Published on 29th July, 2022 (1 year ago) ● Updated on 29th July, 2022
What is Outsourcing & Does My Business Need It?
(8 minutes read)
Outsourcing is a great way to help your business as it progresses through its various growth stages. In fact, some of the largest companies in the world outsource some of the work they do. In order to maintain steady growth and productivity, you should find a happy balance of in-house employees and outsourced resources. In this post, we’ll discuss how outsourcing can benefit your business.
What Is Outsourcing?
When an organization hires another organization to do some of its business processes, it is outsourcing. Services that are outsourced may include bookkeeping, customer service, programming, marketing, or cleaning.
In theory, any function of a business can be passed to an outside contractor rather than done in-house by employees.
Some companies outsource a small project to an independent contractor. Others may hire a major firm to handle all of their customer support functions. As technology improves and new businesses emerge, more and more of a company’s operations can be done outside the organization.
Outsourcing to an organization in another country is often called offshoring. If the operation is kept in the same country, it is sometimes referred to as onshoring. Both have potential economic benefits as well as potential problems.
Why Do Companies Outsource Jobs?
Companies outsource functions for all sorts of reasons. Among them are:1
- Cost: it is often less expensive to outsource an activity than it is to hire people to do the job. This is especially the case if the work can be outsourced to a part of the country with a lower average wage or to another country with a significantly lower pay rate.
- Access to skills: One reason a business might outsource is to gain access to skills and services that it might not be able to obtain otherwise. For example, a small business might not be able to afford keeping a high-end graphic designer on staff, but it can afford to contract one just to design a logo. Many businesses have found they can find higher-level programming, bookkeeping, or human resources skills by outsourcing than if they hired in-house.
- Manufacturing capabilities: Many companies are great at designing and marketing products, but they don’t have the ability to manufacture them. To get the goods, they contract the manufacturing work out to a company that does production.
- Taking advantage of time zones: Many businesses have found they can get more work done in less time by outsourcing it to people in different time zones. A U.S. company can offer 24-hour customer service by outsourcing to call centers in India and the Philippines, for instance. A Swedish investment bank can turn reports around faster if it has freelance editors in the U.S. work on them while Europe is asleep.
How Outsourcing Can Hurt a Business
Outsourcing can be a good solution for many businesses, but it’s not right for all of them. Even if it is approached carefully, it can cause problems.2 For example:
- Lack of control: When you outsource a project or a process to someone else, they might not think it’s as important as you do, or they may not do it the way you want it done. However, the final outcome may be what you want. Some managers are more comfortable giving up control than others.
- Loss of knowledge: This cuts both ways. The organization that takes over your process does not understand your organization and culture as much as an employee on staff does. This may make it harder for the work to meet expectations.
Your staff forfeits expertise in the area that is being outsourced. Your company may lose skills and knowledge by turning the work over to someone else.
- Customer problems: Your customers don’t care if work has been outsourced or if it is being done by your employees. They only care about whether their expectations are met. Language problems, culture clashes, or outsourced work that doesn’t meet consumers’ standards can lead to unhappy or lost customers.
Economic Impact of Outsourcing
Outsourcing has economic effects, good and bad. It has the greatest impact on jobs and prices. In general, it leads to less employment and lower prices in the business’s home country, but not always.
When it comes to employment, outsourcing moves jobs around. Work moves from employees to contractors and from high-cost areas to low-cost areas. This can benefit someone who wants to be self-employed and hurt someone who would prefer employment, just as it leads to job loss in the high-cost area and gains in the low-cost one. Average wages across the economy fall slightly.3 In the manufacturing sector, it’s estimated that offshoring has led to the loss of nearly 5 million American jobs since 1997.4 Globally, employment is the same.
In general, outsourcing leads to lower prices, because the work generally moves to those who earn less. However, some costs may increase. Independent contractors doing specialized work may charge more than an employee would because they are not receiving benefits. Transportation costs and supply-chain disruption may lead to higher prices from offshore manufacturing over time. Eventually, skilled workers even in lower-cost countries will demand higher wages as the demand for their labor grows.
Is Outsourcing Bad for the Economy?
On a net basis, outsourcing is good for the economy. It lets more people concentrate on what they do best and lowers prices for consumers.5 However, some people benefit from it more than others.
Importance of Outsourcing
In order to understand why outsourcing could be the right decision for your business, you need to understand why other companies choose to do it. What advantages does it bring and what value does it add? Let’s look at some of the top reasons companies of all sizes look outside their company for their staffing needs.
Grow more rapidly.
During growth, companies will often find that they would benefit from having more staff on hand, but can’t afford the expenses that go into hiring and supporting more full-time employees. This limits the potential for growth and slows any momentum that your company has built. Some companies may take a gamble and hire new staff, only to find that gambling doesn’t always pay off. Rather than growing slowly, they’ve reversed their growth.
Because it's more affordable to outsource the work than it is to build your own in-house team, and because you can cancel an outsourcing contract without having to put people out of work, it's a great way to ensure that your company maintains a steady growth while keeping the core of your team focused on internal tasks.
The truth is your business may not need the same level of staffing year-round. At the very least, outsourcing provides you with flexibility. Your business can staff up before a busy season without the financial commitment of hiring in-house employees, the cost of which can take years to break even on. After you’ve made it through a busy season, you can easily switch back to an entirely in-house team. An experienced outsourcing agency can allow you to scale your outsourcing needs.
Benefit from top talent.
The world's largest companies can offer pay and benefits far beyond what you can likely offer, so the top talent goes to the largest firms. This can limit your company's ability to achieve the best results. It could even put you at risk of having your best employees poached by larger companies offering better incentives. Outsourcing agencies are capable of attracting top talent to ensure customer satisfaction and competitive results.
Maintain company focus.
Another benefit of outsourcing is the ability to stay focused on the important internal tasks of your business. For example, customer service is an important part of any business. That being said, it can be time-consuming and distracting for key members of your team. Outsourcing for customer service has two benefits. First, you provide your customers with consistent customer service. Second, you allow your internal team members to focus on their own tasks, helping your business run more efficiently and ultimately increasing your ROI.
Outsourcing firms are a tool that should be utilized. A secondary benefit of outsourcing is the image it gives your company. Gone are the days where outsourcing firms were unreliable and lacking quality control. You can expect modern outsourcing firms to represent your business with the highest of standards. Small businesses often lack the ability to provide mass customer service. Outsourcing this aspect of your business will give your company a more professional image.
Increase brand loyalty.
A highly trained customer support staff, backed by management with years of experience, will give your customers the type of service that keeps them coming back. Going from no support staff to an industry-leading support staff is nearly impossible to do internally. The financial strain and experience required to put together such a team are simply too overwhelming for most businesses. The professional services that an outsourcing company provides will leave your customers feeling cared for and appreciated.
Fulfill compliance requirements.
Even large companies can feel the financial impacts of new regulations. Several industries have strict privacy and security requirements that can add costs to maintaining a staff.
More importantly, they add severe consequences. Having a poorly trained staff that doesn’t properly follow regulations could cost your company big. Without the resources of a large corporation, it’s hard to put together such an experienced staff.
Look to hire an outsourcing firm that is PCI level 4 and HIPAA compliant. This prevents your team and company from facing the risk of potential lawsuits and other hardships that come with noncompliance.
As you can see, outsourcing has a lot of potential benefits — from flexibility to professional representation — and businesses small and large are wise to consider scaling their outsourcing needs throughout the year.
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