What Is Outsourcing, How It Works, And It’s Future

Published by admin on January 22, 2023

What is Outsourcing?

In simple words, the act of outsourcing means hiring a third party to perform a certain task. You can outsource one-time jobs like website development or repetitive operations such as accounting and marketing.

Since its inception as a business strategy back in 1989, outsourcing quickly rose to popularity as a fundamental part of many businesses.

This is mainly due to the benefits it delivers to companies, including cutting down costs, labor, and time.

Outsourcing is way more cost-effective than maintaining an in-house team. On the other hand, it saves you the hassle of recruiting, onboarding and training.

With outsourcing, you get a team of experts that you can hire on demand without having to make any serious commitment in the long run.

So you can access the best talent across any discipline on demand while increasing both efficiency and profitability.

Today, you can find business partners to outsource anything you desire.

Thus, from small businesses to multi-million-dollar conglomerate companies across all industries use this method to grow their businesses quickly with reduced risks.

This versatility of outsourcing has even allowed governments to outsource their various sectors expecting better results.

How Does it Work?

Since now you know what outsourcing is, let’s look at how it actually works in a business environment.

Here is an example.

Let’s say you are a textile company looking to develop your website. You might not have a web designer on your team who can do the job.

However, hiring a full-time web designer just to develop one website can be a huge waste of money and resources for your company.

You will have to pay a salary and supervise them. But still, you won’t have a clue if they’ve done a good job or not, as no one in your team knows a thing about web designing.

By outsourcing your web development project, you can be at peace of mind knowing that your website is in the hands of experts. Also, you will be able to get the job done for a fraction of the price of hiring a full-time web designer.

You can outsource specific tasks such as bookkeeping or ongoing processes like customer services or entire projects like developing a specific AI tool.

What Services Can You Outsource?

If you are a business owner who is interested in scaling and growing your business, then outsourcing might be the best option for you.

With the help of outsourcing, you can bring much more variety and flexibility to your company.

In the outsourcing space, there is a wide range of services that you can use in your business.

Below are a few examples of the most common fields to outsource

• Human Resources

• Artificial Intelligence and Automation

• Blockchain, Metaverse, and Cloud

• Business Strategy, Marketing, and sales

• Administrative tasks

• Research

• Customer service and Experience

• Data & Analytics

• Digital Commerce

• Digital Engineering & Manufacturing

• Finance Consulting, Accounting, and Bookkeeping

• Infrastructure

• Mergers & Acquisitions (M&A)

• Security

• Production and Supply Chain Management

• Sustainability

• Technology Consulting and Innovation

Companies That You Didn’t Know To Use Outsourcing

Small and medium-sized businesses are not the only ones that can benefit from outsourcing.

Most of the time, giant companies can stand to benefit much more from the correct outsourcing procedure.

Many large-scale companies in the world use outsourcing as one of their main business strategies. This allows these businesses to stay on top of the curve and be much more successful in their business endeavors.

Here are some companies that use outsourcing to its maximum potential.

• Google

Sometimes, even the 89 000+ in-house employees of Google are not able to handle their workload by themselves.

With the great demand for their services, Google is constantly in search of expertise to uphold its current service quality.

The reports state that, as of now, Google has more outsourced employees than the number of their in-house employees.

• Microsoft

Like in Google, the number of outsourced employees exceeds the number of direct employees here as well.

When outsourcing services, Microsoft tends to look for supplementary expertise or beyond-scope services.

Since a large portion of its workload is handled by contractors, Microsoft uses SOWs to govern the arrangements. These statements of work come with defined deliverables, processes, and service-level agreements.

• Alibaba

As one of the biggest online shopping websites in the world, Alibaba is well-known for its outstanding shopping platform.

Well, surprise, surprise…

The shopping platform and the website are both results of outsourced web development.

The main reason for outsourcing in this case was the scarcity of dev talent in China.

Even though there was a lack of talent in the country, with the help of outsourcing, Jack Ma was able to finish the development of his website with the best possible results.

Moreover, even with the strict internet restrictions in China, Ma came up with a sustainable infrastructure, all thanks to outsourcing.

• Apple

It’s a widely known fact that most Apple products are manufactured in China. Even though all devices are assembled in California, parts within the device come from outsourced labor.

By outsourcing production to China, Apple is continuously cutting down on production costs.

If the current iPhone 14, which sells for $799, moved its production back to the US, the price would skyrocket to cost over $30 000 per unit.

However, with the help of outsourcing, Apple is able to stay as a profit-making business while delivering its products to its consumers at an affordable price point. This is a prime example of profitable outsourcing.

• GitHub

The business that comes with an open-source model is another place where outsourcing thrives.

Back in its development stage, the company did not have the funds to secure a full-time developer to build its system. As a result, they outsourced the development process to Scott Chacon, who later became a vital part of the team.

This shows that even the world’s largest code repository had to depend on outsourcing to solidify its platform.

Key Challenges With Outsourcing

With the wide-scale adoption of outsourcing in all fields, the necessity of the process has become that much more important. Even though the benefits outweigh the drawbacks, there are still some challenges that come with outsourcing.

• Security Of The Company Data

Outsourcing means that you have to work with a third party from outside of the business.

When working with outside parties, there is a potential for a data security breach since you disclose crucial information with your partners.

If the intellectual data like the business plan, trade secrets, etc. are not managed properly, it can lead to negative results.

To avoid such incidents, business owners must manage their private data appropriately and try to sign legally enforceable contracts with the outsourcing firm.

• Control Of The Project

When handing over a project or a department to an outsourcing firm, you won’t have the same control that you have over an in-house team.

This can lead to delays in implementing new changes and quality compromises.

To tackle this issue, you must look for reliable service providers and clarify how much control the outsourcing company’s workers have over the project.

• Cultural And Language Differences

These types of issues generally happen when you outsource to an offshore firm.

Cultural and language barriers, might lead to issues in communication, service quality, and decision-making.

Moreover, since different regions have different cultural holidays, it too can affect the workflow.

So selecting language-proficient firms or English-speaking firms might do the trick here.

And when it comes to cultural holidays, make sure to consider the holidays of the hiring region.

• Knowledge Transfer Issues

Transferring the necessary knowledge is important as it can make or break the outcome of a project.

If your company does a poor job of transferring knowledge, the outsourcing firm might have issues meeting your productivity standards.

On the other hand, if the outsourcing partner transfers knowledge poorly, the project details might become unclear, and customer satisfaction might take a hit.

The only way to solve this issue is by keeping correct documentation and ensuring that your partners are doing the same.

• Inaccurate Outsourcing Model

The nature of your outsourcing model should depend on your requirements. It can be the budget, scope, and deadlines of the outsourced project.

Choosing the wrong model can have negative effects on the outcome of the project and might even waste resources.

So, to avoid any such scenarios, make sure to do your research and select the ideal model.

Outsourcing Industry And Its Future

The outsourcing industry is growing every day, delivering many great solutions to companies of all sizes across all industries.

Due to the economic crisis and the pandemic, the resignation rates are at an all-time high.

As a result, this has led to a massive surge of remote and hybrid workplaces. Amidst this crisis, the popularity of work outsourcing also saw a massive increase.

So as of now, 60% of organizations are either considering or planning to assess their outsourcing strategies in the next 12 months.

Grandview Research predicts that the outsourcing industry will reach $525 billion by the year 2030.

This shows that the future of outsourcing is more likely to keep expanding.

Today there are many destinations around the world that are known for their outsourcing industry. This includes Ukraine, the Philippines, Brazil, Vietnam, Sri Lanka, India, and more.

The industry has enabled these countries to provide many well-compensated job opportunities for their people while helping offshore companies with their business challenges.

However, it’s common for outsourcing companies to get the most done with the least number of workforce. On the other hand, often employees are given massive workloads with tight deadlines. Thus many employees in such companies are overworked and under constant stress and pressure.

So clearly, there are areas that need improvements in the industry.

Myths About Outsourcing

Just as much as businesses keep turning towards outsourcing, there are many myths that hold companies back from enjoying the benefits of this practice.

So here we are, busting 5 common myths about outsourcing once and for all.

• Outsourcing Is Only For Small And Medium Size Companies

One of the biggest myths regarding outsourcing is that it’s only for small and medium-sized companies.

This is false, as even with a large number of in-house workers, most of the outsourcing is done by large companies.

• Outsourcing = Low Quality

Most of the time, people who are new to the concept of outsourcing tend to think that the results of outsourcing are always low in quality. This is a hasty generalization when in reality, choosing the perfect outsourcing service provider can bring much better results.

• Outsourcing Comprises Security And Privacy

While there is still a possibility of a data breach, this can be avoided with correct, legally enforceable contracts.

Moreover, one of the biggest competitions among BPOs now is privacy protection. This allows companies to be less worried about the privacy of their sensitive data.

• Outsourcing Takes Away Opportunities From Our People

Many are in the mindset that outsourcing is a process that takes jobs away from the domestic workforce.

If this is the case, then it should lead to massive unemployment. However, in the US, where outsourcing is widely used, the unemployment rates are at an all-time low of 4.4%.

This shows that outsourcing does not take away opportunities from the domestic workforce.

• Outsourcing Is Only An Attempt To Cut Down Costs

While it’s true that outsourcing can help businesses to cut down costs, it is not the only benefit it brings to an organization.

With correct implementation, outsourcing can provide better results, a wider talent pool, better resources, better efficiency, and of course, save money.

There might even be cases where outsourcing can cost more but with a higher quality result.

Signs That You Need To Outsource

By now, there should be no doubt that outsourcing is one of the best things that ambitious businesses can leverage on for growth.

Yes, it can deliver you many benefits and help you expand your operations.

But how to know if it’s time for you to consider outsourcing? Here are a few signs.

• You Want To Save Time

Managing time perfectly is a must in any successful business.

If you spend most of your time focused on a specific task, the other areas of the company might fall behind.

For a simple example, if you focus all your time on sales and pay less attention to bookkeeping, then it can lead to complications down the line.

However, with a reliable outsourcing plan, you can outsource portions of your business to make sure that they are functioning well. In this case, bookkeeping.

When a reliable group is taking care of your bookkeeping, you can save that time to focus on other, more important aspects of the business.

• You Need To Access Specialized Skills And Expertise

There are instances when your business needs to do something that is outside of its scope. If there are no qualified personnel on your staff to do the task, then it is a clear time for outsourcing.

For instance, if your business needs a website to go with it, outsourcing it to an experienced web development firm is the better choice. It will guarantee a well-functioning website while your staff can focus on their duties.

• You Need Innovative Ideas And Concepts

To scale your business and take it to the next level, you will need new innovative ideas and concepts.

While you and your team can gather and decide on what to do next for hours, there is a better option. It is to outsource some areas of your business and work with people who can provide you with ideas from an outside view.

With a fresh prospective, you will gain access to better ideas that can help the growth of your business.

So, if growth and scaling are what’s on your mind, make sure to consider outsourcing as a viable option.

• You Need A Specific Task Fulfilled

If you and your company can do all the necessary tasks within the company without any issues, that is a good thing.

But, if the need ever arises for you to do a target-specific task, then outsourcing might be a good option.

Maybe you need a blockchain expert or an AI specialist to develop a new tool for your client. In such a scenario, hiring a full-time expert only to finish one project would be a waste of money and resources.

However, outsourcing such specific tasks help you hire talent on demand and expand your teams as needed.

• You Need To Reduce Costs

Reducing costs is one of the main reasons why business owners tend to side with outsourcing. With the correct outsourcing model and procedure, you can reduce costs in more areas than one.

If the outsourcing task is production related, it will cut down your costs spent on the materials, machinery, and property purchases or rentals.

Moreover, if you outsource the task to a region where materials and production are much cheaper, the profitability can go even further. The best example of this is Apple and its China-based production plants.

Hiring and working with an outsourcing partner

So what do you do when you want to outsource a task or project in your business?

How do you select the right outsourcing partner? How to work with them to ensure the best results?

Follow these 11 steps to enjoy seamless outsourcing in your business.

Define your needs: Identify the specific tasks or projects you need help with, and determine the skills and qualifications required for the job.
Research potential partners: Look for outsourcing companies that have experience and expertise in the area you need help with. Use online platforms, professional networks, and industry associations to find potential partners.
Evaluate qualifications and experience: Review the qualifications and experience of potential partners to ensure they have the skills and expertise required to meet your needs.
Check references and reviews: Look for testimonials or reviews online, and ask for references from other businesses they have worked with. This will give you an idea of their level of customer service and the quality of their work.
Assess communication skills: Make sure the potential partner has good communication skills and is able to understand and respond to your needs effectively.
Consider the cost: Compare the cost of outsourcing with the cost of hiring an in-house employee to ensure you are getting a fair price for the services you need.
Negotiate the terms: Once you have selected a potential partner, negotiate the terms of the partnership, including the scope of work, timelines, and payment terms.
Establish a clear communication plan: Clearly define the communication plan, including how often you will check-in, how progress will be tracked, and who will be the point of contact.
Ensure legal protection: Sign necessary legal documents to ensure the protection of all your data and intellectual property.
Monitor progress: Monitor the progress of the partnership regularly to ensure that the work is being completed on time and to the desired quality.
Review and adapt: Continuously evaluate the partnership, make adjustments as necessary, and consider future opportunities to work together.

Final Thoughts

From reduced costs, access to a large pool of talent, ability to scale quickly and speed up processes to reduced management work, there are many benefits of outsourcing.

From small businesses, large enterprises to fortune 500 companies many use outsourcing in their business strategy for different reasons. So for any company that likes to expand with the minimum risks involved, outsourcing is a great practice to utilize.

Although there can be some challenges that come with it, finding the right outsourcing partner and working with a suited outsourcing model can evade many of them.

So be sure to find a good outsourcing solution provider that you can rely on when you are considering outsourcing in your business.