved significant success in this business. In Georgia, there is little number of participants in this market pointing to the low level of competition and unreliability of services. Georgian outsourcing companies “Azri”, UGT”, IBS”, “Navigator state that the service providing takes place only on the basis of recommendations and personal contacts. It is clear that in such conditions it is difficult to outsource.
“Azri” is a company producing software of new generation, operating with the logo “I think and hence I exist”. The company chooses the model allowing provision of the highest quality services and products to the clients at stated prices. In result of long-term collaboration with the western companies the firm has gained significant experience in management and operational management spheres. Currently “Azri” is recognized world-class company due to investment in research and knowledge, practical experience and qualification improvement for many years. Currently “Azri” works with the orders of the largest Georgian companies. It is oriented towards long-term strategic partnership with the clients what is revealed in business achievements of its clients. Advanced technologies, feedback system, updating cycles of the trainings, effective assessment methodologies help the managers to provide permanent control over the projects. Company “Azri” plays the role of strategic technologies provider. It provides services to the banking, finance and communication sectors; designs and creates safe, expandable and flexible web-applications. Methodology it relies on in project implementation provides client involvement at each stage of the process. Its partners are: the Bank of Georgia, Trading Group, Fina, Georgian Card, Injenico, Tbilisi Metro. Though outsourcing in Georgia is not widespread, the leading companies are aware in the advantages of such business relations and entrust production of many internal goods to the outsourcing companies.
Company Azri was established in California, with the interactive television. Further, the management decided to make investment into the similar company in Georgia, which would be served, in 24/24 mode, by the same personnel. By the reason of great difference between time zones in California and Georgia, close communication between the teams was provided through telephone and electronic communication. One of the projects successfully implemented by Azri was introduction of the automatic billing system in Tbilisi busses. Project participants were JSC Bank of Georgia, Municipal Enterprise Tbilisi Bus LLC, Czech company Microelectronics and Metro Service + LLC.
In Georgia, the outsource services are provided by the company UTS as well. It was established in 2006. Basic activities of the company included information and communication products, business decisions and services, extension and development. The company is basically focused on corporative clients and services to the banking sector. It basically provides foreign exchange transfer outsource, postal service outsource, web outsourcing, consultations etc. It has four basic directions: 1. oriented towards outsourcing of the business processes and information technologies of the entities; 2. introduction and consulting with respect of complex business decisions; 3. assistance in improvement of the business requirements, adequate allocation of the investments, optimal planning of infrastructure and its implementation; 4. development of software. it operates only in Georgia currently. The company attempts to meet the increasing demands of the clients, expand and enter the other segments as well.
In Georgia, development of the outsourcing market develops by stages. Most entities have new business objectives requiring involvement of the external providers. This is basis for development of the outsourcing business. The software developing companies working on the outsource projects have the opportunity of attraction of the highly qualified resources. It is clear that cooperation with the international companies allow using of the state of art technologies, modern technical means, which would be unavailable for the outsourcing clients. Outsourcing of the software accelerates the business modernization process and allows the client assessing of the resulting effect, the risks and allows re-distributing the resources.
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