What is outsourcing?

Outsourcing is a business strategy in which certain functions are handed over to an external party to carry out.

The practice doesn’t specifically refer to sending work overseas; that’s called ‘offshoring’. A company could outsource a business function to a local firm if it suited them to do so.

They could also have outsourced workers performing tasks in the same building as the main business. 

Say a company requires security guards. Rather than investing in recruitment, training, and insurance, it may be more straightforward to outsource to a specialist security firm.

A business strategy that has been around since the 1990s, outsourcing can be a contentious subject. It occasionally leads to the loss of several jobs in-house or within the company’s home country.

But there are many tangible benefits to the practice, and companies choose to outsource for a variety of different reasons.

How can outsourcing benefit a business?

Any company could decide to outsource one or more of its business functions. There are plenty of industries that benefit from external workers in any number of departments. 

Here are a few reasons why outsourcing can be worthwhile:

It offers cost savings

Companies primarily choose to outsource services that could otherwise be performed in-house as part of a cost-saving exercise. 

There are loads of ways that outsourcing can save companies money. Here’s just a couple of the top advantages:

• Lower labor costs. If a company needs public relations support, as an example, they could find someone to give them one or two days of commitment a week. By outsourcing, the business avoids having to pay someone a full-time salary.
• Lower equipment costs. Setting up a new function like a customer service team means installing a room full of fully functional workstations. Or the company could outsource to call centers that are already operational instead.

It can be more specialist

The idea of outsourcing is that a company is asking third parties to do work that their employees would otherwise be doing.

But often the external workers are more specialized and experienced in completing the task at hand, which can hugely benefit the outsourcing business.

For example, a retail company might have a sourcing team responsible for designing, briefing, and importing products.

In this case, good design is just one necessary aspect of the job. But if it were outsourced to specialists, the retailer could expect a much higher quality of design work.

It leaves room for growth

Where a company is rapidly scaling, outsourced functions can help to take some of the strain while employees focus on other areas.

Particularly in the world of eCommerce and online services, outsourcing can help growing companies to operate like established businesses without compromising efficiency.

Depending on the nature of the business and its core competencies, any non-core activity could be fulfilled by a third party. 

For instance, retailers might want to outsource platform integration, while a file sharing service could be outsourcing its recruitment and human resources department. 

Advantages and disadvantages of outsourcing

To summarize, the perks of outsourcing are basically all economical. It’s a business decision made purely to help companies function more efficiently and, in the long run, boost profits.

If you take a look at the benefits listed above, you can connect all of them to cost-saving:

• Outsourcing means lower labor costs, particularly if you embrace offshoring.
• It removes the need for training if you can find specialists to undertake tasks.
• There’s no need to purchase specific equipment, or to make room for new teams.
• It saves on time, which could otherwise be spent scaling the company.

But there are some disadvantages, too. It’s always worth weighing up whether outsourcing is right for your business model, considering the following:

There’s a high level of dependence

Once a company has committed itself to outsource a key task, it is pretty much at the mercy of the third party.

Say the external firm goes bust, or decides to increase its prices – those are costly changes to adapt or react to.

Sensitive information is shared

More often than not, the type of service that an outsourcing firm provides will give it access to confidential data.

Depending on the business function, the sensitive information being transferred could be related to pay, employee relations, customer details, or even legal issues.

While this is inevitable, it opens the outsourcing company to a level of risk, so finding a trustworthy service provider is crucial.

Knowledge can be lost

An inevitable consequence of outsourcing is that a company’s own knowledge base will be more restricted.

If nobody in your organization knows about re-platforming, because you outsourced that operation when necessary, it could be a detriment to your organization in the future.

Types of outsourcing

Depending on business needs, there are different forms of outsourcing to choose from. Here are some of the main types:

Professional outsourcing

This is probably the most common type of outsourcing – it covers any specialized function like accounting, legal or administrative support, and purchasing.

With professional outsourcing, a company has the potential to make great cost savings, while still benefiting from the high standards that a specialist firm can provide.

IT outsourcing

Every modern business has IT needs on some scale, making this one of the most common types of outsourcing.

Companies might outsource IT services like user support, maintenance, or development. Even large, hugely successful technology firms will embrace IT outsourcing from time to time.

Often the service provider you need will be in another country, or they’ll have a complex setup that would cost your own company time, money, and hard work to try to emulate.

Process-specific outsourcing

This refers to using external resources to complete a very particular internal procedure, where you require specialized assistance to make something work.

Using process-specific outsourcing could save a company a lot of time, particularly with functions that are not easy to handle as a standalone business, like freight forwarding.

Manufacturer outsourcing

Contracting third parties to make a component or whole product for your business is known as manufacturer outsourcing. 

It’s globally used by companies as a low-cost way to source goods for sale. A lot of this type of outsourcing is managed overseas, although not always. 

Overseas manufacturer outsourcing can be detrimental to production lead times. If a company needs to outsource a small but specialist component, it can be best to find a local third party. 

Project outsourcing

If a company needs help with a project – either in its entirety or just in parts – outsourcing assistance could be a great option.

This is a particularly useful type of outsourcing for redesign projects where a business lacks the skills within its workforce, and only needs temporary support.

Multisourcing

Most often relating to IT functions, multisourcing is where a handful of providers are used to deliver a business need. 

Known as a really outcome-focused strategy, companies who use multisourcing will have to be accomplished at building and maintaining networks of highly skilled people.

Multisourcing is about creating an infrastructure of what is often called ‘best of breed’ providers – companies who are going to work to help your business rapidly achieve its goals.

Offshore outsourcing

Outsourcing in this way is also known as offshoring. It refers to the practice of handing over a business process to a third party in another country.

Offshoring is generally a cost-saving exercise. Companies may find that labor or material costs are significantly cheaper overseas, although this type of outsourcing is also a way to tap into skills that are specific to certain regions.

As an example, a US-based retailer could outsource basket making to a country where materials like seagrass are widely available, and where weaving is a more common trade.