Is outsourcing really profitable or are companies risking a great deal?
According to a Clutch report, 90% of small businesses planned to outsource business operations in 2022. They did it to save time, work with experts, and grow.
But are the objectives of outsourcing paying off? The short answer is yes.
In this article, we’ll uncover the reasons behind the drive for outsourcing. We’ll also talk about some disadvantages and show you examples of successful companies using outsourced talent to boost their downlines.
What is Outsourcing?
Outsourcing is a common business practice where companies choose to hire third-party agencies or freelancers to handle work that can also be done in-house.
In theory, it’s possible for companies to take on these tasks themselves. However, their budget and/or expertise may not be sufficient to handle the pressure.
For large companies, outsourcing is almost always a choice because it helps them reduce costs and keeps things efficient.
Why Do Companies Choose to Outsource Work and What Are the Benefits of Outsourcing?
You’ll find the reasons why companies ship out jobs couched in the benefits of outsourcing. So, let’s cover those benefits.
1. Cost Reduction
Cost reduction tops the list of reasons companies choose to outsource. It’s also one of the biggest benefits of outsourcing, especially for small businesses.
According to a NAPEO study, companies that outsource processes from hiring to compliance enjoy savings that can boost their ROI by 27.2%.
Deloitte’s 2020 Global Outsourcing survey also found that 70% of respondents listed cost as the main reason they outsourced.
There are different areas where outsourcing helps companies to save costs.
Let’s break them down.
Employing full-time staff comes with many financial responsibilities. From paid time off to added benefits like healthcare, employers are expected to pick up additional bills apart from wages.
This payment structure makes outsourcing more desirable since companies will only be obligated to pay for services rendered rather than full employee emoluments.
Whether the business is hiring an agency or freelancer, it can significantly save costs that can be repurposed to other processes.
Less Workspace Needed
Companies need to create an extra workspace to fit every new employer, which consumes time and money. Outsourcing removes the need, as most agencies handle things like employee onboarding on their own. While some companies have to create workspaces for contract workers, they can choose to make remote working arrangements.
Fewer Utility Expenses and Less Equipment
Equipping employees with the tools they need is one of the fundamental responsibilities of every employer. And as it turns out, every worker needs their fair share of resources, from computers to software, to be effective.
Companies also have to always maintain and upgrade these tools and resources to stay competitive and keep employees productive.
Luckily, they can save a fortune by engaging the services of firms that use their own tools and resources to deliver. That way, they don’t have to deal with bloated budgets for staff computers and software subscription renewals.
Reduced Expenses on Training
Training is another aspect of employee investment that takes up a significant chunk of any business’s budget.
Companies have to train staff on emerging technologies and skills to boost capabilities and general brand capacity.
Thankfully, agencies and freelancers are responsible for their upskilling endeavors. So, businesses can always get top-tier services without worrying about hiring and training in-house staff to do the same work.
2. Improve Speed to Market
Speed to Market refers to how much time it takes a business to launch a product and make it available to consumers. The process covers the entire product development cycle, which involves many complicated stages.
Partnering with industry professionals throughout the product development cycle allows companies to tap into a large talent pool and expertise that they cannot access internally. From product design to testing, outsourcing can significantly speed up the product launch timeline.
A business can hire as many freelancers as they need on short-term contracts to get work done. This way, they’re directly paying for tasks without committing to full-time employment.
3. Access to Professional Insight and Business Transformation
When businesses outsource, they go for experienced professionals with rich industry and niche experience.
For example, a company can outsource its digital marketing projects to a digital marketing agency or professional.
Such professionals provide the required guidance and insights to make such projects resounding successes. They also provide the best framework to help businesses turn things around.
So what kind of professional guidance can outsourcing provide?
Best Technologies for the Business
Industry specialists have been around long enough to know which technologies are best for covering more ground and gaining more advantages. They can advise companies on the best path forward in terms of technology and provide the required training. Most agencies use these technologies themselves to give their clients the required edge and results.
Ideal Direction for the Business
Whether the company is outsourcing search engine optimization or accounting, an experienced freelancer or agency can use bespoke factors such as current position, future ambition, and available resources to chart the ideal path.
Future-Proof and Tailored Strategies
Professional agencies and freelancers are able to draw from experience to fashion the best strategies for businesses to meet their short- and long-term goals.
4. Minimize risks
Companies have to deal with a lot of risks when handling different business operations. Outsourcing allows you to share the burden of some risks with partners.
Companies get to reduce operational risks since they’re paying for services and it’s up to the agency or freelancer to deliver. The agency or freelancer bears the risk of operating costs required to deliver the service.
Businesses will also avoid the risks related to manpower since the agencies are responsible for recruiting the workers required to handle the jobs. If companies hire freelancers, they’re on a contract basis and responsible for things like tax, training, and welfare.
5. Boost productivity
A paper published by the Organization for Economic Cooperation and Development argues that outsourcing jobs abroad led to significantly higher productivity numbers at an industrial level, especially for US companies.
As companies ship off jobs to slash costs, they can also employ more labor to boost their productivity numbers.
But that’s not all. There are other ways outsourcing boosts overall efficiency and productivity.
Using the Right Talent
Using the right experts means tasks will be executed faster and with fewer errors.
More Hands Means More Work Done
The company can significantly boost output by leveraging money saved from outsourcing to employ more labor or outsource more tasks.
More Time for In-House Staff
By outsourcing tasks, company staff have more time on their hands to tackle more critical issues, boosting overall efficiency and output.
6. Repurpose Internal Resources for More Critical Operations
Outsourcing allows companies to delegate specific processes and projects, freeing up significant resources that can be used to handle critical operations.
For example, repetitive and monotonous tasks can be outsourced, allowing staff to handle more complex and sensitive jobs that require in-house experience.
This strategy helps reduce costs, boost revenue, improve efficiency, reduce errors, and increase productivity.
7. Improve Workload Management
Identifying the right talent for each task is one of the major challenges for business owners. It’s also one of the most valuable skills for managers.
Outsourcing affords entrepreneurs and companies the opportunity to use the right experts for each job, making workload management less stressful and more efficient.
Since brands have access to a deeper talent pool, they can find the ideal professionals to handle every aspect of their businesses.
What’s more, the abundance of global talent in each industry means companies don’t have to rely on generalists. Instead, they can hire freelance specialists to handle each role or project on temporary or long-term bases.
Companies can also outsource human resources and management to experts who can hire, manage, and deploy the right talent.
Additionally, outsourcing reduces the responsibility of in-house HR managers to create things like rotating shifts and time-off plans.
8. Scale Business Operations
Businesses are able to improve their capability and competence to take on more projects, thanks to outsourcing.
Hiring external professionals and agencies allows a company to meet the demand as it rises or falls. That’s because the global talent pool is almost infinite and can be accessed at any time.
And while this helps companies meet surging demand, they can easily drop services when projects are scaled down. That way, they won’t have to deal with the financial burden of hiring and training new talent to meet demand, then retrench workers when said demand falls.
Also, companies tend to outsource when they’re expanding their services and entering new markets. They need expert knowledge, new equipment, and consultations to navigate unfamiliar territory and adapt to changes.
9. Expand Geographical Reach
Companies can leverage global talent to enter new and emerging markets. With the help of technology, businesses can hire and manage freelancers from any locale, and use that workforce to their advantage.
Workers will provide insights about the location and communicate better with the locals, boosting reach and effectiveness.
10. Reduce Employee Turnover
One of the good things about freelancing is doing more work without having to deal with more employees.
The cost of losing and replacing one worker can be costly. But the overhead is less when it comes to replacing an outsourced agency or freelancer.
When an in-house employee quits, especially without notice, companies have to speed up the emergency recruitment process to fill the position as fast as possible. And it’s common knowledge that the hiring process is time- and cost-consuming. On top of that, the business has to bear the cost of inducting and training the new recruit.
On the other hand, replacing an outsourced agency or freelancer doesn’t require the lengthy process of getting in-house workers settled in. Agencies and freelancers are already professionals in their niche, so they can get started without any adjustment phase.
Disadvantages of Outsourcing
While the benefits of outsourcing are enough to entice businesses to consider shipping out jobs, there are disadvantages to consider. Let’s cover those downsides.
Businesses Give Up Some Level of Control
Companies that like things done in a specific way will have to give up a level of control when they outsource jobs.
You can’t easily monitor and track freelancers, especially when it comes to your preferences regarding the fine details. While companies can always scrutinize agencies and contractors to make the right pick, they may not be able to get them all to do things their way.
Also, the code of freelancing is autonomy. Businesses have to settle on an agreed schedule and work pattern with agencies and freelancers. They don’t always have their way when it comes to dictating how things should work.
For example, you have to consider a freelancer’s schedule when setting up a meeting, presentation, or even deadline.
Increased Security Risks
Farming out sensitive aspects of a business comes with the risk of security exposure and increased vulnerability. This is especially the case in the IT sector.
For example, handing off customer data to a third party can put a company at serious risk and expose them to vulnerability when the agency comes under attack.
And as it turns out, the cost of a security breach can be damaging to any business. From losing consumer trust to shouldering liabilities, companies that suffer such problems have a hard time surviving the fallout.
Using an outsourced agency may leave some of your staff redundant, which means the company is bleeding money to keep these employees.
Risk of Reduced Work Quality
Companies also run the risk of mediocre work quality when they outsource complicated tasks and projects that should be handled in-house. Such jobs require the expertise and focus of trained, full-time employees, not freelancers that use run-of-the-mill strategies and concepts.
For example, if you’re running a marketing campaign across different channels and want to maintain a uniform brand voice and messaging, you need an expert on your company’s culture.
Customers, in many cases, also want to talk to experts that know everything about a product, not people who’ll pass on their queries to the “team in charge.”
Outsourced agencies are also motivated by profit and fight in a competitive market. So, they tend to save costs and boost profit by reducing equipment quality and hiring lower-tier talent. This style of operation could end up hurting the quality of delivered work.
Issues with Communication
Communication is another challenge that companies have to deal with when they outsource. Sending instructions through emails and other electronic means may leave tiny details out, causing potentially serious issues. There could also be cultural discrepancies that hamper communication, especially when companies outsource abroad.
Examples of Companies that Successfully Outsource
Many multinational corporations wouldn’t be successful without outsourcing. Bigwigs like Apple, Google, and Facebook heavily rely on outsourced contractors for different aspects of their businesses.
Let’s cover how these companies outsource.
Google’s 139,000+ in-house employees are not enough to deliver everything for the World’s biggest search engine. As you know, Google has numerous subsidiaries, including YouTube, Android, Fitbit, and Nest, among others.
According to Bloomberg in 2018, about half of Google’s workforce were outsourced contractors who receive fewer benefits than its direct staff. While the company moved some of those contractors to full-time workers, it still deals with a significant number of contract workers.
Developers make up a huge chunk of the talent the company outsources, especially from places outside the US.
Google also outsources the manufacturing of its Pixel phones to Foxconn to reduce production overhead.
This business model allows them to save costs on talent acquisition and equipment and increase revenues.
Apple has been shipping out jobs to China for many years. Its biggest partner, Foxconn, manufactures iPhones out of factories in the Asian country.
The company also outsources some of its backend software to India. It invested hundreds of millions into the country, which has since yielded mind-blowing returns.
Known to all as Facebook, Meta is another big player that relies on other companies for sensitive tasks. While it has a reputation for hiring in-house staff for core IT tasks, it outsources things like content moderation.
For example, reports suggested that it heavily depended on Accenture to scrub disturbing content from Facebook.
Despite the disadvantages of outsourcing, companies have found a way to turn things in their favor.
If you’re considering outsourcing parts of your business, you have to leverage the right tools to monitor performance and stay in touch with freelancers and agencies. For example, you can use time tracking software like Traqq to accurately calculate billable hours, monitor freelancers working remotely, and conduct performance evaluations.