As the business world becomes more advanced, firms both big and small seek cost-effective means to streamline workflow and remain competitive. For many firms, outsourcing some of their essential and nonessential business functions presents an ideal opportunity to reduce daily operational costs while focusing on the most vital aspect of the organization's main goal.
According to statistics, roughly 300,000 U.S. jobs are outsourced annually. The global outsourcing industry is a huge one that will continue to grow as more companies realize the inherent benefits of outsourcing (especially regarding operational efficiency and reduced operation costs). Although big businesses are more likely to outsource some aspects of their business operations than small businesses, small businesses and startups are also key players in the outsourcing industry.
That said, if you're thinking of outsourcing some of your business operations, this article will give you insight into the pros and cons of outsourcing. That way, you'll have a more balanced view of it before making a decision.
What Is Outsourcing?
Outsourcing occurs when firms, organizations, or small business owners shift operations to a third party to reduce workload and save operational costs. Most often, such a third party is a gig economy worker. The type of jobs that can be outsourced cut across diverse fields, such as human resources, customer support, content writing, security services, legal services, IT services like data entry, web and software development, graphic design, and virtual assistance.
Business Process Outsourcing (BPO) and outsourcing are often used interchangeably. However, while that is acceptable to some extent, they're not strictly the same thing. In BPO, specific business operations or responsibilities like human resources, customer service, call center services, sales, etc., are outsourced to third-party businesses.
On the other hand, outsourcing involves any situation where a firm uses contractors, external resources, or third-party services providers as part of their company. This may range from janitorial services to customer support services. BPO is, therefore, a form of outsourcing.
Also, for clarity, outsourcing differs from offshoring. Offshoring involves shifting both the firm's operations and offices, usually outside of the primary country or abroad. Outsourcing, however, involves only operational shifts and may be within or outside the primary country (in the case of offshore outsourcing).
Reasons for Outsourcing
Business owners outsource jobs for different reasons. Some of them include:
- To reduce operational and labor cost
- To improve productivity and operational efficiency
- To improve service delivery
- To take advantage of a lower tax rate abroad
- To focus on core business objectives
- To free up internal resources and put them to more effective use
- To tap into the global reservoir of experts
- To maintain some level of operational flexibility
- To expand and gain access to a new market
- To enjoy cost-saving or lower-wage requirements
- To mitigate against business risk
Advantages and Disadvantages of Outsourcing
Understandably, outsourcing is highly beneficial in helping a business achieve efficiency. However, knowing the advantages and the inherent disadvantages will go along in shaping your perspectives before outsourcing some of your essential operations. Here, we will look at some advantages and disadvantages of outsourcing that business owners should know.
Advantages of Outsourcing
- Reduced labor cost: By outsourcing some of your business operations, you save the cost of recruiting and training more employees. Additionally, the burden of employee benefits is also removed from you. Money saved can be channeled into other business aspects to ensure sustainability and maximize profit.
- Access to experts and professionals: Outsourcing grants you access to experts in specific fields. Understandably, your in-house employees might have competencies in doing a few things. Still, they cannot be perfect at everything, especially new employees. There is, therefore, the need to hire experts in those niches where the in-house teams may not deliver. For instance, technical expertise is required to perform specific tasks efficiently, and you may not have that in your group. Outsourcing the job to people with the proper knowledge will guarantee quality and timely delivery while boosting productivity.
- Great competitive advantage: By leveraging the skills and vast expertise of professionals in specific fields, you gain a competitive advantage.
- Tasks are done faster: Outsourcing is a great way to get extra work done within a short time period. When specific roles are assigned to experts that know how to get it done, output time is drastically reduced and productivity increases. Increased productivity is good for a business's overall profit margin.
- Freedom to focus on other vital issues: Outsourcing makes for greater freedom and flexibility. This is especially so for small businesses and startups at the growing stage. Moreover, outsourcing tasks will allow such business owners to concentrate on improving other core business operations. Flexibility guarantees efficient decision-making and proper management that enhances business performance. Additionally, it gives you time to focus on skills that'll sharpen your business orientation so that you become a better business manager.
- Easy project management: It is easier to manage different projects when you outsource. For instance, most outsourcing platforms have automated project management features. With the automated feature, you can manage the overall operation flow and key issues — like how the project will be done, the due date of submission, and how payment will be made — become clear. This way, you don't need to think much about how the project is done since everything will be in place and payment will only be released when you are satisfied with the job done. All that is required from you is to monitor the progress from time to time to ensure everything is going according to the plan. You then have enough time for other business matters.
Disadvantages of Outsourcing
- Loss of confidentiality: Your business or company is at risk of exposing confidential data when you outsource tasks like payroll, recruitment, and HR services to a third party. It becomes a serious issue, especially when you fall into the hand of an outsourcing company that is not credible. At this point, your business can be in danger of intellectual property theft or some of your confidential personal data could be used for malicious purposes.
- Loss of control: When outsourcing, you give specific guidelines on how you want the task to be done, but the reality is that you lose monitoring control — unlike when a full-time employee completes the same task. This may be problematic, especially if your outsourcing partner lacks the competency or skills to execute the particular tasks. The remedy is to ensure you are outsourcing work to someone whose skills you have tested to some extent.
- Delay in service delivery: With outsourcing, there is a high possibility of delayed delivery because most gig economy workers and outsourcing companies service many clients at the same time. The issue of disappointments and delayed delivery is rampant. In addition, the difference in time zone can be a factor in delayed service delivery, since you might outsource a job to someone in a different location. This can affect your business performance and productivity, which will eventually defeat the reason for outsourcing the task in the first place.
- Quality issues: Freelancers may be servicing multiple clients simultaneously, which can affect the quality of the work delivered at the end of the day. Although they are experts in the field, servicing numerous clients under strict deadlines can be overwhelming and may impact the desired quality. Discuss quality delivery upfront and ensure that the contract worker is given sufficient time to complete the task.
- There can be hidden charges: Generally, outsourcing tasks are cheaper, but you can be at a disadvantage when you get hit by hidden costs you were not even aware of at the contract's start. For example, there are some contract agreements that you and the outsourcing partner need to sign before you begin. If you don't read the agreement paperwork carefully, you might end up agreeing to pay for additional charges.
Stay on Top of Your Business Finances With Skynova
Ideally, outsourcing is a great way to improve your business productivity, performance, and efficiency. However, while trying to improve performance, you also need to prioritize the financial management of your business. With Skynova's accounting software, you can focus specifically on managing other aspects of your business without bothering about accounting. Our accounting software enables you to stay on top of your business finances by efficiently managing your cash flow, invoice generation, transaction execution, and more.
Notice to the Reader
This content details, among other things, the pros and cons of outsourcing for both big and small businesses. Outsourcing may or may not be beneficial in your specific situation. It's advisable that you seek an expert opinion on this topic before making a decision.