Overview:
- Outsourcing became a strategic business tool in the 1990s.
- Includes various specialized forms providing cost reduction, access to expertise, and improved efficiency and quality.
- Involves communication issues, security concerns, and loss of control over delegated tasks.
- Will continue to drive innovation and efficiency, remaining a key strategic advantage for businesses.
Understanding Outsourcing
Outsourcing as a business practice can be traced back to the 1980s. Initially, the practice focused solely on cost efficiency. However, it became an integral part of business in the 1990s. Businesses recognize their strategic value in adding value and eventually contributing to a company’s growth. It is a practice wherein organizations hire third-party service providers to handle operations, perform tasks, or produce goods. These services or tasks are those which were traditionally performed in-company. When these tasks are delegated, the results are usually received from outside your organization. In some cases, those employees work on-site until the organization’s needs are met. These tasks are often secondary services or operations which enable the organization to focus on its core business. It is usually adopted as a cost-cutting measure. Marketing outsourcing, business process outsourcing, and customer service outsourcing are some of the most popular in the industry.
There can be various reasons why companies prefer third-party contracting. The following are some of them:
- Companies can focus on their core competencies by delegating their secondary functions to third-party organizations. This also helps in increasing the efficiency of the primary organization.
- External contracting allows companies to have access to the workforce irrespective of seasonal availability of labor. This guarantees that the work gets done no matter what.
- Organizations can improve the quality of their products or services. This is because the external partners are experts in the products or services they offer.
- Staff augmentation, a type of outsourcing, gives organizations access to individuals with desired skills for a specified amount of time. This means that companies need not worry about their employees having the know-how of new operations that are highly specialized.
Benefits of Outsourcing
There are several benefits that attract organizations to adopt external contracting. The following are a few advantages of jobbing out in addition to the obvious cost-cutting benefits.
Better Focus on Core Competencies
Companies often outsource services that are secondary to its core competencies. These services can include anything from human resource tasks to bookkeeping or payroll functions. Companies can also job out entire departments that are secondary to the company’s main function.
Increased Access to Skills
When delegating work, there’s increased access to innovative technologies, intellectual property, and thought leadership of experts in the industry. This means that companies don’t have to hire individuals for specific project requirements. They can externally contract talent, skill, and technology.
Ability to Reduce Costs
Organizations have to constantly improve their talent pool and infrastructure to have a competitive advantage over their counterparts. Investing in this is counterproductive especially if it’s a short-term project. This gives companies the advantage of not having to hire employees with specialized skill sets or have the newest technology. As third parties specialize in these services or tasks, organizations receive the service for reduced costs.
Time efficiency
Companies take a sufficient amount of time training their employees or to familiarize themselves with new areas of expertise. If they externally delegate the service or task instead, the delivery of the services doesn’t take a lot of time. This also allows companies to spend their time and energy on other important tasks that they’re experienced in.
Increased Product Quality
Companies that offer alternatives are industry experts with a high degree of specialization. This ensures that the products or services they deliver are of high quality. This enables the organization’s services or products to have a qualitative advantage over their competitors.
Types of Outsourcing
Companies can decide how to outsource work based on their needs and requirements. They are discussed below:
Onshoring
In onshoring, companies relocate or set up service delivery or product manufacture to low-production cost locations. These locations are in the same country as the company.
Nearshoring
The company sets up service delivery or product manufacture to countries near the country where the organization is located.
Offshoring
The company sets up service delivery or product manufacture overseas, often with low labor or production costs.
Business Process Outsourcing
All of the company processes are delegated to specialized service providers.
Professional Outsourcing
This includes products like administrative, human resources, accounting, or legal services. These companies are specialized and have access to high-quality resources. This allows cost-cutting without compromising on quality of service delivered.
IT Outsourcing
As most companies have IT needs, IT outsourcing has become the most common service that are delegated. This may include software development maintenance and technical support. These services become less expensive compared to setting up an in-house IT department.
Multisourcing
Companies in complex or highly specialized business areas such as automobiles or avionics usually multi-source their products. These products from specialized companies combine to create a finished product. More often than not these companies become their long-term partners.
Manufacturer Outsourcing
Companies choosing to manufacture products in-house need to spend capital on infrastructure, paying workers, and buying raw materials. This can be avoided if the manufacturing is done by external companies that specialize in it.
Process-Specific Outsourcing
This includes services that relate to a specialized task or procedure.
Risks of Outsourcing
Although it looks like the perfect solution to a lot of contemporary business problems, it does not come without the risks involved. When you are communicating your requirements, especially overseas, things can get lost in translation. It also requires plenty of sensitive information to be communicated outside of your organization. This may result in security breaches. Companies also need to religiously maintain their contracts to ensure efficiency. Organizations lose control over certain aspects when the services or products are externally sourced compared to an in-house service.
Outsourcing Trends
Successful organizations employ outsourcing strategies which gives them a competitive advantage over their competitors. Companies have access to expertise and novel technologies. It helps them deliver products and services efficiently.
Conclusion:
Organizations that prioritize time over money may find outsourcing advantageous. However, if the company fails to retain control over the processes involved, problems can arise. It will continue to play a critical role in driving change and innovation in all industries.
FAQs:
What is an example of outsourcing?
A retail company using an international shipping company for their international deliveries is an example of delegating services out.
What is the meaning of outsourced production?
In outsourced production, companies deliver services or products manufactured by third parties.
Where is outsourcing used?
IT services like data warehousing, website development, and cyber security services are outsourced. Payroll, invoicing, and bookkeeping services are also outsourced.
