Why Do Companies Outsource?

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Why Do Companies Outsource?

Understanding the benefits and advantages of strategic outsourcing.

Dec 20, 2020

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Outsourcing is the process of using outside employees to accomplish tasks or handle responsibilities traditionally done by in-house employees. For instance, a company may choose to outsource its payroll needs to a firm specializing in payroll processing and accounting. However, there are many other examples, all of which offer strategic benefits for the company doing the outsourcing. Why do companies outsource? In this post, we’ll explore the many reasons for this, as well as the benefits that the right outsourcing strategy can offer.

What Is Outsourcing?

We’ll begin with a quick recap – outsourcing is taking a business process, usually handled within the organization, and having it performed by someone outside the company. One prominent example is manufacturers closing domestic customer service call centers and then outsourcing to contractors overseas.

However, it should be noted that this is just one example. Not all outsourcing involves sending work to overseas contractors (a process called offshoring). Nearshoring is the term used for outsourcing where the contractors are located within the same area as the company outsourcing the business processes.

It should also be noted that not all types of outsourcing involve a business laying off existing employees. In many cases, outsourcing provides small businesses with a more affordable avenue to obtain the talent they need to compete, thereby opening up new jobs that did not exist previously.

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The State of Outsourcing Today

Outsourcing is growing in popularity, particularly as Small Medium Businesses (SMBs) realize the benefits that it offers. According to Fundera, 30% of companies in the US outsourced at least some of their business processes in 2020, accounting for 14 million jobs.

Of those companies, 78% experienced positive results and established a strong relationship with their outsourced service provider. Additionally, outsourcing is most prominent in the manufacturing and IT industries, with 80% and 94% of companies respectively using some type of outsourcing arrangement.

Why Do Companies Outsource?

Companies outsource for a very wide range of reasons. Cost-control is only one of these. Just a few of the reasons include the following:

  • Gain Access to Talent Otherwise Unavailable – For many companies, the choice to outsource has nothing to do with cost savings, at least not directly. It’s about building a team of trained, credentialed experts without incurring the costs of hiring traditional employees. For SMBs, those costs are often impossible to meet, so outsourcing provides a viable path forward. Assembling or augmenting an IT team is one common example here. An IT staffing company provides SMBs with access to trained, experienced experts on demand and as needed, saving time and costs while accelerating growth and profitability.
  • Improve Focus – In some cases, businesses choose to outsource certain processes to improve their focus on their core goals and competencies. For instance, by outsourcing some processes, SMBs can often lighten the burden on existing team members and enable them to focus on mission-critical tasks and goals. The improved traction and profitability offered more than offsets the cost of outsourcing.
  • Improved Agility – Many startups and SMBs occupy volatile verticals that require ongoing adaptation to survive. Companies must be agile and able to evolve quickly. Outsourcing helps maximize agility without sacrificing access to critical business processes.
  • Repurpose Existing Talent – In many cases, employees in an SMB wear multiple hats. While that might seem necessary at times, it ultimately reduces productivity, focus, and traction. By outsourcing some business processes, employers can repurpose existing talent, allowing employees to focus on what they do best while still ensuring all required processes are being completed.

The Pros and Cons of Outsourcing: Is It Right for Your Company?

With a better understanding of why companies outsource, it’s time to turn our attention to the pros and cons offered by this arrangement. While there are lots of pros, there are some potential downsides that must be considered if you’re going to make an informed decision.

The Pros of Outsourcing

  • Cost Control and Reduction – With the right outsourcing partner, SMBs can save money over the traditional hiring paradigm while still gaining access to necessary talent.
  • Predictability – Most outsourcing is done via contract. Those contracts specify what will be done and when providing predictability and enabling better business planning.
  • Automation – Outsourcing offers the ability to automate less important tasks within a business, saving time, and ensuring employees can focus on what is most important.
  • Access to Talent – Often, outsourcing provides SMBs with access to the talent they would otherwise not have had.
  • Risk Reduction – While outsourcing comes with its own risks, the process also helps you share risk with the outsourcing provider when it comes to task completion and quality.

The Cons of Outsourcing

  • Existing Employees May Feel Threatened – This con primarily applies to large companies that are outsourcing for cost savings, as opposed to gaining access to the talent they would not otherwise have. If employees see jobs being sent overseas, it may make them nervous about their own future with the company.
  • Communication Issues – Outsourcing to an overseas business may mean problems with communication. However, nearshoring alleviates this issue, ensuring that everyone is on the same page and eliminating language barriers.
  • Standards – Anytime you outsource to a company, there is a chance that your standards and theirs will not match. That is particularly true when outsourcing overseas. Nearshoring offers more peace of mind, but it is still important to discuss standards and expectations in terms of quality with the outsource provider before signing a contract.
  • Security Considerations – Outsourcing means that others may have access to your network and data. It’s essential to work with a partner that takes information security seriously and understands and implements best practices.

What Does It Take for Successful Outsourcing?

Successfully outsourcing requires several critical components. One of those is accurate, ongoing communication. This begins with your initial consultation and then continues for the duration of your relationship with the outsource provider. Without clear, accurate, and ongoing communication, mistakes can occur, and processes may not be implemented correctly.

In addition to communication, it’s important to consider the clarity of expectations. Goals and objectives must be laid out from the beginning, with roles and responsibilities clearly defined for both sides (your business and the outsource provider). What do you expect the outsource company to provide? What are your own responsibilities? Laying the groundwork for success starts at the very beginning with a commitment to transparency.

What Do You Need to Outsource?

While payroll and accounting are two examples of frequently outsourced business processes, the truth is that IT needs are the most commonly outsourced for SMBs in the United States. From website development to cloud migration, SaaS to mobile application development, software projects, and even staff augmentation, the right partner can support your success in many ways.

Finding the Right Outsourcing Partner

Outsourcing can provide SMBs with critical benefits, particularly when it comes to creating the IT infrastructure required for success in today’s world. At Softrizon, we offer access to a broad range of outsourced solutions and services, from IT staff augmentation to outsourced software development. We are committed to helping our clients not just survive but to thrive within their verticals, and we can do the same for you. Contact us today to schedule a no-cost consultation on your needs and learn how we can help you grow.

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