In today's quickly interconnected and fast-paced global economy, outsourcing has become an important strategic initiative for many businesses from diverse industries, ranging from customer service to IT and manufacturing, as well as marketing. It can help companies streamline their operations, cut down on costs, and focus on what they do best.
True, outsourcing is not a very new concept in itself, but it certainly has become even more accessible and effective with burgeoning digital transformation and globalisation. But what would outsourcing in business be, and what makes it so important for companies regardless of size? This blog post explores a whole realm of outsourcing-from definitions and advantages to challenges and even examples in the real world.
What is outsourcing?
Outsourcing can be defined as contracting out various business functions or processes to an outside third party without keeping them in-house. The external provider can be another company, an individual contractor, or even a foreign entity in a different country.
Outsourcing includes services or tasks that aren't directly related to the core mission or the primary focus of the business - they would free up time for companies to concentrate more on their primary operations by outsourcing to an external contractor. Functions outsourced depend very much on the needs of the company, the industry, and its complexities.
Though outsourcing has existed in some form for decades, its modern meaning is accentuated by the late 20th century and its new technologies, transportation, and rising emerging markets. The main objectives of outsourcing are improving efficiency in business operations, cost saving, and accessing specialised knowledge or resources that the company may not have internally.
Related: What is HR outsourcing?
Categories of outsourcing
We shall discuss the most common categories of outsourcing, each with its own beneficiary purpose.
- Offshoring: Outsourcing performed by companies or service providers located in countries different from that of the organisation (mostly lower-wage countries). For instance, many US and UK companies outsource their customer service or even manufacturing functions to countries like India, China, or the Philippines.
Read more: What is Offshoring?
- Nearshoring: An extension of offshoring, nearshoring entails outsourcing to countries adjacent to the home market, which include nearby areas or countries with similar time zones. For instance, a company in the UK may outsource to Eastern European countries like Poland or Romania.
Read more: What is Nearshoring?
- Onshoring: Onshoring is outsourcing services within the same country or territory. This could simply be to avoid complexities that usually arise from offshoring outsourcing, such as time differences or breakages in communication, while still achieving cost benefits. For instance, IT support is contracted out by a company based in the US to a service provider in another.
- Multi sourcing: This is the utilisation of several outside vendors for a service or function. Companies generally use multi-sourcing for multi-stage processing or when the activities require a variety of competencies. For instance, it can engage an outside vendor for marketing services, another for customer service, and another for logistics services.
Check the difference between Outsourcing vs offshoring.
Advantages of outsourcing
Most corporations in competitive environments often turn to outsourcing as a viable strategy. It has a scope for producing an array of benefits in a business context, from simple cost savings to improved efficiency.
Here are some of the biggest benefits of outsourcing that create its possible appeal for many businesses.
1. Cost savings
Cost-effective is perhaps one of the strongest motivating factors for outsourcing by businesses. Outsourcing is expected to cut costs at many levels, such as labour costs, operational costs, or even overhead costs.
- Labour costs: Companies outsource to countries, which offer lower labour wages. Thus, they can employ zero-cost skilled labour. For example, a UK company would outsource its customer support function to Indian shores where there are lower wages but competent services.
- Operational and infrastructural costs: Infrastructure such as office rooms, equipment, and technology need not be invested in outsourced services like IT support do not need their clients to buy expensive hardware or software, as so much of it exists with the service provider.
- Economies of scale: Many outsourcing providers provide the benefit of economies of scale, particularly in specialised services. It means that the company can enjoy the infrastructure and expertise that the provider has already established, leading to lower unit costs than if the company used the function in-house.
2. Access to expertise and specialisation
Companies get levels of expertise and specialisations that probably their businesses do not have when they outsource certain functions. Certain activities in the fast-moving world of business develop into needing in-depth knowledge or technical skills that the internal team may not possess. Outsourcing allows companies to gain access to special knowledge without having to recruit and train people.
For example, if an organisation requires building a high-end software application instead of hiring new, it could outsource the software development to a company that specialises in software engineering. These firms have some of the most advanced developers specialising in the latest programming languages, frameworks, and methodologies. Outsourcing to experts, therefore, assures businesses that their projects will be handled within industry best practices.
3. Concentrating on core competencies
Another way outsourcing provides value to the organisation is by enhancing the core competencies of the company owing to the freeing up of internal resources that would have been set apart for non-core functions. Core competency is where a business is particularly proficient and very much different from competitors through innovation, customer support distinct from the competition, and effective product development.
For instance, an organisation that is primarily dedicated to manufacturing may outsource its logistics and warehousing operations while concentrating more on its core objective development and design. Just like this software companies may outsource the marketing or customer support functions to have more time and energy for developing their technology and products.
4. Rise in efficiency and productivity
Outsourcing will enhance operational efficiency and productivity as specific operation functions will be transferred to specialised providers. Compared to in-house teams, external providers have more systematic processes and technologies that make their work faster and more efficient.
One of the examples of providing these services is outsourcing customer service to a specific and dedicated call centre because it helps to achieve such goals-speedy response times, well-informed agents, and ultimately, an enriched customer satisfaction experience which contributes to productivity in the aggregate.
With such efficient processes in place, businesses can concentrate on ensuring continued growth by improving other crucial areas.
Learn about the benefits of HR outsourcing.
5. Scalability and flexibility
Outsourcing helps a business to scale quickly and flexibly within itself. As a company matures or enters an unpredictable period, outsourcing allows the company to adjust operations without incurring a critical capital investment. The additional workload or seasonal variations in volume can thus be made efficient by external service providers handling the work as per the specific needs of the businesses.
As an example, for the entire holiday season, perhaps an e-commerce business may outsource its increase in duties related to warehousing and order fulfilment so that it may set itself aside for the surge of its orders during that time. Or a tech startup might get customer support or software development done on an outsourcing basis just to be able to ramp up very quickly without having a big internal team.
6. Risk mitigation
Externalisation could help reduce various business risks that could be handled by specialised providers that can address certain aspects of the business, investigation and legal functions, such as IT security or compliance. Such providers often have the expertise to deal with complex risks and guarantee the business remains compliant with the requirements of the regulatory authorities concerned/issues of the industry.
For instance, a financial services company could outsource its data security services to a provider known for having solid knowledge of the latest cybersecurity protocols and the measures to expect against data breach events.
Outsourcing challenges
While it provides several benefits, there are some inherent risks and challenges which businesses must consider when they plan to outsource. Mismanagement of outsourcing can have unintended consequences when careful planning and management are not done.
Below are the major challenges that businesses face when they outsource.
1. Issues in communication
Perhaps the biggest hurdle that any organisation faces when outsourcing is communicating. For instance, if two countries are going to outsource, it would differ by work culture, languages used, and styles of communication. There are times when poor communication occurs with different teams in the same country, and this sometimes leads to delays, mistakes, and a lack of clarity regarding objectives.
For instance, language barriers may particularly hamper customer service or technical support outsourcing, and in most cases, such a problem manifests itself when a customer calls a service agent and has pre-determined English language proficiency. The case may end up with the customer baffled at something more due to the agent, even though this happened due to a completely different kind of situation where they understood his or her point.
2. Loss of control
When functions within a business are outsourced, the dimension of relinquishing some control over the way the tasks are done comes in. For certain organisations, this can be quite uncomfortable. To manage external service providers in the same way in terms of standards, values, and expectations can also be really daunting.
Consider a company that outsources software development. It's that company that will find it difficult to make sure if the final product fits their specific requirements or the best practices. Besides, if the quality of the outsourced vendor drops to a poor level, the consequences can be delay in project completion, loss of revenue, or worse, damage to the company's reputation.
3. Risks of security and data privacy
Outsourcing, especially pertaining to sensitive information like customer data or intellectual property, can expose the company to security risks. Breaches in data or misuse of information can be quite costly and damaging to the business and can even tarnish the image of the company. If the outsourcing provider fails to adhere to stringent security protocols, the company might face various legal and regulatory consequences.
As an example, when outsourcing IT or when data would go on cloud storage, then a company must ensure that security is well-established by the provider such as encryption, secure data centres, and compliance with data privacy laws.
4. Quality control issues
Expertise comes into play with outsourcing, but in addition to that, external service providers might not always match the same level of quality control maintained by in-house teams. Sometimes, this translates to low-quality deliverables, missed delivery dates, and also inconsistency in the quality of product/service.
For example, an organisation outsourcing its content creation finds out that the outsourced content is different from what it is perceived to be in terms of voice, tone and even quality even all three altogether will then have to undergo several revisions before it can finally come to a proper time.
Checkout HR outsourcing costs and the latest outsourcing trends
5. Hidden costs
There might be savings, but it might hide many other costs for the possible business. Counted under it all could be vendor management, onboarding and training, travelling, and last but not least, strange fees because of the outsourced services.
For example, when a company outsources software development, the company incurs additional costs while trying to communicate with the outsourced team or managing the timelines anticipated for the delivery of the software.
6. Dependency on providers
Excessive reliance on outsourced vendors makes businesses vulnerable to disruptions within their services. As a case in point, an outsourced provider that faces financial problems and supply chain issues could lead to labour disputes that would create severe spoilage in the operations of that company. Such dependency creates disruptions and delay effects when there is hardly contingency planning.
For instance, consider a manufacturer that buys one essential component from a single supplier. This would leave such a manufacturer suffering delays when the supplier faces logistical problems or production issues.
Examples of outsourcing in business
The below examples depict how outsourcing has affected different fields:
1. IT outsourcing
Most companies, mainly in the technological corner of the sector, will be using outsourced I.T. services by specialised firms to plan everything from infrastructure management up to software development and cybersecurity. I.T. outsourcing can help in gaining access to prime expertise but without an in-house I.T. department.
Example: For instance, IBM and Accenture provide outsourced IT solutions to large corporations. Start-up and mid-enterprise companies tend to outsource software development, app management, or website maintenance for economic viability.
2. Outsourcing customer service
Outsourcing customer service is one of the most popular types within the outsourcing family. Call centres in countries such as India, the Philippines, and South Africa usually acquire customers on behalf of many corporate businesses to effect client support across various channels like calls, emails, and chats.
For example: American Express, Dell, and JetBlue outsource customer care to a third party instead of setting up their own in-house call centre operations so that they can provide 24-hour service at lesser costs.
3. Manufacturing outsourcing
Manufacturing outsourcing entails shifting operations to another location with lower labour costs and better-developed manufacturing facilities. This practice is typically adopted by industries such as electronics, textiles, and consumer goods.
For example: All the iPhones and other products are manufactured through Foxconn, based in China, by Apple, where it enjoys the benefits of lower labour costs and highly efficient manufacturing processes.
4. Human resource outsourcing
HR outsourcing is most likely to be embraced by big organisations with a desire to streamline the tasks carried out by their HR departments. These systems usually include the outsourcing of recruitment, payroll processing, benefits management, and any sort of training for the employees.
Example: Companies such as ADP provide HR outsourcing services required to ensure the concentration of organisations on their core competencies while providing a professional and efficient service delivery in the handling of all HR functions for the companies.
Conclusion
Is outsourcing into business channels flexible and brutish? Outsourcing reduces expenditure, offers specialised skills, and helps to improve process-related operational efficiencies. Outsourcing holds great promises, yet organisations need to pay close attention to the associated challenges in terms of barriers to communication, control of quality, and security problems. By choosing the right outsourcing partner, the organisation can ensure a competitive advantage and an avenue for driving success in the global marketplace by setting the processes correctly.
The meaning of outsourcing is the best example of a fast-moving landscape that has proven to be a boon for businesses, wherein such businesses can rely on speed and become flexible to an event with an even better adaptation. Accessing cheaper labour, pulling in technical skills, or augmenting flexibility, this component in business policy seems to be around for a few more years.
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