A recent report by SkyQuest indicates that 39 percent of global businesses outsource services or some of their business processes. The top reason cited for the implementation of outsourcing services is cost-effectiveness. Other factors include enabling businesses to focus on core business functions and access to a larger talent pool.
Outsourcing has been gaining traction globally due to its effectiveness. Data by Statista shows that the global market size of outsource services was valued at $92.5 billion in 2019. That number is projected to reach $525.2 billion by 2030 at a CAGR of 9.1 percent from 2022-2030.
However, despite the widespread adoption of outsourcing, there are also trade-offs and risks associated with this strategy, including time management, security issues, and cultural misfits.
In this post, we highlight the most common outsourcing problems you may encounter and how to avoid them.
What Are Outsourcing Services?
Outsourcing services or business process outsourcing is a term used to describe the delegation of specific business process tasks, such as payroll, logistics, and IT. These are services that apply specifically to businesses that contract out various aspects of their operations to third-party vendors.
Traditionally, the outsourcing market revolved around the manufacturing industry.
However, with the IT revolution – with emphasis on SaaS-based solutions, the rapid adoption of automation, and improvements in cloud-based infrastructure – the industry has experienced major growth.
Outsourcing services can be divided into two categories:
- Internal business functions (back office), like human resources, billing, or purchasing, and
- Customer-related functions (front office), like tech support or marketing.
IT outsourcing, which includes infrastructure outsourcing and application outsourcing, is expected to boost the capacity to execute certain key business operations while keeping operating costs low.
Infrastructure outsourcing entails data center outsourcing, service desk capabilities, managed security operations, network services, and overall infrastructure management. Application outsourcing, on the other hand, can include legacy system maintenance, packaged software implementation and management, new application development, and testing and QA services.
Pros and Cons of Outsourcing
There are many reasons why, as a business leader, you’d want to outsource services. But along those same lines, you must be aware of the drawbacks to the practice.
Here are some of the benefits of outsourcing:
Lower costs. A study by NAPEO shows that companies that outsource HR functions like hiring, recruiting, and compliance can lead to a 27.2 ROI. There are various ways companies can reduce costs by outsourcing. Management can decide to hire freelancers to perform numerous tasks, including content writing, marketing, accounting, and customer support service. Or, they could contract out services to third-party providers located in regions with a lower minimum wage. Ultimately, outsourcing helps minimize overheads, particularly those related to human resources and equipment.
Staffing flexibility. Sometimes it makes sense to hire short-term outside contractors when demand is high than to hire new employees, considering the high hiring costs. A good example is eCommerce retailers, who can outsource customer service representatives during the winter or other major holidays.
Focus on the company’s core competencies. When you outsource certain non-core business tasks to external contractors, you allow yourself and your team to focus on the most crucial aspects that will drive success. This is particularly true for startups that often operate on a smaller scale.
Improved efficiency. Third-party providers offer specialized skills in specific niches. This means you can outsource services based on the unique needs of your business. And since their focus is on that particular task or niche, they can do it better, faster, and cheaper than hiring and training new employees.
Affordability. Small businesses and startups may not have enough resources to support an in-house, full-time team. In that case, it’s more economical to hire freelancers to work on a contract basis.
According to a 2021 Deloitte survey, 88 percent of organizations cited cost reduction as their main outsourcing objective. But there are disadvantages associated with outsourcing. These include:
Time zone differences
- Loss of management control and inability to control operations of outsourcing activities or processes
- Lack of quality control since most third-party providers are profit-driven rather than focused on delivering quality work
- Hidden costs imposed by outsourcing companies
- Exposure to security vulnerabilities by giving third parties access to sensitive company information
What Is an Example of Outsourcing?
Research by Clutch shows that in 2019, over one-third of small businesses outsourced parts of their business processes. Over half had plans to outsource at least one business process in the foreseeable future.
Now, you might be wondering, what services should you outsource? Here are some of the services companies outsource the most.
- IT services
- Finances and accounting
- Digital marketing
- Customer support
- Human resources
Remember, the services you decide to outsource should not affect core business operations. Leave those services to your in-house team.
10 Problems of Outsourcing and How to Overcome Them
What is the main problem with outsourcing? Experts say it’s a lack of a clear plan of action and poor communication. But there’s more. Small business enterprises should pay attention to the following potential pitfalls to understand how to mitigate them
1. Lack of Effective Communication
There are three geographic categories that companies can choose to outsource:
- Onshoring means contracting out to a firm or contractor in the same country as your business.
Nearshoring means outsourcing services to people, firms, or contractors in neighboring countries with similar or identical time zones.
- Offshoring means outsourcing services to third-party providers overseas.
Working with onshore firms means working in the same time zone. This translates to more convenience in scheduling and collaboration, as well as timely communication. The communication aspect becomes more important if you outsource services to offshore companies with a significant difference in time zone and language.
Formulate a well-implemented communication policy that outlines clearly the protocols and guidelines that support a healthy outsourcing relationship. These include:
- Choosing the right technology for synchronous and asynchronous communication.
- Leveraging cloud technology for document sharing and project collaboration.
- Having dedicated channels of communication for specific tasks, like project discussion, feedback, and workflows.
2. Misaligned Goals and Expectations
Here’s a common mistake of outsourcing that can result in repercussions that can impact your business – failing to set clear expectations and goals. Goal setting is a crucial step when implementing outsourcing strategies. That’s why they should be done at the very beginning if you want to maintain transparency, consistency, and authenticity in your business relationship.
If you’re outsourcing a service like code development, make sure you set clear requirements and expectations about the process, tools used, timelines, testing, expected results, mid-development demo, and so on. The same goes for any other service. Otherwise, you can expect low productivity and inefficiencies in service delivery.
Here’s what you can do:
- Share your company’s principles and work culture with the outsourcing company
- Define your company’s process standards, course correction strategies, and performance metrics (KPIs)
- Document all these details and make them accessible to the provider
- Develop a strategic project roadmap, defining clear milestones and timelines
Doing so provides a high level of transparency and visibility to the project, allowing the third-party provider to align their goals and expectations with that of your company.
3. Hiring the Cheapest Outsourcing Firm
When starting out, you may be more inclined toward finding the cheapest contractors. You probably want to hire someone with a low impact on your bottom line. Unfortunately, the lowest rates also tend to come with low-quality work, insufficient experience, and poor communication.
This mistake can also lead to hiring firms that don’t know about your company and the unique problems that affect it.
Before hiring an outsourcing provider, perform a thorough background check. Are they reliable? Do they offer quality services? Can they be trusted? Don’t find the cheapest contractor just to save costs. Instead, focus on finding someone who has invested their time in perfecting their craft and has a proven track record.
4. Not Knowing What to Outsource
Most business owners, particularly startups, get into outsourcing without fully understanding the impact on their business. Most will opt for this strategy to lower costs and minimize the management tasks involved.
Even worse, some end up outsourcing core business functions, which could put their businesses at risk of losing clients or profitability.
Before you find the right outsourcing company, you may want to identify aspects of your business you want to outsource. Likewise, it’s imperative to know how you’re going to integrate the contractors to ensure smooth workflows.
In addition, it’s crucial to understand that some tasks are better left to be handled by in-house teams, such as those related to customers.
5. Lack of Proper Data Security Measures
Handing off certain portions of your business comes with some level of risk. For example, call center outsourcing may mean giving the provider access to sensitive customer information. A case of data breach could severely harm your organization’s reputation, brand, and bottom line. Not to mention the risk of running into legal trouble.
- Prioritize security preparedness.
- Ensure that the provider is fully compliant with the GDPR and has a high level of data privacy and intellectual property protection policy.
- Mandate your service provider to sign a non-disclosure agreement (NDA).
6. Failure to Develop an Implementation Strategy
While you may want to work with outside service providers, you don’t want your clients or customers to know about this. To ensure smooth workflow and stellar service delivery, there must be a seamless integration of both companies.
Most entrepreneurs fail to develop and implement a well-laid-out execution plan. In the end, communication issues, delays, and confusion ensue.
- Formulate a clear implementation strategy that covers:
- Sourcing and management of shared resources
- Communication between the two companies
- Team training (where applicable)
- Tax and employment laws compliance, especially when nearshoring or offshoring
7. Not Paying Attention to Hidden/Unforeseen Costs
One of the main objectives of outsourcing services is to save costs that could otherwise go into maintaining an in-house team and performing non-core business tasks. That’s why experts recommend ensuring accurate calculations of all relevant costs and comparing the number with the cost estimate of your in-house team.
Inquire about pertinent issues, like what happens when tasks take longer or projects require specialized skills. Keep in mind that there might be additional costs like software upgrades, redeployment, and troubleshooting.
Transparency is key here. The outsourcing firm should lay everything out openly and outline all the extra costs that might come up in the course of offering their services. You have a budget to work with, and failure to address hidden costs can lead to problems later.
8. Poor Transfer of knowledge
When you outsource, you’re moving project requirements and processes to people located thousands of miles away. A poor transfer plan will prevent the provider from meeting your expectations. On the other hand, a solid plan with clear documentation facilitates a smooth transfer of knowledge from your in-house teams to the outsource services provider.
Develop a detailed document outlining the knowledge transfer plan. This should include details like technology, features, scripts, and so on. You want your preferred outsourcing company to discern the scope of the project and expected outcomes just by reading the documented directives.
9. Language and Cultural Differences
Another big problem with outsourcing services is the cultural differences that exist between the client and the service provider. For example, an outsourcing company may have a significantly dissimilar organizational culture relating to decision-making, a flexible working environment, and customer success. This could be influenced by national/regional cultures and traditions.
If none of you are willing to be flexible with your work cultures, you may hit a wall and likely experience complications in your business arrangement.
Likewise, language barrier and failure to understand the subtleties in all aspects of communication can result in tempers or harsh verbal exchanges, which can be detrimental to a meaningful business relationship.
Cultural differences is not something you can underestimate or afford to ignore. It has a direct impact on workplace relationships and can drastically affect collaboration and productivity. Fortunately, it’s a problem that you can easily mitigate. You can do so by:
- outsourcing services to a firm that has a good command of English or your preferred language.
- researching the service provider’s company culture or having 1-1 sessions to discuss the differences in your company cultures and find a common ground.
- giving preference to providers that embrace a corporate culture that aligns with your company’s.
- giving preference to firms that can demonstrate a similar scale and business values as your own enterprise.
10. Failure to Measure Team Performance
One of the biggest mistakes you can make is failing to implement a proper monitoring system. When researching the right service provider to work with, your focus should be to understand their performance. After all, the provider is your partner, and their work quality can significantly impact your business performance, as well as customer satisfaction.
Implementing a tool that can monitor the progress of your outsourced teams and projects can help you quickly identify and mitigate potential pitfalls. Take a tool like Traqq. It simplifies the task of assessing whether the outsourcing partner is keeping up with the pace or is going off-track.
With Traqq employee monitoring software, you can:
- actively measure your outsourced team’s performance
- track productivity levels on work to determine whether they are delivering their fair share of tasks
- generate real-time reports about your outsourced team’s activity levels and overall time usage
- monitor team attendance and punctuality so you can define clear work schedules
Traqq promotes ethical employee monitoring by blurring all screenshots and video clips by default. This way, your outsourced team doesn’t have to worry about privacy concerns.
In addition, the tool helps prevent a common problem with outsourcers – micromanagement. Since you can gain insight into the team’s activity and performance in real time, you won’t have to be constantly asking for status updates.
Outsource, But Prepare for Challenges
This list of common outsourcing problems is by no means exhaustive. Each business has unique needs and will, therefore, require varying outsource services. Understand that, despite the many benefits of outsourcing, you should expect varying degrees of challenges along the way.
You want to pay close attention to the implementation stage, as it’s where you must set things on the right path. Outsourcing might seem daunting at first. But if approached correctly, nothing should prevent you from moving forward.