As the world becomes more and more interconnected, with technology that can transfer data, ideas, and workflows across borders instantaneously, the business landscape is also changing. Businesses are increasingly looking to outsource work to other countries where labor is cheaper, more experienced, or more readily available.
There are many reasons to outsource work. It can be a way to save on costs, tap into new markets and expertise, or simply get tasks completed more quickly than if they were done in-house.
But whatever the reason, businesses need to carefully consider the pros and cons of outsourcing before making any decisions.
It’s not as simple as just comparing costs. Several other factors should weigh into any outsourcing decision, including what kind of provider you are going to use.
Below, we’ll give you a thorough outsourcing definition, break down the various types, list potential benefits and drawbacks, and walk you through how to choose an outsourcing solution.
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What is outsourcing?
Outsourcing is the process of contracting with another company or individual to perform a specific task, service, or role.
When outsourcing work, businesses typically look for providers that can do the job more cheaply, quickly, or with better quality than they could internally.
Different types of outsourcing
This isn’t as simple as scrolling through a directory of providers. There are different types, sub-types, and models of outsourcing, each with its benefits and drawbacks. In a maze of initials and acronyms, it can be difficult to sort out who is providing what service. Let’s clear up any confusion.
Business process outsourcing (BPO)
The first and most common type of outsourcing is called business process outsourcing, or BPO. This is when a company contracts with another company to perform an entire process or business function. The most commonly outsourced processes include:
- Customer service and support
- Data entry
- Payroll and accounting
BPO can be either domestic or offshore. Domestic BPO providers are based in the same country as the company that is outsourcing the work. Offshore BPO providers, as the name suggests, are based in another country.
Offshoring vs outsourcing
You may have also heard the term “offshoring” used to describe the outsourcing of work to another country. Offshoring is a subset of outsourcing and refers specifically to the transfer of company operations, facilities, or jobs to another country.
The main motivation behind offshoring is usually to reduce labor costs. But there are other potential benefits as well, including accessing new markets and talent pools and reducing business risks by diversifying your workforce.
However, offshoring can also have some drawbacks. These include the challenges of managing a remote workforce, as well as the potential for political and economic instability in the host country.
The second major type of outsourcing is called project outsourcing. This is when a company contracts with another company or individual to complete a specific project. The project has a defined scope, timeline, and deliverables. Once the project is completed, the contract is typically terminated.
Project outsourcing is different from BPO in that it’s usually used for one-time tasks or short-term projects, rather than ongoing work. It’s also more common to use an individual contractor for project outsourcing, rather than another company.
Project outsourcing is often used for:
- Website design and development
- Marketing campaigns
- Software development
- Data analysis
Like BPO, project outsourcing can be either domestic or offshore. The same considerations apply in terms of cost, language barriers, and cultural differences.
Shared services center
A shared services center, or SSC, is a type of business process outsourcing in which a company consolidates various functions into one central unit. The most common functions that are outsourced to an SSC include:
- Finance and accounting
- Human resources
- Customer service
An SSC can be either domestic or offshore, although they are often located offshore to take advantage of lower labor costs. One of the benefits of using an SSC is that it can help standardize processes across a company since all functions are centralized in one unit.
What are the benefits of outsourcing?
No matter which type you choose to employ, outsourcing can provide the same key benefits to an organization.
This is often the primary reason businesses choose to outsource, and it can be a significant benefit. When done correctly, outsourcing can lead to reduced labor costs, increased efficiency, and economies of scale.
Tap into new markets and expertise
Outsourcing providers often have access to markets and resources that businesses don’t. This can help companies expand into new geographic markets or gain access to specialized skills or knowledge.
Increased speed and agility
When businesses need to get tasks completed quickly, outsourcing can be a helpful solution. Providers can scale up or down rapidly to meet changing demands, and they often have processes and infrastructure in place that businesses don’t.
Focus on core competencies
By outsourcing non-core or support functions, businesses can free up time and resources to focus on more strategic initiatives.
Businesses face many risks, from financial fluctuations to natural disasters. Outsourcing can help mitigate some of these risks by transferring them to the provider.
In some cases, businesses outsource to improve the quality of a product or service. This is often the case with complex tasks that require specialized knowledge or skills.
Outsourcing can provide businesses with the flexibility to respond quickly to changes in the market or business environment. Providers can often scale up or down rapidly to meet changing demands.
Improved customer service
In some cases, outsourcing can lead to improved customer service. This is often the case when businesses outsource customer-facing functions such as call centers.
Reduced environmental impact
In some cases, outsourcing can lead to a reduction in a company’s environmental impact. This is often the case when businesses outsource manufacturing or other processes that have a high environmental impact.
There are many other potential benefits of outsourcing, such as access to capital, reduced regulation, and increased competition.
These are just a few of the potential benefits of outsourcing. But it’s important to remember that there are also some potential drawbacks that businesses need to be aware of before making any decisions.
What are the drawbacks of outsourcing?
Before you go and jump into a contract with the nearest outsourcing provider, there are a few things you need to consider. Below are some of the potential drawbacks of outsourcing.
- Loss of control: When you outsource work, you are giving up some degree of control over how it’s done. This can be a problem if the provider doesn’t meet your expectations or if there is a misalignment of goals.
- Dependence on the provider: Once you outsource a function, you will become dependent on the provider to get the work done. This can lead to problems if the provider is unreliable or goes out of business.
- Communication difficulties: When you outsource work to another country, there can be difficulties with language and culture. This can make communication difficult, which can lead to misunderstandings and errors.
- Quality issues: It’s important to carefully vet any outsourcing provider to ensure they meet your standards for quality. Otherwise, you may end up with subpar work that reflects poorly on your business.
- Limited flexibility: Once you sign a contract with an outsourcing provider, you may be locked into that arrangement for some time. This can limit your ability to respond to changes in the market or your business.
These are just some of the potential drawbacks, not an exhaustive list. As you can see, there are pros and cons to consider before making any decisions. So how do you choose the right solution for your business?
How to choose an outsourcing provider
It can be difficult but there are a few key things you need to consider when trying to choose a provider.
- Your type of work: First, you need to identify the type of work you need to be done. This will help you narrow down your options and find providers that specialize in the kind of work you need.
- Your budget: Once you know the scope of work that needs to be outsourced, you can start to develop a budget. This will help you narrow down your options and find providers that fit within your budget.
- Your timeline: You also need to consider your timeline when choosing an outsourcing provider. If you need the work to be done quickly, you’ll need to find a provider that can meet your timeline.
- Your company culture: In today’s marketplace, company culture matters more than ever. What are your values? What is important to you and your team? Make you and the provider you choose are in alignment.
- Your business goals: Finally, you need to consider your business goals when choosing an outsourcing provider. What are you looking to achieve by outsourcing this work? Make sure the provider you choose can help you meet your goals.
By considering these factors, you can narrow down your options and find the right outsourcing provider for your business.
For any business, giving away a piece of control can be difficult. It can be hard to trust that someone else will do the job right, on time, and within budget. But when done correctly, outsourcing can be a great way to save money, time, and stress.
Follow the tips above and you’ll be on your way to finding the perfect outsourcing provider for your needs!