The historical arc of modern business is one of increasing specialization. As the work of individuals or organizations becomes more specialized, they get better at it and that, over time, raises the level of value they can bring to market. This specialization megatrend has led some companies to organize themselves as mini-federations of specialist service providers with only the most crucial, value-generating activities remaining inside the organization’s core.
While federated businesses are still an extreme – and rare – example of outsourcing at work, there are many advantages of outsourcing that can be brought to bear for almost any business.
What Is Outsourcing?
Outsourcing is a business practice in which a company hires a third party to provide goods or services, rather than producing those goods or services in-house. The word combines “outside” and “resourcing” because outsourcing involves paying an outsider to perform work. A company may choose to outsource within its own country (onshore), in a nearby country (nearshore), or in a far-off country (offshore). No matter where a company outsources, the primary benefit often is to lower costs and streamline operations.
Today, outsourcing can include many different types of goods and services, including business processes, financial processes, operational tasks, and even non-core functions like legal or travel. Publishing companies, for example, have traditionally outsourced the printing of newspapers, books, and magazines to specialist printers, as well as their delivery to the U.S. Postal Service. A company might outsource tasks occasionally or as a regular part of business operations, such as payroll or recruiting.
Outsourcing is often used in industries where there is a shortage of labor or where the cost of labor is high. For example, some U.S. companies outsource IT development tasks to foreign countries because of a domestic shortage of programming skills.
Advantages of Outsourcing
One of the most significant advantages of outsourcing is cost savings. Hiring and training full-time skilled workers is expensive, especially for short-term projects. Outsourcing can help a company avoid overhead, equipment, or technology costs.
Because outsourcing companies are highly skilled at what they do, they can often perform activities more efficiently.
There are other potential advantages, too. Outsourcers often offer specialist knowledge, expertise, or experience that can be difficult to obtain in-house. Because outsourcers focus extensively on a specific business activity, they stay abreast of best practices and trends, and constantly hone their skills. An outsourcer might also have access to the latest technology, which can give a business all the benefits of that technology while amortizing the cost across all of the outsourcer’s customers.
Because outsourcing companies are highly skilled at what they do, they can often perform activities more efficiently. Speed can lead to faster completion times, which can improve a company’s competitiveness.
Delegating repetitive processes and tasks might also help a company retain employees. Given today’s competitive labor market, this could be especially important. An employee who gets the chance to learn new skills and take on more challenging tasks might be more likely to stay with a company than one who must perform repetitive tasks. The company might also benefit from new ideas and innovation as a result.
Finally, by farming out certain non-core operations, a company can spend more time focused on its core value-generating business activities.
Outsourcing Best Practices
Businesses interested in outsourcing should consider certain important practices before signing on. Take some time to consider the following steps before moving forward with an outsourcing agreement:
1. Put together an outsourcing plan.
Define the business’s outsourcing needs, goals, budget, required skills, etc., up front. The plan will help you think through and define your outsourcing objectives and give you a requirements document to share with potential outsourcing partners to help them understand what you’re looking for. An outsourcing plan will help ensure that you and a provider are on the same page before any agreements are signed.
2. Agree on a pricing model.
Outsourcing vendors use different pricing models. Some may offer a fixed-price agreement with cost, scope, and timelines clearly defined at the outset. Others might elect a more flexible time-and-materials model that uses a billing rate for time and resources dedicated to the project. Still others might rely on a dynamic pricing model that uses a pay-as-you-go method. Pick the pricing model that works best for your organization, based on the budget defined in the outsourcing plan. Also, make sure you fully understand the pricing model so you aren't surprised by hidden costs later.
3. Agree on a communications model.
Communication is critical to a successful outsourcing arrangement. Determine how and how often you’ll communicate with your outsourcing provider. Setting up checkpoints to discuss progress, challenges, key performance indicators (KPIs), and other concerns will help keep you both moving forward and potentially prevent any surprises or delays.
4. Agree on an approach to security.
Opening business systems or data to an outside provider can introduce security risks, especially when proprietary/confidential data or information systems are involved. Discuss potential security risks with your external provider early and agree on a plan for how they will handle sensitive data. Also, agree to a protocol for handling and reporting a security breach should one occur.
5. Select a compatible outsourcing provider.
Compatibility is key to success. Make an informed decision by selecting an outsourcing vendor with the expertise, experience, background, and pricing you need. Conduct interviews with potential providers to fully understand how they work, what’s expected from both sides, and to ensure that your business values align. The provider should also have experience in projects relevant to your business’s industry and expertise in relevant technologies. Ask potential providers for references and reach out to those references to ask about their experiences. You may also want to ask the provider for a list of employees who will be assigned to your account. Outsourcers will often provide bios for those employees so you can get a sense of who will be involved and the experience and skills they possess.
The Bottom Line
Outsourcing is a growing practice as businesses become more specialized. It can be a good solution that lets companies concentrate more internal effort on their key business goals while potentially reducing costs and improving the business’s competitiveness. A good outsourcing provider can often perform routine, non-core tasks faster, less expensively, or more effectively than the business can itself. But outsourcing agreements need to be well thought out to be successful. Make sure to consider critical aspects of an outsourcing relationship before you commit to a provider.
