During the late 20th century and the early 21st century, the world saw a new industry being born. It grew fast to what is now a US$120 billion industry. Called Outsourcing or Offshoring, it has recently gained a lot of popularity and continues to do so.
Outsourcing is also referred to as contracting out and is a business practice where the important functions of running the business are given on contract to other vendors. Web design of the company’s business website, for instance, can be easily outsourced. This enables the business to save on cost and increase efficiency by a significant margin.
Offshoring, on the other hand, refers to outsourcing business tasks to a third-party country outside the country from which the outsourcing business operates.
Industries that can work on the outsourcing model typically include the following:
- Manufacturing — parts of the manufacturing process can be outsourced to smaller home-based businesses or to third world countries to save on labor costs.
- Customer Service — especially call center-based customer services can be outsourced to save a lot on infrastructure costs and manage logistics issues.
- IT Support Services — online IT help desks can offer 24/7 support and save a lot on infrastructure costs.
- Computer Programming — cloud computing and software as a service offer access to companies to use computer services and tools that were traditionally managed by the company’s IT function.
- Human Resources Consulting — projects on building processes on organization development or setting up policies done by vendors give a better output as well as save a lot of time in terms of assigning resources who might not have the requisite expertise.
- Benefits Management — employee benefits management like processing payroll, pension funds, and taxation are outsourced to give the outsourcing company a breather in terms of spending time and resources on these transactional issues.
While there are other industries outsourcing business tasks, the ones above are the most likely to do so for a number of reasons.
The Advantages of Outsourcing Business Tasks
There are a number of advantages in outsourcing non-core tasks. Here are just a few.
Infrastructure cost. Outsourcing is very cost effective as it entails minimal usage of resources in terms of time, facilities, and infrastructure.
Resource effective. It also entails utilizing a minimal amount of manpower resources, and overall reduction in statutory costs like taxes, energy costs, and production costs.
Specialization. The company can be assured of a better output in quality if the outsourcing is done to a company that specializes on the aspect that has been outsourced.
Also, the outsourcing company can focus more on what its core competencies are and also build on a strategy to diversify.
Production time. The production process can be streamlined and shortened, and operational costs are reduced as well.
Regulatory mandates eased out. Companies usually outsource to avoid complex government regulations such as mandates or environmental regulations. Through outsourcing or offshoring, they do not have to bother about the complications in their own country.
The Disadvantages of Outsourcing Business Tasks
While there are certainly a lot of advantages, there are some disadvantages of outsourcing business tasks as well.
Managing relationships. This is a very important aspect of the outsourcing industry.
Any bitterness in the relationship between the outsourcing company and the third party can cause inappropriate business practices leading to huge implications for the outsourcing company.
Legalities. While getting into an outsourcing relationship, a considerable amount of paperwork has to be completed in terms of negotiating and signing of contracts.
This requires the time and involvement of the company’s legal support. A lot of time can also be spent going back and forth trying to arrive at mutually acceptable terms and conditions of the contract.
Security. This is another important factor in the outsourcing business. The outsourcing company has to share a lot of information with regards to sensitive and confidential business data and trade secrets that is necessary for the third party to perform the assigned duties.
Goodwill and brand name. Any inappropriate action taken by the third party on behalf of the outsourcing company can have an adverse impact on the outsourcing company’s brand name. There might also be negative public relations which can be a scar on an outsourcing company’s name.
Assess Whether Hiring In-House or Outsourcing is For Your Business
To decide on what will work best for your business, you should explore your options and study a lot of things. You have to decide on the scope of the project and figure out whether this is going to be a short-term project or a long term one.
Outsourcing a short-term project might not be a very cost-effective decision. The manpower cost alone can inflate the cost of the overall project.
Another important thing to evaluate is that whether the specific expertise is available in-house or not.
It is always cost-effective for the company to give additional tasks to an in-house employee who might also feel motivated with an extra incentive and would be more than willing to utilize his or her talent to finish the project at hand.
Furthermore, a lot of innovation is possible when the resources working on the project understand the business well and can think of ways that would be feasible for the success of the project and the company. And as a business owner, you can rest assured of the protection of the intellectual assets of your company.
Ongoing or long-term projects are more feasible to be outsourced as over a period of time the cost impact reduces considerably. In such a scenario, outsourcing options tend to work very well.
This can improve the quality of the output as most freelancers would be experts in their own subject matter and would concentrate on the requirements of the project.
They would also be examples of practice makes perfect as they would typically be working on similar projects. The time taken for them to deliver on the same tasks repeatedly would also be less, hence will be a benefit for the company from the turnaround aspect.
Outsourcing business tasks to countries from different parts of the world, especially to developing countries where economies are more dynamic, can give the cutting edge of making more profits to the outsourcing business. Less labor costs can mean more profits.
Because of the time zone differences, work can also happen around the clock – without the additional cost for overtime work — thus increasing productivity and gaining more revenue.
The vital factors to decide whether to outsource your business tasks or not are cost, expertise (e.g., in web design), and flexibility. However, there are pros and cons in both ways. Assess whether it’s best for your small business or not.