Outsourcing is when a business contracts out tasks, services, or functions to a third party instead of handling them with in-house staff. Companies use outsourcing to reduce costs, access specialized experts, and increase productivity. Outsourced contractors may perform tasks on-site or remotely.
How does outsourcing work?
The business outsourcing process works by delegating tasks, processes, or functions to service providers or contractors. Businesses will find talent they would like to work with and negotiate contracts. Companies can compensate contractors differently than full-time staff and don’t need to provide benefits, offering cost-saving opportunities. Companies may save additional expenses and resources if the contractors are remote workers in charge of their technology and equipment.
What are the types of outsourcing?
Outsourcing is increasing in popularity in distributing business workloads. There are four main types of outsourcing in terms of dividing the labor:
- IT outsourcing: Information technology (IT) outsourcing is when businesses use outsourcing partners to help with tasks such as software development and IT support. For example, American companies may outsource IT tasks to contractors in countries with lower labor costs, such as Brazil or the Philippines.
- People outsourcing: People outsourcing happens when organizations bring in temporary staff members through outsourcing companies. The outsourced staff helps businesses achieve improved efficiency while reducing overheads. People outsourcing often requires staff to handle basic, time-consuming tasks so employees can focus on core competencies and business growth strategies.
- Project outsourcing: Project outsourcing involves hiring contractors to take on specific projects. These projects often require extensive skill and experience that may be challenging to find or only needed for a limited period of time.
- Business process outsourcing (BPO): BPO is an outsourcing practice where a business contracts specific processes or operations with an outsourcing provider. Companies may use BPO for multiple industries, including customer care services, performance management, and supply chain outsourcing.
Three additional types of outsourcing refer to the location of the work taking place, which are:
- Onshore outsourcing: Onshore outsourcing is sending some business tasks to a company nearby in the same country. Onshoring results in very few cultural, linguistic, and time zone barriers, but it may mean higher labor costs.
- Offshore outsourcing: Offshore outsourcing is when a business sends some tasks to a company based in a different country. This often results in more cost savings, but there may be cultural and linguistic challenges, as well as administrative hurdles, like payroll processing and local law compliance.
- Nearshore outsourcing: Nearshoring involves outsourcing certain tasks to a nearby country with similar linguistic and cultural backgrounds. This often results in better communication and potentially cheaper labor.
Reasons for outsourcing
Startups, small businesses, and large organizations all use business outsourcing services to gain competitive advantages. Companies decide to outsource work for various reasons, including:
Reduced labor costs
Outsourcing is an effective way for businesses to reduce costs significantly. Companies must pay full-time employees consistently, even if they’re not needed. By contrast, outsourcing allows businesses to pay workers only when needed. Companies can save more when tasks are outsourced to countries with a lower cost of living and aren’t required to cover employee benefits like they do for full-time employees.
Increased efficiency
Companies that outsource can utilize experts for brief periods. This increases efficiency by reducing the training needed to get other employees up to speed on necessary tasks. It also opens up possibilities to utilize advanced technology that full-time employees may not be familiar with.
Reduce risks
Businesses can use outsourcing throughout challenging times to reduce a decline in efficiency and productivity. When management roles shift, mergers occur, or downsizing occurs, companies can outsource tasks to keep continuity intact.
Resource flexibility
Outsourcing provides opportunities for full-time staff to take on other duties, which can lead to more productivity. Using outsourced workers vs. full-time staff for certain roles can also free up areas in the budget for technological upgrades or other helpful resources.
Increased reach
Establishing a presence in a new market segment is easier with outsourcing. Outsourcing to international locations can provide local insights and advantages operating within that time zone. Utilizing international experts also broadens the available talent pool.
Pros and cons of outsourcing
Companies must consider many factors when deciding whether to outsource.
Pros of outsourcing
Some of the most significant advantages that outsourcing provides include:
- Larger talent pool: Outsourcing allows companies to access knowledge, experience, and insights on a global scale. It may be difficult for a business to hire a full-time employee with the amount of experience they need; outsourcing allows them to gain that experience for a defined period.
- Competitive advantage: Outsourcing can increase a business's competitive edge in several ways. Access to more experience and knowledge can improve productivity and efficiency. A globalized workforce can also provide 24-hour work cycles, leading to faster project completion.
- Flexibility: Flexibility increases in multiple areas with the inclusion of outsourced talent. Outsourcing can take some of the stress off of full-time employees, reducing burnout. If the quality of work from outsourced talent is poor, businesses can quickly move on to other contractors.
Cons of outsourcing
Some of the drawbacks that a company might experience from outsourcing work include:
- Poor communication: Employing outside help means they won’t be familiar with the business operations. Other factors, such as time differences in time zones, limited access to technology, and internet connection, could hamper communication initiatives.
- Unreliable quality: While some outsourced talent may deliver high-quality results, others may not. There is no guarantee that outsourcing will deliver the quality a company needs.
- Cybersecurity concerns: Increasing the number of people with access to a business’s cloud computing system, networks, intellectual property, and sensitive information also increases the possibility of a security breach.
What are examples of outsourcing?
Outsourcing has become increasingly popular in multiple industries. Customer support, content creation, and data entry are a few examples of outsourcing. Some of the primary outsourcing examples include:
Customer support
Businesses use call centers or online support providers to handle customer complaints and inquiries. Outsourced customer support can increase the amount of available representatives, leading to faster service and a better customer experience.
Content creation
Companies can outsource tasks related to content writing, graphic design, video production, or editing to professionals in those fields. They can also outsource other responsibilities, such as social media management.
Accounting
Businesses may choose to use external firms for accounting purposes such as bookkeeping, financial auditing, and tax preparation.
Data entry
Routine, tedious tasks like data entry are easy to outsource. Organizations can find contractors to enter data into spreadsheets, freeing up full-time staff members for more important duties.
Outsourcing vs. offshoring
Outsourcing and offshoring are distinct concepts. The outsourcing definition is contracting business functions to third-party companies or freelancers based domestically or abroad. Businesses use outsourcing to maximize cost savings and allow full-time staff to focus on core business activities. Common examples of outsourcing include human resources (HR) management, IT services, and customer support.
Offshoring is the business practice of relocating business processes or production to a more cost-effective country. Offshoring can involve moving factories to cheaper economies and selling the products in the United States to maximize profits. Common offshoring examples include back-office operations, software development, and manufacturing.
Insourcing vs. outsourcing
Unlike outsourcing, insourcing doesn’t bring in external talent to complete tasks. Insourcing keeps work in-house and may take employees from other roles or departments to fill business needs. Some companies prefer insourcing because it provides more control over business processes, maintains effective communication, and helps develop internal staff.
Hiring remote talent internationally requires extensive resources—plus (a lot of) administrative time and effort. After you find a candidate match to fill your new role, our talent management platform handles payroll, local compliance, benefits administration, and more. Let us take on the administrative burden while you reap the benefits of global, remote talent. Work with our team to get your developer shortlist today.
