Outsourcing is when one company contracts another company to undertake its business processes and functions. The word ‘outsourcing’ comes from the phrase ‘outside resourcing’ and has been in use for many decades now.
Outsourcing has become an indispensable business practice for many companies around the world. In the 1990s, management consultant Peter Drucker came up with the well-known slogan, “Do what you do best and outsource the rest.”
The slogan is well-known because many companies live by it. Although outsourcing was untested territory in its beginning years, it’s now considered standard business practice.
A key ingredient in the growth of outsourcing was the growth of technology. Outsourcing processes usually happen through technology.
As the use of technology in business became more widespread, outsourcing thrived. In the late 1990s, the global expansion of telecommunication and Internet infrastructure was coterminous with global outsourcing booms.
What are the pros and cons of outsourcing today? Let’s find out together:
Source: TechSeek.com.au
Pros of Outsourcing
Reduction of Costs
Source: Entrepreneur
Reduction of costs is one of the clearest benefits of outsourcing. In fact, outsourcing gained popularity because it was a purely business decision that led to record increased profits without changing the core structure of your business. Usually, this increase happens by taking advantage of lower tax rates in different states or abroad.
Outsourcing is incredibly versatile. Almost any business function can be outsourced; there are even companies that exist solely to fulfill outsourcing needs for other companies.
The biggest companies in the world like Amazon, Apple, Google, and Microsoft all make ample use of outsourcing to post record profits. It’s important to note that for these companies, outsourcing is not a business contingency plan but rather an essential cornerstone of their yearly manufacturing, sales, marketing, and customer service strategies.
To reduce costs and increase profits, outsourcing works in a holistic manner. This means that although outsourcing targets specific business needs, its cost efficiency is felt throughout the organization.
Increased Efficiency
Source: CIO
When you outsource some business processes, you leave your team free to focus on the rest. Outsourcing mundane tasks to focus on more high-value tasks or core business functions will allow your team to meet its goals more efficiently.
This increased focus and reduced workload will no doubt increase productivity. It can also boost employee morale.
Outsourcing mundane tasks is invaluable when your organization is going through a period of change. Trying to deal with everything at once when everything is changing could leave your team stretched too thin.
Change management becomes necessary for each business sooner or later. Change is a natural part of business just like it is a natural part of life.
Change management and outsourcing often go hand-in-hand. For example, to prepare your existing team to accept incoming outsourcing processes, you need to adhere to change management principles to ensure that the transition is smooth.
At the same time, your business may choose to outsource change management processes to companies that specialize in it. Outsourcing change management is especially useful for smaller companies without the size or budget necessary to justify hiring specialized change management employees.
Outsourcing is also useful for large companies. This is because for such companies, it can be very difficult and often downright impossible to change business workflows and processes to meet business needs as they arise.
Although it’s not a good idea to outsource all aspects of change management, outsourcing works particularly well for some change management functions such as change readiness assessments, strategic planning, communication, and coaching.
The fast turnaround promised by outsourcing allows for scalability. Your business can quickly build needed infrastructure without burning out its employees or hiring new people.
This agility gives you a competitive advantage that your business simply cannot do without in this day and age!
Access To Expertise
Source: Aepiphanni.com
Specialized expertise is costly to obtain. This difficulty makes sense because it takes a lot of time and money for a person to both develop and maintain valuable specialized knowledge.
Large companies with strong revenue can afford to cultivate in-house specialized talent. In fact, it’s often the case that larger companies hoard specialized talent or poach it from smaller companies.
Luckily, outsourcing provides smaller companies with access to such talent despite budgetary constraints. Through outsourcing, smaller companies can gain access to experts who work as consultants or who are physically located in other countries.
The exchange between co-workers is crucial for the success of a business. Internal staff development can happen through this access to expertise; in-house employees often learn a lot from specialized talent brought in through outsourcing.
These kinds of exchanges prevent business environments from becoming stagnant by injecting much-needed vitality. Such exchange is great for consultants too, who gain lots of opportunities to grow their knowledge and expand their portfolios.
Reduction of Risk
Source: Wealth Management
Hiring employees is both risky and costly. The selection, onboarding, training, and maintenance of employees is an entire specialized field of study and practice, Human Resource Management (HRM), that requires a great amount of knowledge and experience from its practitioners.
Almost all companies have human resource teams for business, legal, and procedural reasons. Smaller companies sometimes rely on a single human resource professional or even human resource software.
One of the best things about outsourcing is that as an employer, you can work with great talent without having to take part in the costly and lengthy processes of selecting, onboarding, training, and maintaining employees.
This is very convenient especially if you are outsourcing minor business functions which although necessary, do not justify the risk and cost inherent in bringing on new employees.
There are companies that exist solely to help you deal with each step of the entire outsourcing process. Once you communicate your needs and pay for their services, you can sit back and relax as your work gets done without you having to onboard new employees.
Interestingly, even when companies want to bring in new people, they often outsource human resource work to other companies.
This means that they depend on outside companies to deal with some or all of the various aspects of managing human resource needs like selection, onboarding, training, and even maintenance.
This approach towards meeting human resource needs is life-saving for small businesses that cannot yet afford to bring in comprehensive human resource teams. It’s also great for businesses that have to manage a large amount of risk.
For example, some companies work with a significant number of internationally-based employees. It’s both logistically and legally difficult to manage that.
The good news is that there are outsourcing companies that specialize in managing such risk. Examples of human resource outsourcing companies that specialize in payroll, benefits, taxes, and compliance for international teams include Deel, Pilot, Remote, Multiplier, Rippling, Oyster, et cetera.
These companies leverage cutting-edge software and technology to achieve human resource goals on behalf of other companies. This is another example of how outsourcing goes hand-in-hand with technology.
Other kinds of risks that can be managed through outsourcing are fraud and security risks. For instance, internal fraud is often a very dicey problem to deal with for many companies.
It’s difficult and often impossible to confront internal fraud breaches using existing company infrastructure. Outsourcing fraud management is an excellent way to deal with issues like these.
Additionally, it takes an incredible level of specialization to effectively manage fraud and security services. Sometimes, a company just doesn’t have this expertise on hand.
Outsourcing fraud and security services solves both risk and specialization issues. Finding a trusted firm to help your business with these services eliminates internal fraud risks.
Such an outsourcing company would use its specialized skill set to elevate the strength of your security systems in a way that would be impossible using in-house resources. Strong security systems are indispensable for companies that handle lots of sensitive or confidential market data.
Global Exchange
Source: Infinit-O
Before the advent of information technology that allowed people all over the world to communicate quickly and efficiently with one another, each company was limited to the expertise contained within its physical location. This is how different industry hubs developed in many of the world’s major metropolises.
For example, we associate the tech industry with San Francisco and global finance with Wall Street in New York City. Although those associations are still somewhat true, they are no longer the status quo.
It goes without saying that outsourcing allows you to access industry experts from around the world at the click of a button. You do not have to remain limited to working with people within a 30-mile radius of your physical location.
Sometimes, companies take part in subcontracting, which is technically a kind of outsourcing. Subcontracting is when a business contracts an individual or organization to complete a specialized task that cannot be completed internally.
Without modern technological innovations, subcontracting would be a very costly affair. Now, outsourcing processes have become so efficient that you don’t have to spend money on travel and accommodation just to bring world-class talent to your company.
This access is great for your business. It also provides new opportunities for talented people who wouldn’t otherwise have them because of life factors outside their control such as where they were born.
Your business can also increase profits by taking advantage of lower taxes abroad. However, that’s not the only way global exchange benefits your business.
Remarkably, it also allows you to tap into new markets! When you outsource manufacturing to a foreign country, for example, there’s a very high chance that you will discover new customers in that country.
Furthermore, studies have shown that outsourcing strengthens policy relationships between different countries.
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Cons of Outsourcing
Communication Issues
Source: StopWastingWords
Communication issues always seem to arise during outsourcing processes. The logistics involved in successfully outsourcing a project can seem insurmountable, leading to numerous breakdowns in communication.
For example, the time zone that you’re used to operating in may not match that of the outsourcing company or outsourcing freelancers. This mismatch in time zones may affect your usual business hours and cause communication delays.
Communication norms in one part of the world often differ from those in another part of the world. This difference may cause communication barriers that can be frustrating.
For example, if you are American, your preferred means of communication may be instant messaging and you may expect same-day responses, whereas in some European cultures, it may be considered rude to conduct business affairs via instant messaging and same-day responses are not a common expectation. It takes considerable time, effort, and patience to bridge these gaps.
Language barriers are another huge challenge. Outsourcing often makes use of contracted workers who speak a variety of foreign languages; it’s often difficult to come together to achieve a common goal.
Finally, although global internet infrastructure has made impressive strides in recent years, low broadband speeds are a persistent issue. This issue also affects rural areas in richer countries; rural places where most companies tend to outsource a good chunk of their business functions to save costs.
To avoid falling into these miscommunication pits, it’s important to come up with a communication plan in advance. You should also vet your outsourcing company or outsourced contractors to ensure that they are able to meet your business needs.
Any reputable outsourcing company has invariably dealt with these communication issues and has found a way to deal with them. Usually, when selecting contractors or freelancers to work with them for other companies, they make sure that a minimum standard is met.
Your business can do something similar on its end, independently. Additionally, you can prepare your team on ways to work through such challenges when they arise.
Lack of Control
Source: Brendan Beeken
The popular saying goes that you can’t have your cake and eat it too. If you would like to outsource business functions to save time and money, then you will also have to relinquish direct monitoring control over those functions.
This lack of control can be a hard pill to swallow, especially for owners of smaller businesses who have become accustomed to directly managing every aspect of their business. It’s even harder for younger entrepreneurs who often attach their identities to their businesses.
Furthermore, the outsourcing contractors or outsourcing suppliers are often not based anywhere near your physical location, making physical monitoring impossible. The ability to work with somebody so far away from you may be an advantage in one context but a disadvantage in another because you cannot directly monitor them.
You may also be unable to ensure quality control. Even when you’ve laid out a comprehensive set of details on how the quality of your business product or service should be ensured, a few mistakes may still slip through the cracks.
One way to deal with this lack of control is to have legal documentation of your expectations for the outsourcing service that you are purchasing. It is important to have such a document because, in the event of a delivery failure or delays, this document can be referred back to.
Such a document is most commonly written in the form of a Service Level Agreement (SLA). A Service Level Agreement stipulates the commitment between a service provider and a customer.
The only problem with such an agreement is the inflexibility it could create down the road. A Service Level Agreement (SLA) may work well at the beginning of a working relationship but fail to evolve with changing circumstances.
A diplomatic approach would be another way to deal with the lack of control inherent in outsourcing. For example, cultivating long-term relationships with your outsourcing suppliers gives better results.
You may also choose to enlist the services of a skilled commercial lawyer to draft a flexible Service Level Agreement (SLA). A flexible SLA accommodates frequent performance reviews and changes.
Although the Service Level Agreement (SLA) should be clear about penalties for failed targets on the part of the third-party provider, you should make sure that both parties take part in the drafting of the document and approve of the final document.
It should not feel like a contract that the third-party provider was compelled to agree to, but rather something you both arrived at together.
This is another example of the diplomatic approach that’s one solution to the lack of control that outsourcing brings. On the other hand, you should not be afraid to enforce penalties when the service falls short of your expectations.
Finally, every Service Level Agreement (SLA) should have an exit clause that allows you to quickly and easily end a working relationship with your third-party provider should unresolvable difficulties arise.
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Company Culture Erosion
Source: The 74
One of the more serious disadvantages of outsourcing is the eroding of company culture and morale. Although there are many ways in which outsourcing helps with these aspects of the company, there are also a few ways it negatively impacts work culture.
Your in-house employees may live with the fear of having their job functions outsourced and therefore being rendered insolvent. Such fears affect their work, their mood, and the work and moods of fellow employees.
The workflow interruptions brought in by the introduction of new outsourcing processes may amplify the sense of change, change that may already be unwelcome. Low morale affects general work efficiency and may inadvertently weaken or sabotage outsourcing processes that would otherwise have been vitally important to the company.
You can deal with this problem through clear and consistent internal communication. Do not dismiss your employees’ concerns because it is true that outsourcing often accompanies job losses; affirm their needs without underlining their panic.
Remind them how they each stand to benefit from outsourcing, even though change is difficult. This is part of the reason why it’s important for every company to undergo change readiness assessments before introducing new talent through outsourcing.
Change readiness assessments will reveal already existing weaknesses in internal systems and processes. These assessments help determine whether your business is ready to take the step into outsourcing.
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Security Risks
Source: CSO
Although outsourcing your security infrastructure to reputable companies can improve and even foolproof your security systems, it contains an inherent risk. Having a third-party provider in charge of your company’s data offloads certain burdens from you but leaves you exposed and powerless if a security breach were to happen.
The decision on whether or not to outsource your company’s security functions is up to you. It should depend on the nature of the confidential data owned by your company, and whether you have the resources to manage that confidentiality.
Some companies are willing to spend top dollar to retain in-house cybersecurity experts to keep their confidential data and intellectual property safe. Others with fewer resources are equally willing to spend a lot of money to contract high-end cybersecurity firms to keep their security systems strong.
It’s important to do research on the outsourcing contractor you’d like to work with. It’s doubly important to do so when it comes to security matters.
For example, be sure that the firm is located in a country with laws that protect your information. Many countries don’t have such stipulations.
Hidden Costs
Source: MCL
For a practice that exists first and foremost to reduce costs, it’s often surprising to find out that outsourcing can cost more money than it brings in. This is because it’s rather difficult to track the specific financial change directly tied to outsourcing.
Near the beginning of the article, I said, “Outsourcing works in a holistic manner… Although outsourcing targets specific business needs, its cost efficiency is felt throughout the organization.” This is a double-edged sword; it’s hard to trace outsourcing’s cost efficiency but it’s also hard to trace its cost wastage.
The main solution to this conundrum is to meticulously measure the success (or lack thereof) of any outsourcing processes you introduce to your company.
Be sure to invest in people with strong business skills, talent, and education to help you measure performance and set targets when it comes to outsourcing.
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Wrapping Up
Did you know that outsourcing has an antonym? ‘Insourcing’ is the direct opposite of ‘outsourcing.’
Insourcing was a term coined to describe the process of reassigning previously outsourced tasks to in-house employees. Insourcing is what happens when outsourcing relationships break down.
Although outsourcing has been a great success, the term ‘insourcing’ proves that there are two sides to every coin. We shouldn’t forget that outsourcing can fail badly.
That’s why it’s important to keep these pros and cons in mind as you make business decisions.
Best of luck!
