In the ever-evolving business landscape, companies continuously strive to improve operational efficiency, enhance their competitive edge, and optimize resource allocation. The emergence of outsourcing has provided a strategic approach to address these challenges.
While outsourcing presents many benefits, organizations should carefully evaluate the risks associated with outsourcing and the options available before making a decision. This article provides everything you need to know about outsourcing (positive and negative) and steps on how your organization can ensure an optimal outsourcing strategy.
What is Outsourcing?
Outsourcing is where companies hire an external provider of services to assist them with their services, from performing tasks to providing additional resources and support for their existing workforce.
For example, out of Microsoft’s 220,000+ employees, only around 131,000 are in-house employees. A large workforce of contract workers supports Microsoft’s in-house employees. As a significant portion of Microsoft’s workforce is contracted, they outsource most project management for their contracted workers. This makes the outsourcing suppliers responsible for managing the day-to-day work of Microsoft’s contract workers, reducing the workload for the in-house team.
Outsourcing is often a quick and affordable way to facilitate growth within an organization, as it often provides a company with an instant team of service experts. However, like any strategic business decision, outsourcing must be assessed to ensure it supports your organization’s specific needs.
Why do companies choose to outsource work?
1. A Reduction in Costs and an Increase in Profitability
Outsourcing allows companies to cut costs significantly, as external companies or individuals are often available in regions with lower labor costs. This cost reduction isn’t just in terms of service cost and salaries; organizations must also include the significant savings they’re making on infrastructure, technology, training, and other factors covered by the outsourcing provider.
2. Outsourcing Can Increase Flexibility
Outsourcing offers flexibility in managing fluctuations in workload and rising operational demands. Companies can choose to increase and decrease their outsourced workload, based on the current demand, without the medium to long-term commitments associated with hiring full-time employees.
This flexibility simplifies the organizational process of adapting to market changes, seasonal demands, or other unexpected challenges, enabling companies to gain a competitive edge.
3. Access Global Talent and New Tools
Another reason why companies outsource work is because it extends an organization from limited access to talent to a global pool of skilled professionals and specialists. This access enables companies to leverage expertise that might not be available locally, allowing the organizations to adopt new tools and practices that can help them improve their offering or process efficiency, helping to reduce costs and increase revenue.
4. Decreases Time-Consuming Tasks So you can Focus on Core Business
Companies can free up internal resources by delegating larger, time-consuming tasks to external parties. This reallocation allows employees to focus their time on core business functions, helping to enhance overall productivity and generate additional revenue for the organization.
5. Facilitate Growth
Outsourcing can be an excellent opportunity for business growth. It allows organizations to expand their capabilities and reach without needing significant internal resources or capital investment. By leveraging external expertise and resources, businesses can explore new markets, trial new products or services, or test new software and processes with a minimized cost, significantly increasing the chances of successful business growth.
The reason why businesses can facilitate growth through outsourcing can be attributed to the distribution of risk. When organizations outsource business functions, they distribute their financial risks and other associated risks, such as responsibility or liability for a project. For example, this type of risk-sharing can be particularly advantageous for complex or high-risk projects, where the outsourcing partner’s expertise can help mitigate and manage potential risks better.
7. Enhance the customer experience
Outsourcing functions like customer support or external IT services can lead to a more professional and positive customer experience. External providers specializing in these areas often have advanced systems, technology, and training, which, combined with years of experience, will help to improve service quality and customer satisfaction significantly.
Types of Outsourcing
IT outsourcing (ITO)
Information technology outsourcing is delegating non-core IT functions to external service providers, such as maintaining the company’s servers or networks.
While this enables companies to gain access to specialized expertise and focus on core competencies, it also relinquishes control of internal IT systems, creating an additional risk of data security vulnerabilities.
Business Process Outsourcing (BPO)
Business process outsourcing (BPO) delegates non-core business processes to external service providers. BPO focuses on outsourcing standard business functions, such as customer support or accounting.
However, this also poses risks regarding loss of control and data security vulnerabilities. Successful BPO requires clear expectations, an understanding of your organization’s needs, and ongoing monitoring of the services being carried out.
Knowledge Process Outsourcing (KPO)
Knowledge Process Outsourcing (KPO) refers to outsourcing knowledge/information-heavy work to individuals or teams with specialized expertise in specific areas. Organizations will often utilize KPO when they have a particular skill shortage or are trying to further develop an area of their business offering.
Make sure you research the different types of outsourcing before making a decision, as you may find additional cost-saving opportunities or a service that better aligns with your outsourcing goals.
Why Is Outsourcing Important for Big and Small Businesses?
The use of an outsourcing business can be a valuable tool for businesses of all sizes, as they offer a plethora of benefits that all companies can capitalize on. We have provided key benefits below to help understand potential benefits for organizations of varying sizes.
Outsourcing is often important for larger enterprises to delegate non-core functions, such as project management and admin tasks. This is because they tend to have a broader array of non-core business functions due to the scale and diversity of their operations.
Additionally, larger organizations are more inclined to need access to a specialized or specific type of expertise, as they’re more likely to be trying to keep pace with international market trends and technological advancements. By outsourcing these skills and services, organizations are also expected to reduce the time to market, increasing their performance against competitors.
One of the primary advantages of outsourcing for small businesses is the potential for significant cost savings. Outsourcing tasks to third-party service providers, especially those based in regions with lower labor costs, can reduce the expenses associated with hiring full-time employees, such as salaries, benefits, and training costs. This is especially important for small businesses that often operate with tighter budgets and smaller margins for growth.
Moreover, small businesses can share associated risks by outsourcing certain functions, especially in areas where they may need more in-depth expertise due to a lack of time spent within an industry. Outsourcing partners with specialized knowledge and experience can better manage and mitigate these risks.
Perceived Risks to Outsourcing
As with everything, there are potential risks to look out for before outsourcing your services. This list has been provided not to deter you but to help you to pick a reliable outsourcing company.
Impact on Employee Morale
Internal staff may feel threatened by the decision to outsource, as they may feel this indicates a lack of job security or that the company is struggling financially. This can lead to a decrease in morale and productivity. Therefore, reassuring employees with transparency about why your organization is outsourcing services is essential to avoid this.
Quality of Service
When putting any service outside of your control, there will always be a risk that the quality may not meet the expected standards. Therefore, choosing an outsourcing provider with a history of delivering a high quality service is important, as this will always trump outsourcing providers that may be more cost-effective but deliver a lower-quality service.
Data Security Risks
Outsourcing work and sharing sensitive company data with an outsourcing partner can pose security risks, mainly if the outsourced work involves critical data or intellectual property, as the incorrect handling of data or any disputes between parties could lead to compromised data.
Dependency on Suppliers
Relying on external vendors for key business functions can create dependency, which could quickly become problematic if the vendor faces sudden issues such as financial instability or a shift in strategy, as this would then require the immediate onboarding of a new outsourcing company, which isn’t always easy.
While outsourcing is commonly seen as a cost-saving strategy, it’s important to always check for hidden costs involved, such as legal fees, transition costs, and any costs related to unforeseen complexities in the project.
How to Outsource Successfully
When selecting an outsourcing provider, you must know the critical steps to identify the best option for your needs. To help you in this process, we have compiled a list of the top 5 trust signals you can look for to ensure your work is outsourced successfully.
Top 5 Things to consider when hiring an outsourcing company
1. Expertise and Experience
Evaluate each outsourcing company’s experience with organizations within your industry and their experience handling similar services and business processes. Ensure you view their existing case studies and request references from previous clients if you need clarification.
2. Quality of Services
Even if a company has the experience and case studies to back this up, there’s never any harm in delving deeper. You can gain an understanding of the quality standards at your target outsourcing company by reviewing their certifications, such as ISO standards or any awards they may have earned.
If your project schedule allows, consider requesting a trial period of the services. This approach offers a clearer insight into the service quality you can expect to receive.
3. Technology and Infrastructure
Confirm the technological capabilities and infrastructure of the company. Your outsourcing supplier should use up-to-date technology systems that align with your business needs and guarantee the secure handling and storage of any shared data.
4. Communication and Language Skills
Effective communication is essential for the success of any business partnership. It’s crucial to thoroughly assess the language proficiency and communication practices of the BPO company, particularly in terms of service-level agreements (SLAs). This is especially critical if they are based in a country with a different native language, as this can be a particularly crucial element for customer-facing services.
While these considerations will not guarantee you the right outsourcing partner, taking these factors into account can guide you in choosing a firm that aligns well with your desired business model and requirements for outsourced tasks. The main key to a successful partnership is to ensure mutual clarity between both parties on what is expected and what will be delivered.
Perfect your Outsourcing Strategy with Tek Experts
In conclusion, outsourcing offers many advantages for companies looking to enhance efficiency, reduce costs, and gain access to specialized skills. Tek Experts has a team of leading IT professionals who support organizations wanting to stay competitive in a rapidly evolving market and further grow their business offerings.