Are you looking for ways to reduce costs and increase the revenue for your company? Outsourcing might be what you’re searching for.
In this article, we’ll look at the pros and cons of outsourcing. We hope to help you make the decision that’s best for your business.
What Is Outsourcing?
Outsourcing is the business practice of hiring a third party organisation to perform services or provide goods, instead of doing these things in-house. It is usually used to reduce cost. Many aspects from web design to warehouse cleaning can be outsourced.
There are three types of outsourcing. These are differentiated by the distance between customers and the provider
- Onshore outsourcing is the practice of outsourcing to a company within the same country.
- Nearshore outsourcing is when a company is in a neighbouring country or a country within the same time zone.
- Offshore outsourcing is the most controversial out of the three types. It describes companies that outsource to companies from a distant country.
What Are the Benefits of Outsourcing?
Outsourcing is very common, with businesses globally spending $75.2 billion on the practice in 2021 as reported in Fortunly’s article “15 Must-Know Outsourcing Statistics for 2022”.
According to the same article, one of the main reasons for companies to use outsourcing is to save money. However, there are more benefits to outsourcing than simply reducing costs.
- Cost Advantages
Saving money is one major advantage of outsourcing, but how does that work exactly? It’s a combination of differing wage levels and a general reduction in utility cost.
If the growth of your business requires you to increase your office space, it might be more efficient to outsource some operations. It costs less than expanding your business and maintaining a bigger space. Additional costs of expanding and hiring are also reduced, including the cost of performing a hiring search and onboarding.
Outsourcing providers will have the right tools and software to perform the tasks you wish to delegate. You don’t need to invest in these tools yourself.
Note, these cost reductions shouldn’t come at the expense of quality. The outsourced work should be as good, if not better, while keeping costs low.
Outsourcing the back-office operations allows you to focus on the core aspects of your business. If you decide to outsource part of your finances, customer service, or human resources, you can devote more time to do what you excel at.
Every minute you work on something outside of your expertise is time spent inefficiently. In the worst case, this can hinder the development of your business, because your time and resources are tied up in important but mundane activities.
It can also help to expand your business internationally.
If you want to transform your company into a global business, it may be easier to outsource some of your international operations than to do everything yourself.
- Staffing Flexibility
Staffing flexibility is especially important for businesses or departments that have cyclical demands. Demand for certain operations varies because of various factors. An example would be hotels and restaurants, which are usually busier during summer. It is also useful if your business suddenly gains a large order.
Outsourcing helps your business to remain flexible. You can bring in additional resources as needed without having to hire and train new staff, then release the outsourcing company if things slow down again.
What Are the Negative Aspects?
- A Loss of Control
Outsourcing can sometimes mean giving up some of your managerial control. This can happen whether you outsource a single task or an entire department.
Your partner company might not be driven by the same standards and ideologies. They’ll try to maximise their profits, and the easiest way to do this is to reduce expenses. This can lead to a loss in quality that can go unnoticed if you don’t monitor your partners carefully.
- Potential Security Risk
Depending on the type of work you’re outsourcing, you may need to share confidential data with the outsourcing company. This increases the risk of a security breach where confidential data is compromised.
If you share proprietary company data with your outsourcing company, put safeguards in place to protect this information. Having the outsourcing company sign a confidentiality agreement or add a protective clause to the agreement will keep your data safe.
When you outsource some of your company’s operations to a third-party, you grow based on your outsourcing partner’s financial well-being. It’s important to review the financial statements of the company you want to enlist before hiring them.
If your outsourcing partner underperforms financially, they might default on their contractual obligations.
- Employee Morale
A hidden risk of outsourcing is the effect it can take on your company culture and employee morale. If you decide to outsource one of your departments, it might upset your current employees. They may feel that they’ve been replaced and that their own position may be at risk of being outsourced.
These concerns are valid and, as the company’s leader, take care with how you convey your stance towards outsourcing to your employees. Otherwise, it will impact their morale and impact their performance.
Why Is Outsourcing So Controversial?
Perhaps outsourcing is an inevitable cause of globalisation. In a free-market, capitalist society, it only makes sense for businesses to seek ways to reduce costs and increase profits. Outsourcing is a great way for many companies to achieve this, but it doesn’t come without controversy.
Opponents of outsourcing have many arguments against the practice. For example, they are concerned about the loss of jobs from the domestic workforce. Outsourcing jobs, especially when done offshore, is a ‘loss’ within their own community.
While there are arguments contesting this point of view, there are other issues that make outsourcing a controversial topic.
Some people associate outsourcing with exploitation and so called ‘sweatshops’. Those are facilities in foreign countries in which employees – sometimes even children – are forced to work in poor working environments for minimal wages. This is possible because legislations on wages, workplace security and labour laws vary wildly between countries.
The rush of companies to become more profitable comes at a human cost. Big companies like Nike and Apple have been under public scrutiny because of problematic outsourcing before.
With the rising awareness of consumers about these practices, look into how your business can outsource ethically for the benefit of everyone involved.
Outsourcing is the practice of handing a part of your business operations over to a third party. If done well, it can have many benefits for your company, but it is important to be aware of the challenges that come with it.
Whether you outsource a specific task, such as to do your taxes or your customer support, choose your outsourcing partner carefully. This will help you reap the benefits while reducing the risks. From lowering your costs to allowing you to focus on what you do best, outsourcing is a great way to enable your business to grow and expand.