Outsourcing: Definition, Benefits, and Services
Outsourcing has become increasingly popular as companies grow and their needs start to get more specific, such that the supply for particular positions, is not easily found in the national market.
Outsourcing is currently one of the most effective tried-and-tested models for profitable business operations. It is a successful competitive strategy that enterprises can use on a long-term basis as it has provided a way for companies to find top international talent at a reasonable discount to create their companies or enhance their existing team.
Most times, when an organisation needs a large volume of employees, it results in some form of a dilemma on how this can be accomplished. Options like outsourcing arise. This could lead to the question “what is outsourcing?”
In this post, we will be breaking down:
- The meaning of outsourcing
- Why companies outsource
- Types of outsourcing services
- The benefits of outsourcing.
- Challenges of outsourcing.
- The right approach to outsourcing
- Service levels agreements for outsourcing
- Negotiating the best outsourcing deal
- The hidden costs of outsourcing.
- How to choose the right outsourcing partner
- Principles guiding successful outsourcing
What Is Outsourcing?
Outsourcing is a process where a company passes over the responsibility of planning an activity or project that is or could be done internally to another company. Outsourcing is a practice many companies deploy to get top candidates without getting involved in the process of sourcing and selecting.
Many companies all over the world are adopting employee outsourcing to achieve greater organisational effectiveness, flexibility, improved efficiency, reduced overheads, and focused/strategic HR management functions. The outsourcing company finds, selects, and trains candidates based on the client’s specifications to meet their workforce needs. Individuals and organisations opt for outsourcing to ease the burden and transfer the risk associated with carrying out specific functions and focus on their core competencies.
Recommended Post: Hack Your Business Growth Like Alibaba with Outsourcing
Why Companies Outsource
Companies that opt for outsourcing rely on third-party providers’ expertise in carrying out the outsourced tasks to gain such benefits. The principle behind this is that since the third-party provider focuses on that particular task, they are most likely to do it better, faster, and more cost-effectively than the hiring company could.
However, there are several other reasons why some companies decide to outsource, such as:
- A company might be experiencing growth at a higher rate than it can support with its own, internal staff. To keep up the pace, the company can choose to hire a pre-trained team from an outsourcing firm, to deploy as needed and where needed in its operations without interrupting its business flow.
- A company might have processes or projects that only take place for a short time, making it more efficient to hire a temporary team of workers for completion. If a company implements a new process, it can outsource the work to trained workers, instead of investing the money, time, and effort to train and maintain internal workers.
- Companies sometimes choose to outsource some functions as a way to reduce risks or shift regulatory obligations to the third-party provider.
Given all the benefits that come with outsourcing, companies often decide to outsource non-core or supporting functions within their businesses so that they can focus their resources on their core competencies, and gain competitive advantages in the market.
The Four Major Types of Outsourcing
Broadly there are several distinct forms of outsourcing, depending on the process, one may be preferable over another. However, the four major types of outsourcing Include:
- People outsourcing
- Project outsourcing
- Business Process outsourcing
- IT outsourcing
In this case, a company contracts certain business functions over an extended period to non-permanent staff that is managed by the outsourcing firm. The point is for the outsourced staff to handle support functions to allow them to focus on their key competencies and drive business growth.
People outsourcing is a growing trend that many companies around the world are adopting to achieve greater organisational flexibility, improved efficiency, reduced overheads, and hassle-free HR management.
Project outsourcing is an effective means for businesses to execute one-off tasks effectively, especially if the project requires skills that are beyond the capabilities of a company’s current employees.
More so, project outsourcing has been proven to improve core business competency. It helps companies cut back on capital expenditures since the tools needed to accomplish the project are already provided as opposed to purchasing new ones.
Considering how expensive and unrealistic it is for businesses to stockpile skill sets that are only used occasionally, companies look to project outsourcing, as this helps them maximise time and profit, and minimise costs.
Business Process Outsourcing
This type of outsourcing service was formerly adopted mostly by manufacturing companies. But these days, it has turned into a concept embraced across several industries. As the business world becomes more competitive, it has become imperative that organisations outsource some of their processes if they must increase focus and efficiency.
Some process outsourcing solutions include:
- HR systems management
- Performance management
- Customer care services
- Call centre
- Marketing and marketing research support
- Data entry and correction
- Information centre
IT outsourcing is an effective means for companies to find suitable resources or contracting out of the company’s jurisdiction for IT services. Different companies now use IT outsourcing depending on needs beginning from software development, engineers staff to maintenance and IT support.
For example, your company can outsource IT, personnel, because it’s cheaper and much more comfortable than to build your own IT team. Based on your goals, plans, and job scale, IT outsourcing companies can control the whole IT infrastructure or partial IT services groups either, which is selective IT outsourcing.
IT outsourcing makes the organisation of your business as flexible as you can imagine: now you can expand and shrink the scope of your activities with no need to hire and dismiss the IT staff.
Companies often outsource as a way to reduce costs, improve efficiencies, and gain speed – It is purely a business decision.
Benefits Of Outsourcing
- Faster services: outsourcing helps you get your ideas converted into products better and faster. It cuts down on time wasted in onboarding new employees.
- Access to skilled resources: by hiring an outsourcing firm, you gain access to a pool of highly skilled resources. As a result, you no longer need to invest in recruiting and training expensive resources for your business.
- Cost-saving on infrastructure and technology: outsourcing your projects helps you eliminate investment in infrastructure since the outsourcing partner takes the responsibility of the business processes.
- Focus on core areas: when you outsource, you can focus on building your brand, investing in core areas of your business.
- Increased efficiency: A lot of outsourcing companies like this possess expertise from years of being in the business. Therefore, they do the job better with their vast knowledge and understanding of the territory.
Outsourcing can help companies concentrate more on their core business while simultaneously controlling expenses.
Major Challenges Of Outsourcing
As much as outsourcing is a useful tried-and-tested model for profitable business operations, this reason alone isn’t enough to implement a successful outsourcing program. Organisations must ensure that they consider the upcoming issues beforehand. Some of the challenges associated with outsourcing include:
Risk of Loss of Intellectual Property
A great deal of insight into your business process will be exposed to the outsourcing firm. The risk involved is high because of the vulnerability of sensitive information, and this information is necessary for the outsourcing firm to carry out its functions effectively.
Selecting the Right Service Provider
Selecting the right outsourcing firm for your business is the bedrock on which the entire outsourcing process depends. If the selection phase is flawed, then frustration and breach of contract are bound to occur over time.
If the legal implications of the outsourcing contract are unclear to both the organisation and the service provider, there will be uncertainties surrounding the outsourcing decision. Many companies overlook legal issues and face outsourcing failures.
Cultures and lifestyles may lead to a gap in communication. In most cases, you might think that what you had conveyed was understood, but at a later stage, realise that the output was unlike what you had in mind. Communication is the key to achieve success for both parties involved.
A well-drafted requirement document can save hundreds of hours and capital, down the line. To avoid misunderstanding, you should consider documenting precisely what you have in mind. It is crucial to highlight that if these issues are not addressed beforehand, they can have a substantial negative impact on your business.
The Right Approach to Outsourcing
There is no one right approach to outsourcing. Just as companies differ from one another, so also are outsourcing strategies. However, the following best practice has proven itself in many situations:
Analyse the actual state of a task, project, or a business process. From the analysis, you will be able to determine the best further course of action and be sure that outsourcing is the right solution at that point.
Organise a meeting with all of your company’s stakeholders to get the most out of your outsourcing project. In the session, you should highlight and discuss the content, the benefits, the timing, and the next steps of the project.
Select a Service Provider
Compare all your options of service providers with each other. For the interaction with potential service providers, you need a service requirement and a statement of work. In the service requirement documents, you record all requirements. However, in scope statements, you note all the required solutions and detailed specifications. These documents will enable service providers to come up with new solutions or develop existing ones.
Service Levels Agreements for Outsourcing
A contract between an outsourcing service provider and a client is referred to as a service level agreement (SLA). It states, usually in measurable terms, what services the vendor will provide. At the beginning of any outsourcing relationship, service levels are determined. They are used to measure and monitor the service provider’s performance.
In most cases, a client can charge a vendor a penalty fee if specific SLAs are not met. If used judiciously, SLAs are an effective way to ensure the service provider carries out their duties effectively. Bad service from an outsourcing service provider, even at a deep discount, is still bad service and can lead to more significant problems in the future. Well written SLAs alone will not guarantee success when outsourcing. They are one of many tools to help manage outsourcing deals.
Negotiating the Best Outsourcing Deal
An outsourcing service provider has one thing in mind when entering negotiations: making the most money while assuming the least amount of risk. As a client, t is crucial for you to have the end in mind and understand what you hope to achieve from establishing the relationship. The goal of the negotiation process is to balance the risks and benefits for both parties. Smart buyers usually take the lead in negotiations, prioritising issues that are important to them, rather than being led around by the outsourcing service provider.
Most importantly, don’t take any steps toward transitioning the work to the outsourcing service provider while negotiating. An outsourcing contract is never a complete deal until you sign in black and white. If you begin handing over the work to the service provider, you will be giving them more power over the negotiating process
The Hidden Costs Of Outsourcing
The number of resources that a company will spend when opting for outsourcing is not accurately represented by the total amount of an outsourcing contract. Depending on what is outsourced and to which service provider, an organisation might end up spending at least 10 per cent above the total amount of an outsourcing contract deal.
Some of the most significant additional expenses associated with outsourcing are:
- the cost of research, and analysis to determine if outsourcing is the right choice for you
- the cost of investigating, comparing and selecting the right vendor
- the cost of transitioning work and knowledge to the outsourcing service provider
- costs associated with possible staff layoff and their associated HR issues
It’s important to consider all these hidden costs when opting for outsourcing.
Recommended Post: Ways to Cut Business Costs During a Crisis
How to Find the Right Outsourcing Partner
To realise all the benefits of outsourcing, you need to consider several factors before making a final decision. These factors if overlooked, can result in failures, loss of time additional costs. While the process of choosing an outsourcing service provider is almost always the same, you mustn’t make hasty decisions. Following the best practices stated below will help you to find the right outsourcing partner for your business needs.
Clearly Define your Goals
Before you start searching for an outsourcing partner, it is crucial to assess your company’s strengths and weaknesses. Outsourcing should be an option if you are not proficient in a specific aspect of a business or if you lack the resources to develop those aspects of your business further.
In this case, it is better to let the professionals take care of it, instead of risking making a huge mistake by trying to do it yourself. So go through all of your business operations required for your startup to develop appropriately and find the aspects you’re least proficient at. That way, the outsourcing company will know what to do, to meet your needs.
Search for Reviews and Testimonials
Deciding on which outsourcing partner to choose should never be based on an impulse. Picking a company just because they are the most affordable is not a criterion for you should base your decision on. It is better to do research and identify potential partners. An excellent way to select a few is options is to check online reviews and testimonials from other clients.
Client testimonials and reviews and reviews are an excellent way to gain honest insight into how an outsourcing company carry out their operations and how satisfied are their clients with their services. Focus on how an outsourcing company helped a particular client and see if the clients have referred them to anyone else.
This will aid you in making more informed decisions and determine which outsourcing partners may be right for your businesses, based on their reputation, previous work and client satisfaction.
Look for Qualities
Every outsourcing company operates uniquely. The point is to choose a partner whose qualities match your needs. Moreover, their conditions must match your company’s culture so that you can have the best communication with your outsourcing partner. If your outsourcing partner doesn’t meet your expectations, you may experience challenges and conflicts.
That is why you should prioritise finding a reliable and experienced outsourcing partner, that will meet your business needs and help your achieve your business goals. It is also important to note that looking for specific qualities in an outsourcing company usually takes a considerable amount of time and effort before you finally find the right one to hire.
Look Out for Additional Costs
A major goal of outsourcing business tasks is for businesses to cut costs and focus on the growth and development of their businesses. That’s why you need to ensure that the outsourcing partner you choose doesn’t charge extra for services and implementations, such as connectivity, communications, infrastructure, etc.
It is better for that the price for services are fixed and that there are no additional or hidden costs that may be above your budget because, once the contract has been signed, fixing the issues you weren’t aware of initially becomes more difficult.
Test their Level of Competency
Irrespective of how good an outsourcing company may seem to be, it would be best if you were entirely sure that you’re choosing the right outsourcing partner for your business. This is why you need to test the competency and be sure that they have the expertise, experience, and infrastructure to meet your business needs.
Take a deep dive into their business operations and what methods adopt in resolve issues. This will provide insight into how the outsourcing service provider will most likely perform. It would be best if you had an outsourcing partner who can do their job efficiently and meet your business needs, as well as a partner you can rely on and not worry about them messing things up.
Finding the right outsourcing service provider is not as simple or straightforward as it sounds. If you make a hasty decision, you may end up with more problems than you started with. That is why it is crucial to carry out a thorough research on your potential partner thoroughly and ensure they’re up to the task.
Principles Guiding Successful Outsourcing
According to Azim Premji, “the important thing about outsourcing or global sourcing is that it becomes a potent tool to leverage talent, improve productivity, and reduce work cycles.”
Successful outsourcing is the dream of every organisation, and modern-day organisations are beginning to appreciate and leverage outsourcing to accomplish more. Achieving success with outsourcing, however, much depends on a cordial client/provider relationship. For this to be achieved, it’s essential to adhere to the following principles:
The outsourcing company and client must be transparent with each other at all times; all processes should be open and accessible. This will naturally build confidence and trust. Successful outsourcing can only be achieved when there is a joint effort; teamwork.
There should be a balance of power as both parties have to work collaboratively to achieve desired results.
Create a room for everyone to air their opinions/ideas without bias or fear of judgment. Inform each other of developments, good or bad. There should be open and honest communication at all levels. Excellent communication ensures that everyone is on the same page, goals are achieved, and there are no hidden surprises.
The client should endeavour to be available for the outsourcing provider throughout the project and vice versa.
Goals and Achievements
The outsourcing provider and client need to establish realistic goals together to determine the achievements they are working towards. That way, everyone is on the same page, and plans and strategies are aligned.
The goals and objectives of the projects must be quantifiable and established. Be upfront and clear about your expectations.
Review and Analytics
It is advised to have access to analytics and frequent formal review meetings. At these meetings, both parties get to bring each other up to speed on achievements/obstacles, reviews and deliverables.
Waiting until the end of the job before checking for progress is the best way to set your organisation up for failure. The provider should check with the client to see if the procedures/processes are in line with what he desires.
The client should also make sure to receive updates at each stage, not only to be conversant with the job but even to know everything possible about it. This will help to mitigate and manage risks.
At the end of the day, the success of an outsourcing project, though determined by the client, impacts on both the client and the outsourcing provider. Successful outsourcing is beneficial to both parties.
In conclusion, outsourcing has proven to be a major ‘life-saver’ for companies who intend to hire employees to execute particular projects or those who don’t want to go through the rigorous employment processes for full-time staff.
Workforce Outsourcing as an outsourcing partner understands all the challenges associated with outsourcing, and mitigate these risks well in advance while working with clients. Having a team of highly skilled and dedicated resources working with clients across Africa has had the communication barrier been taken care of.
Our recurring clients vouch for our dedicated and professional attitude towards our work and excellent after-sales support. Cost-effectiveness, relatively fast response and on-time submission of the project are the perks of working with or alongside us.