What Is Outsourcing and How it Works

When executed well, outsourcing can bring immeasurable merits to your business. However, arranging and handling outsourcing relationships also poses new risks and challenges. Here, we’ll debunk everything you need to know about contracting out so that it works seamlessly for you.

Whether you are a small business owner looking for the perfect team to start your venture, an established tycoon considering an effective way to cut back business costs without compromising operation quality, or an enthusiast, this article is for you.

What Is Outsourcing

Outsourcing is a strategy used by companies to lower costs and increase efficiency through hiring third-party suppliers to perform tasks, deliver services, or oversee operations instead of accomplishing them in-house. Simply put, outsourcing means having any particular job function of your business done outside the company.

How Outsourcing Works

Depending on the business needs, a company can outsource one individual, a department, or even an entire business function to do non-critical operations that require lots of time and effort. Moreover, relying on outsourcing companies for special projects or seasonal tasks is considered more practical than sourcing an in-house team.

Although it’s not customary, subcontracting core business functions is also possible. However, this may be costly since it requires highly skilled experts. 

Common Outsourced Work

 

Outsourcing categories vary greatly and will typically lean heavily on your business needs and the industry you operate in. But to serve as a reference, some of the most commonly outsourced operations include:

• Human resource management
• Custom graphic design and illustration
• Content writing
• Web design and development
• Engineering
• Research
• Customer support services
• Digital Marketing

 

Different Types of Outsourcing

Contracting out is not a new business concept. A few outsourcing companies have been around since 1898. Since then, outsourcing has evolved and has become an integral part of the business economy. Different types of outsourcing have also emerged to cater to every nature of business. Below are the different types of outsourcing:

Location-based Outsourcing

 

This type of sub-contracting is defined by the distance of your company from the outsourcing company.

• Onshore - refers to acquiring outsourced services locally or within the country where the business resides.
• Onsite - is a type of outsourcing where the local third-party service provider sends you experts to work within your company for a fixed period.
• Nearshore - means contracting out services or products from an adjacent region, or ideally one in the same time zone.
• Offshore - is acquiring your business process from an outsourcing company in a remote region.

All location-based outsourcing models have their merits, but nearshore and offshore outsourcing are traditionally preferred over other types because they’re more cost-effective.

Relationship-based Outsourcing

 

This outsourcing model focuses on both managing ownership and agreement between the company and the outsourcing company.

• Staff Augmentation model - allows you to lease staffers from a BPO partner to help your company with the project or job.
• Managed Team model - enables collaboration between your company’s employees and the BPO partner’s staff.
• Project Based model - is a traditional outsourcing approach where you hand off the entire project to a BPO partner. 

Other Types of Outsourcing

Here are a few more outsourcing types and their definitions.

• Professional Outsourcing Professional outsourcing means contracting a specific professional field and highly skilled experts to operate for your business (e.g., legal, administrative support, accounting, and other specialized services).

• Business Process Outsourcing Business process outsourcing is a popular outsourcing type. It involves subcontracting non-core business operations or repetitive tasks to a third-party service provider (e.g., technical support and customer service)

• Process-Specific Outsourcing Process-specific outsourcing is contracting out specific processes and internal procedures (i.e., turning over management of civic services like police or armed forces).

• Manufacturer Outsourcing Manufacturing outsourcing is the acquisition of manufacturing processes your business needs from a third-party provider (e.g.,  goods or parts production).

What Are Outsourcing Pros and Cons

 

The effects of outsourcing on a business vary by circumstance, but its advantages usually include one or more of the following:

• Focus on core business operations Since outsourcing takes care of your company’s non-core processes, your staff can concentrate on more critical business tasks like strengthening future strategies.

• Controlled cost Due to the differences in economic scale and labor rates, you have more control over your costs. In fact, around 70% of businesses are outsourcing to reduce their business costs.

• Increased efficiency Acquiring services from an outsourcing company specializing in the process you want them to fulfill can increase productivity and efficiency. More than 24% of small businesses rely on outsourcing to increase the efficiency of their business.

• Lower investment in internal infrastructure Upgrading equipment or moving to a new infrastructure may be extreme. Most times, outsourcing is more practical than investing in in-house operation expansion.

• Flexibility Outsourcing offers increased flexibility to meet certain business conditions.

Of course, outsourcing has a few risks:

• Lack of control Outsourcing may mean losing control over the outsourced function, causing security and confidentiality to be a potential risk.

• Cultural barriers Differences between your business and the outsourcing company’s culture may lead to friction.

• Instability There’s always a chance that a third-party service provider could go out of business, especially if it’s new in the industry and not established.

Takeaways

Deciding whether or not to outsource your business operations isn’t simple, but it’s not unattainable either. Most successful subcontracting cases lie in careful consideration. Once you have defined and prioritized your business needs, you can better decide which services are worth outsourcing.

In need of a skilled and dedicated team that can contribute to scaling your business? Contact us through connect@ripeconcepts.com. 🍊

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Outsourcing