Definition – What is Outsourcing?

Jamie Johnson

in Tallyfy Project Management

In the past ten years, companies have increasingly begun to look to hire outside of their company. This is commonly referred to as “outsourcing” and can be an opportunity to minimize payroll expenses and decrease costs. Common outsourcing functions include human resources, accounting, customer service, marketing, design, content writing, and legal services. These functions can be outsourced either to another company or to a freelance contractor.

Outsourcing and globalization of manufacturing allow companies to reduce costs, benefits consumers with lower cost goods and services, causes economic expansion that reduces unemployment and increases productivity and job creation. Larry Elder

When a company chooses to outsource it is usually so they can lower costs and improve the efficient allocation of resources. Outsourcing allows businesses to focus their attention on the areas they are most skilled at and let outside resources handle the other necessary tasks.

There are 3 different ways to handle outsourcing:

  1. Offshoring – Outsourcing to a different country where the living costs are significantly cheaper.
  2. Nearshoring – Country in geographical proximity to the company’s HQ.
  3. Onshoring – Same country, different state, city, etc.

There are both benefits and pitfalls of outsourcing and there is no one-size-fits-all solution for any industry or business. Just as you would with any business decision, consider any potentials risks or gains carefully before deciding whether outsourcing is a good move for your company.

Why Should You Consider Outsourcing?

When companies develop a clear plan and strategy for outsourcing, it can help the company make better decisions and maximize the relationships with its outsourcing partners. There is no doubt that outsourcing works – a study from IBM Research showed that businesses that outsource have lower expenses and higher operating income than a business that doesn’t outsource.

However, outsourcing does more than simply lower expenses for companies; it provides numerous other benefits as well. Here are the 5 biggest reasons companies choose to outsource:

  • Limited staffing resources or experience

Often companies don’t have the staffing support in place to have multiple employees focus solely on one project. If existing resources are overextended it may become necessary to focus on the daily operational duties.

Your staff also may not have the specific experience or training needed to effectively tackle the project at hand. If the project requires specialized experience, outsourcing may be optimal. An example of this could be hiring an independent accountant to handle the bookkeeping off-site.

  • Increased efficiency

Handing off a particular project to an agency or contractor with the expertise to deliver on that project quickly and efficiently will lead to increased productivity. Handling the same project yourself could involve spending weeks to months hiring and training new employees before you can even get started on the project.

  • Lower costs

Companies that don’t outsource tend to have higher expenses for research, marketing, and development. As competition grows and budgets become tight, it can be difficult to find the extra resources to fund projects that require specialized staff.

Freelance contractors offer different pricing structures based on their level of services and experience. Although it may take some upfront effort to obtain price quotes and determine who the best fit is, it can be cost-effective in the long run.

  • Objectivity

Outsourcing can bring in individuals that have a level of objectivity that is not present in those people closest to the business. This can be a huge asset when it comes to the project outcome.

  • Focus

According to this article in Entrepreneur, managing multiple projects at once can result in a 40 percent drop in productivity. Outsourcing can reduce distractions and allow companies to focus on their core competencies. By freeing up time-consuming tasks, management is able to focus on the activities that are essential to the long-term growth of the company.

Things to Consider

Few companies function independently anymore; most businesses form partnerships with a variety of contractors and suppliers. Outsourcing allows companies to do business more effectively by passing off functions that are necessary but not strategic for the growth and success of the company.

Knowing how and when to outsource can be challenging. As with anything else, there are both advantage and disadvantages to outsourcing. Anytime the disadvantages outweigh the advantages of outsourcing, you should probably avoid outsourcing that function. Here are some things to consider when deciding whether or not to outsource:

  • Quality

The quality can improve or decrease after outsourcing, depending on what you are outsourcing. Always keep in mind you get what you pay for – there are contractors out there who will agree to do the same work for a fraction of the cost as other contractors. But this could result in poor quality work and a lot of unnecessary time and frustration.

  • Control

Some companies are perfectly happy giving up control over parts of their business to focus on their core competencies. Others prefer to hang onto control of all areas to guarantee the work is always done to their satisfaction. Before making the leap to outsource, ask yourself if your company is ready for this step. Consider how much control you are willing to let go of because failing to think about this now could result in long-term problems.

  • Employee morale

Before outsourcing any key functions you should carefully consider how employees could react to this decision. Some employees could feel threatened or like their jobs are at risk. According to this article in Time, 80 percent of Americans feel outsourcing puts their jobs at risk.

It is important to communicate with employees and make them feel included during times of major change. Be sure to keep employees in the loop and help them understand that this decision to outsource is beneficial to them as well.

  • Access to sensitive information

If you are considering outsourcing payroll or other confidential information, there is always a chance that confidentiality could be compromised. And if the outsourced function involves company data or knowledge then this should be taken into account. Look into the outsourcing company carefully to ensure you data will be protected.

Steps for Successful Outsourcing

Now that you have made the decision to outsource you may be wondering, how you can make it work for your business? There are steps that must be taken to ensure a successful transition and partnership.

The first step is to determine what type of outsourcing will best meet the needs of your business. Determine the functions that do not meet the bottom line of your business and consider outsourcing those to skilled contractors or agencies. This can be a recurring job or one-time task.

After you determine what functions to outsource, you can begin contacting potential agencies or contractors to access the services they provide. This will allow you to determine whether or not they are a good fit for your company’s needs.

Now you can select an outsourcing partner you trust in order to develop a mutually beneficial relationship. Be sure to develop measurable goals of job performance and project milestones before entering into an agreement. The contract should outline what kind of performance is expected and should include a means of ending the professional relationship if the service provider doesn’t meet your expectations.

Conclusion

When considering the decision to outsource a company function, there are a number of different vendors and contractors to choose from. It can be challenging to find the person who has the skills and resources best suited to the needs of your company.

As you evaluate your options, be sure your decision best suits your company cultures. Also, keep in mind that what works for your business needs today may need to be re-evaluated in the future as those needs evolve.

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