Why Do Companies Choose to Outsource Work or outsourcing job
Everything You Wanted to Know About Why Do Companies Choose to Outsource Work
Companies outsource to manage professionals and acquire expertise as they focus on the core business objective. They also outsource for several other reasons: business growth, increased revenue generation, and business continuity. Outsourcing is becoming more popular for large organizations and SMEs.
Before getting a detailed breakdown of why companies outsource, a basic understanding of this business concept is essential.
What is Outsourcing?
Outsourcing is a business process of hiring another company or a third-party provider to execute and handle operations, tasks, and services. The external company is responsible for its employees and systems to provide or perform the required tasks. The most common jobs and operations outsourced include information technology (IT) services, marketing, and technical support.
Companies outsource other activities such as human resource operations, manufacturing, mostly supply chain tasks, payroll, and bookkeeping processes.
Many business owners and leaders opt for outsourcing in a quest for creativity or to advance the talent pool. The concept may initially seem counterproductive, but experts indicate it’s usually a smart move for local and international companies. However, according to Professor Robert S. Huckman (1):
“…cultivating important person-to-person relationships with the vendor of outsourced services can improve the efficiency and perhaps the quality of services delivered…”
-Harvard Business School
Top Reasons Why Companies Outsource
Third-party outsourcing services focus on a specific task making them efficient and reliable. According to Yasin Altaf (2):
“The primary benefits of outsourcing software development include achieving time and cost efficiencies, launching products on schedule and being able to focus on the entire business instead of spending all your energy, effort, time and money on software development.”
These providers offer many options on what to outsource, which sometimes alters the essential employee-employer relationship. With so many available providers, here are the top motivations why companies outsource.
Lower or Control Costs
Most organizations outsource as a cost-cutting measure and resource management. Some company operations change over time based on demand and supply patterns. In such cases, a company may want to control costs and increase productivity to meet demand.
Hiring full-time employees can be expensive for many organizations like SMEs. Contractor rates from outsourcing companies offer excellent and cost-effective solutions for business owners who cannot afford full-time employees.
The company leaders also use the outsourcing concept to curb inefficiencies in operations. This approach can save significant operating expenses when managers and directors examine and identify incompetence.
Growth is mainly a leading factor and objective of all organizations. This may require stringent measures such as time-saving approaches and the elimination of expensive unskilled tasks. Outsourcing allows C-suite leaders to save time and increase efficiency by contracting third-party companies to handle small time-consuming tasks.
Businesses looking to improve their talent pool may prefer to look for specialists over generalists. For instance, a company can hire contractors who have mastered a required skill over the years. It also reduces the workload on the existing professionals allowing them to focus on specific tasks efficiently. This approach saves time and brainpower and retains top-level workers.
Reduced Micromanaging Risk
Most outsourced contractors are highly skilled in their tasks, keeping them focused on their operations with minimal supervision. Company leaders take advantage of this aspect to guide and manage the company effectively. Managers focus and ensure the organization remains on track, meeting core objectives.
Businesses can also look for critical opportunities and identify and quickly mitigate potential threats to productivity. This approach lowers the risk of micromanaging the current workforce and improves professionalism.
Access to Advanced Talent
Organizations can acquire and utilize top talent through outsourcing. Many outsourcing contractors have years of experience or well-trained experts in a specific task. Companies can easily access top talent in their operations by taking advantage of this factor.
Businesses also don’t need to retrain these experts. Instead, they pay for the contracted period or task. Access to top talent allows a business to regain focus on operations momentum, making it easy to manage in-house staff and improve company culture.
Typically, most outsourcing jobs are within the backend of the company, behind the scenes mostly in IT. However, that doesn’t mean front office positions, or customer facing positions cannot be outsourced as well. This subject can get a little confusing, so if you’re interested in learning more about front office vs. back office, click for more information.
Improved Flexibility and Productivity
Outsourcing allows business leaders to hire specific and needed expertise, which enhances productivity. It will enable managers to scale up and down quickly, increasing production capacity with minimal expenses.
The flexibility of outsourcing means there is no long-term commitment, and a business can efficiently manage its cash flow. The resources saved can be channeled or redirected to other operations or improving other departments.
Improves Customer Experience
Hiring third-party contractors significantly improve customer experience in a company. Managers may outsource customer care services to prevent slow response time if they need to increase or enhance their clientele or convert potential sales (3).
A company can contract content marketers or web developers to enhance its online services. The outsourced experts can improve the website, fix technical problems, clarify messaging, and optimize site conversions. This approach is practical for SMEs because it levels the playing field where they can’t hire a full-time team like the larger and more established firms.
Management of Risk
Managing a sizeable in-house workforce is sometimes challenging, especially for SMEs or new firms. When a company outsources its operations, it seeks to reduce management and other operational risks.
But outsourcing partners, mainly those with access to sensitive information like accountants and CFOs, can help identify mistakes and catch fraudulent activities. To reduce the management risk, new outsourced talent can lower the employer’s burden, which may involve legal and administrative issues.
In addition, outsourcing will reduce the risk of a language barrier, time zone challenges, and cultural differences if a company works remotely.
News Ideas and Insight
When a company has reached its peak and begins to level out, outsourcing can be utilized to bring in new ideas and insight. The new talent and professionalism brought by third-party contractors expose a company to new insights and techniques that can be used to improve in-house employees.
Moreover, since the company continues to work with the contractors, it acquires new skills and management systems that streamline internal operations. Also, the long-term relationship between the contractor and a business can bring a sense of ownership to specific procedures, presenting a ground for exchanging ideas and new business models.
They’re a ton of popular and established companies like Slack, and Google, that utilize this process of outsourcing. That’s just to name a few, we’re put together a list of some of the best examples of outsourcing from companies you know and love. By clicking this link, you will be redirected to that page.
Frequently Asked Questions About Why Do Companies Choose to Outsource Work
What Do Companies Outsource?
Companies outsource tasks that will add or streamline operations while lowering costs and saving time. When cost saving was a key factor for several companies in the 90s, outsourcing became popular. The process started by outsourcing minor tasks and operations such as cleaning, security, and catering, among others.
Today, outsourcing is no longer restricted to these peripheral activities but has expanded to include sensitive operations such as human resource services, manufacturing, distribution, IT, marketing, pharmaceuticals, and more. SMEs focus on outsourcing such functions to attain cost-saving strategies to improve productivity and profitability.
IT, for instance, is one of the significant operations outsourced by various companies. Most companies outsource traditional software development services in the United States, especially nearshore teams. IT functions have been categorized into infrastructure or application outsourcing.
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Generally, most outsourcing providers and contractors fall into various categories. These are determined by the scope of a company’s needs and may include,
- Web design and development
- Virtual assistant services
- Marketing and sales support
- Outbound telemarketing
- Accounting and HR management
- Back office support
- Inbound Customer services
- Online and SEO marketing
- Manufacturing and supply chain operations
Most outsourced tasks are operations that independent or third-party entities can easily manage.
Types of Outsourcing
A company can access different types of outsourcing depending on its needs and goals. Businesses looking to outsource must understand and know the various outsourcing models available. These are driven by globalization and competitiveness, according to Alexandru Bodislav, Harvard University.
Here is a breakdown of the most common types.
For most SMEs and some established firms, professional operations can be complex and require in-house training of employees. Others may need additional professional licensing, which can be costly. Hiring a third-party entity with all the requirements and expertise is usually the best and sometimes the only option to complete such tasks.
Professional outsourcing saves costs and gives a company access to high-quality experts. Everyday professional outsourcing tasks include accountants, bookkeepers, engineers, and marketing professionals.
This type of outsourcing applies to any business operation and is popular in complex and high-specialism sectors. These include automobiles, space travel, technology, avionics, and others. Multisourcing combines specialized third-party entities to provide a finished product.
Successful Multisourcing involves creating a partner relationship with other providers. It also needs a comprehensive approach and network to govern the relationship.
Business process outsourcing
This is the most popular type of outsourcing. It involves contracting any company task to third-party contractors. The model mainly deals with repetitive operations like administrative or customer support roles.
Other common examples include a business hiring virtual assistants to help schedule customer appointments and SMEs outsourcing lead generation to acquire more local and overseas clients.
Outsourcing IT services is one of the most popular types today. The process mainly involves contracting technology-based resources and services part-time or for the entire project or function. With technological advancement, all businesses, whether start-ups or established organizations have IT needs.
These tasks raise the demand for IT outsourcing, with many providers coming into play. Everyday IT needs to involve software development, Webhosting services, and other technical services, including cloud storage services.
In-house production can be extremely costly, which affects a company’s revenue. This ranges from acquiring raw materials, operating capital, infrastructure, and equipment. However, outsourcing manufacturing activities lowers costs, and a business eliminates the burden of developing equipment and other needed infrastructure.
Manufacturing companies usually outsource mass production and other supply chain processes such as transport and logistics.
This type focuses on a specific internal or external task in a business. For instance, a company can outsource delivery services to a particular contractor. Such contracts require details outlined throughout the operation, like the timeline, client contacts, and product costs.
Offshore outsourcing means hiring a team in another country to carry out part of the business process. This outsourcing strategy is utilized to reduce labor-related expenses. Some countries offer cheaper labor to complete a task than local providers.
It is also used to tap into the available global talent and skills from other countries and in an attempt to penetrate new markets. The model helps companies overcome local regulations unfavorable to their operations.
Onshoring is outsourcing company operations in the same country as the headquarters. A significant advantage of this model is a common time zone and identical working culture. Some companies consider this strategy more cost-effective than offshoring.
Nearshoring is hiring third-party contractors in geographically close countries. It moves its operations to nearshore providers to cut costs and lessen the shipping and delivery time. Nearshore outsourcing involves nearby countries with cheap labor services. It eliminates most offshore and onshore risks, such as labor costs, language barriers, and time zone differences.
There are several companies utilizing nearshore services in the United States. The most common nearshore operations are IT-related, mainly software development services, cloud services, and IT support.
But what exactly is nearshore outsourcing and why is nearshore important? well this article would balloon if he had all the info here. So instead, we wrote a detailed article that can be found by clicking the blue text “why is nearshore important?”
How to Pick an Outsourcing Provider and Model
Choosing an outsourcing service provider or type can be challenging. There is no third-party provider that can give all the services needed. Picking the right service provider and model requires a company to make informed decisions and articulate what is needed
Realigning and defining the objectives before soliciting a third party will help to maximize outsourcing benefits since the providers will also bring in their ideas and expectations.
Companies looking for outsourcing services need to consider the following.
- How quickly will the provider help cut or lower costs?
- Evaluate the organization’s goals based on the available resources
- Clarify the objectives and set a budget
- Screen through the available providers carefully
- Expect and schedule onboarding time
- Are the services needed broad or specific?
- Is the cost fixed or allows variable options?
The management must also engage in in-depth internal consultation to evaluate the risks before making the final decisions. Balancing the benefits and risks for the parties involved gives a business more focused negotiations and helps to prioritize issues.
Outsourcing Pros and Cons
Outsourcing has helped several companies remain in operation while others have shut down operations. Professionals can quickly learn from previous experiences in the industry to guide the choices made when choosing outsourcing providers.
While many reasons lead companies to outsource, it’s vital to consider the core benefits and setbacks presented by this business strategy and avoid dangers, according to Harvard Business School
Reduced operation costs
This is the most common and significant reason why companies outsource. It’s also the topmost benefit of outsourcing. Many businesses hire contractors or outsource tasks from less expensive labor and service providers locally or overseas. This way, the company saves more while sustaining the required productivity.
Companies can penetrate new markets by hiring local and foreign marketers through outsourcing. This brings in clients and expands the customer base.
Companies usually look forward to retaining top talent by reducing their work burden. This is easily achieved by outsourcing peripheral activities allowing them to focus on the core tasks.
Potential communication breakdown
When companies hire offshore providers, the difference in time zones and a language barrier can lead to communication breakdown and delays. Well-established systems are vital to prevent this problem.
Sometimes in-house employees may feel threatened by the presence of third-party contractors in terms of job security. Business leaders should understand that they are there to help and not replace them.
As the business grows, outsourcing providers may fail to meet the growth rate and provide substandard services. This can hurt the organization’s image and efficiency.
Potential risk to sensitive data
A disgruntled contractor may become a threat to a company, especially if they possess sensitive business data. Such data can be compromised or used to solicit illegal payments. However, businesses should implement proper security parameters for such data before hiring third-party contractors.
Generally, for SMEs and large organizations, outsourcing is an excellent strategy to streamline operations and increase productivity at reduced costs. Still, it’s essential to ensure that a company offers the needed operations before hiring its services.
- …cultivating important person-to-person relationships with the vendor of outsourced services can improve the efficiency and perhaps the quality of services delivered…– Harvard Business School Quote
- The primary benefits of outsourcing software development include achieving time and cost efficiencies, launching products on schedule and being able to focus on the entire business instead of spending all your energy, effort, time and money on software development. – Forbes Quote
- What To Look For When Outsourcing Your Customer Service – Forbes