Outsourcing is the practice of purchasing goods and services from external suppliers rather than using one’s own resources to perform those functions. Doing so can have numerous benefits, but the primary reason companies outsource is to cut costs and gain access to experts.
Generally speaking, outsourcing is pretty common in the fields of manufacturing, customer service, transportation, computer programming, tax filing, and accounting. In recent years, companies have also started outsourcing employee leasing — they hire vendors to recruit, hire, train, and even handle payments for employees.
Outsourcing has particularly gained prominence in recent years because businesses and companies have been adopting a new and global outlook. Back in the 1980s and earlier, companies didn’t outsource processes — instead, they focused on acquiring other companies in order to diversify their interests. However, doing so lead to a crisis of management as running so many unrelated businesses posed its unique set of challenges.
Outsourcing started gaining ground as a business tool in the late 90s and it has grown exponentially in recent years — especially in the global age when companies can gain access to a more experienced (and even cheaper) workforce from across the globe.
It’s extremely hard to find companies that can create and sustain value on a yearly basis. According to research conducted by a consulting firm called Bain & Co., only 10% of all companies can sustain continued growth every year. When all of these companies were examined for what they had in common, it was found that all of them follow innovating capability sourcing techniques, mostly in the form of intelligent outsourcing and offshoring or internal processes.
Most companies believe that the only benefit of outsourcing is cost-cutting, but that’s an extremely narrow viewpoint. Outsourcing can have a number of benefits, and that’s what we’ll explore in this article.
Shortage of talent can massively impede a company’s ability to grow and expand. Yes, it’s true that companies have been hiring local talent for all of their processes for decades and centuries. But now that we’re living in a truly global age, it’s beneficial to look for talent across the globe. This gives you access to the best that the world has to offer. Furthermore, most industries now have sections of their processes that can be handled completely online — such tasks can easily be handed over to offshore third-parties and organizations. Companies across the globe are really benefiting from outsourcing processes overseas.
Outsourcing also allows companies to forge partnerships that can capture value while simultaneously reducing risks. Yes, it’s true that outsourcing can be risky, but companies can mitigate those risks by exerting tight control over their overseas partners. Toy manufacturing company Hasbro, for example, is a good example of how to handle your external outsourced relations as partnerships. In fact, Hasbro’s integration of their overseas partners into their domestic operations is what saved them during the 2007 lead pain crisis that shook the entire toy manufacturing industry. If you continually monitor and exert control over your overseas factories or partners, you can drastically reduce the risks that come with outsourcing while capitalizing on the value.
Your decision to outsource should be based on more strategic factors than simple cost-cutting. Even so, cost-cutting is still a major consideration because outsourcing essentially converts fixed costs into variables. This means you can invest your capital elsewhere so that you can avoid large expenses when you’re just starting out. This benefit will especially ring well with startups that would like to avoid making large capital investments, at least not until the business has truly stabilized. Furthermore, having more disposable capital means you can invest it into revenue-generating streams, which can also draw more investors.
It’s impossible for small companies to handle all of their internal processes on their own without stretching themselves too thin. Companies that handle everything internally need to incur immense expenses for tasks like development, transportation, research, marketing, distribution, customer service, etc. Outsourcing tasks allows your company to focus on what you specialize in, thereby increasing efficiency.
As mentioned in the previous point, if you don’t outsource secondary tasks, you have to incur the costs of processes like development, transportation, research, marketing, distribution, customer service, etc — processes that can just as well be handled by external companies. If you incur the expenses of all of these additional processes yourself, you will inevitably have to increase the cost of your products and services to make up for the fixed capital costs. If you don’t, you’ll have to lower your own profit margins. If you decide to outsource certain tasks, you’ll be able to retain your customers by maintaining lower rates while also increasing your profit margin. This will give you a competitive edge.
Let’s say you’ve decided to launch a new project for which you need access to a strong team of web application and mobile application developers. Since you don’t run a technology-related company, you probably don’t have a web development team on standby. In this case, if you want to handle these new projects internally, you’ll have to hire a complete team. The process of hiring and onboarding a complete team may take weeks or months, which can be expensive and also delay your project considerably. Instead, you can simply hire an external organization that specializes in these tasks. They’ll be able to work on the project and develop your apps immediately. Outsourcing allows you to make quick decisions and launch new projects efficiently.
Almost every business and organization is now connected to the digital highway to varying degrees. In fact, for most organizations, digital security is far more important than physical security. In recent years, however, the frequency and expertise of cybercrime has expanded exponentially. That’s why all businesses should focus on cybersecurity in order to secure all of their trade secrets, assets, and other sensitive information. But it’s extremely hard to find competent digital security personnel — currently, there are 200,000 unfilled security positions in the United States. Organizations can really benefit from hiring the services of cybersecurity experts. An experienced and well-reputed firm will give you access to the most advanced security options.
Outsourcing can be an extremely beneficial capital sourcing method and it can have numerous benefits to your organization. Outsourcing can help cut labor costs, free up capital costs, give you access to a global pool of talents, improve your cybersecurity protocol, increase your profit margins, and also help you launch new products.
But outsourcing can also have its drawbacks. If not handled correctly, outsourcing can increase risks, make your company vulnerable, decrease company loyalty, or minimize the amount of control you have over your own processes. However, these risks can be managed and minimized if you outsource correctly. In order to maximize the benefits of outsourcing, you need to think strategically — outsource processes that are costing your company too much or ones that you don’t understand yourself, hire vendors that are completely reliable, and do your due diligence.