As a small or medium sized business (SMB), you’ve most likely outsourced certain aspects of your business operations to an external provider. This is especially common for activities that are either personally time consuming for a business owner, or require specialised expertise such as payroll processing, HR management or digital marketing.
In this article, I’m going to tell you precisely what outsourcing is and why it is important in business today and what I think are the top 5 advantages and disadvantages of outsourcing for businesses such as yours.
What is outsourcing?
Outsourcing is when a business hires an external third party to do important tasks and activities on your behalf such as content creation, legal services or HR outsourcing. Here, you are giving complete control to a third party to do it for you. This is quite different from hiring in-house or freelancing, where you have complete control and responsibility yourself.
Due to an increasingly more difficult economic climate, it's becoming common practice to reduce costs and maximise the efficiency of a business's operations. According to Deloitte, global spending on outsourcing will grow to £887 billion by 2025.
Our top 5 benefits of outsourcing
1. Global talent access
2. Cost savings
3. Concentrate on core business activities
4. Operational scalability and flexibility
5. Greater efficiency and specialised expertise
1. Global talent access
Most aspects of your business can be completed anytime, anywhere. Outsourcing offers companies from all industries - retail, healthcare, and technology, to name a few - access to a worldwide talent pool of skilled workers. Outsourcing hotspots like India, Ukraine, and Vietnam are famous for producing high-quality work at much lower prices.
2. Cost savings
For most small and medium-sized businesses (SMBs), labour costs are one of the largest expenses. Outsourcing business services to a global third-party service provider, rather than having an in-house team, can significantly reduce overhead costs. This can be achieved by making a monthly or lump-sum payment, depending on the services needed, to a global talent partner who offers a team to help streamline operations.
Related: HR outsourcing cost
3. Concentrate on core business activities
The complexities of running a business on a full-time basis make it easy to neglect tasks that are important but not urgent, which are necessary to make operations continuous. Outsourcing core administrative functions like customer service or accounting enables companies to release crucial time and resources, allowing the owners to focus on core competencies and business growth opportunities.
4. Operational scalability and flexibility
Businesses in industries like e-commerce have variable demand throughout the year. With outsourcing, businesses can expand or contract operations as need be, without compromising on efficiency or service quality. Working with a talent supplier or an outsourcing agency that is open and flexible in their thought process may further enhance the scaling process.
5. Greater efficiency and specialised expertise
As business owners, it's common to personally do everything yourself. But with outsourcing to a third party with specialised expertise, such as an SEO digital marketing agency, you can optimise business growth with a faster turnaround time and enjoy the privilege of access to advanced technology that third parties know how to utilise. It also eliminates the hassle of having to fund external recruitment fees and delegate end-to-end handling to the third-party provider.
Our top 5 disadvantages of outsourcing
1. Loss of control over operations
2. Communication barriers
3. Quality concerns
4. Hidden costs
5. Data security risks
1. Loss of control over operations
The problem: Even if outsourcing services to a third party simplifies your business's operations, it does come with some risks. With that, you relinquish control and accountability and thus increase dependency on the provider.
The solution: Depending on the complexity level and the specific needs of a business, an element of supervision might be required to achieve the intended outcomes. Therefore, choosing a partner who incorporates transparency and client interaction to reduce the risks of delegating control to an external supplier is crucial.
2. Communication barriers
The problem: Communication barriers can equally be a challenge when outsourcing unless the correct communication infrastructure is put in place. Many companies outsource their operations to countries in different parts of the globe which poses challenges because of cultural and time zone differences. It can also lead to difficulty with integration with the main business team.
The solution: This can be addressed by using effective team management tools with external third parties, such as integrating them into the company's central communication platform, for e.g. Slack. This will enhance a business’s workflow by maintaining clear communication channels with third parties.
3. Quality concerns
The problem: With all these outsourcing services being available all around the world, there are also some that may cause quality concerns and offer low-quality service that will not meet your business standards.
The solution: The above can be prevented by performing regular quality audits, measuring performance metrics as well as assessing the reputation of a potential partner, one which places special emphasis on quality output, before entering into a partnership with them.
4. Hidden costs
The problem: Hidden costs are often related to quality problems. While outsourcing has traditionally been considered reducing labour costs, if you get a partner outsourcing organisation that does not deliver in quality of output, you will be trapped in a never-ending cycle of ongoing quality checking and rework, costing and extending the partnership.
The solution: A good end-to-end talent partner with transparency in costs would avoid this.
5. Data security risks
The problem: Collaborating with a third party would also mean sharing your data externally outside your firm. This could lead to data security risks. The key issue is imposing a covenant between your firm and an outsourced third-party provider. Job contracts provide more protections because they have non-compete clauses and confidentiality agreements not to disclose trade secrets.
The solution: By having strict data security protocols in place and having a provider, which has proven to manage compliance effectively on behalf of its customers, is the optimal way to reduce this risk.
What to consider before outsourcing
The question for you as an entrepreneur is: Do I outsource my business so that it will be of positive long-term impact? The answer is: It depends. Before you choose to outsource, you will have critical considerations for maximum effectiveness of a partnership. This involves choosing the right partner for your business and one that ensures a transparency in costs and contracts.
Conclusion
Outsourcing, done well and with tremendous caution, can be a game-saver in enabling small and medium-sized businesses (SMBs) to grow their operations successfully.
Nevertheless, the long-term implication of outsourcing operations largely depends on going into partnership with a well-established provider that boasts of an excellent track record when it comes to giving its clients results.
At Black Piano, we rise above such difficulties by providing prospective clients with a transparent and effective model by helping them build their remote teams and giving them full control thereby mitigating as many drawbacks as possible of a typical outsourcing provider.
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