Why Companies Choose to Outsource: 7 Obvious Reasons

Considering bringing in extra help but unsure if outsourcing is the answer? Many companies choose to outsource for a reason.

That’s why, we’re going to explore the benefits and value outsourcing can offer companies of all sizes in this blog post. Hopefully, once you’ve read this article, you will have a clear idea of whether outsourcing is the right fit for your staffing needs.

What is Outsourcing?

In the world of business, outsourcing is a practice that lets you hire an outside company to handle specific tasks or entire departments. This can include anything from building software to making sure your systems can recover from unexpected problems.

Outsourcing allows businesses to offload a wide range of tasks. From tech support and app development to customer service and manufacturing, many companies choose to outsource these functions. Even HR tasks, bookkeeping, and payroll can be handled by outside providers.

Read more: Offshore Software Development: Pros and Cons [Expert Guide]

What is an Example of Outsourcing?

To give you an example of how outsourcing works, let’s imagine a startup company with a fantastic business idea for a fitness app. They have a clear vision for the app’s features and functionality but lack the in-house development team to build it.

To overcome this issue, the aforementioned startup decides to outsource the mobile app development project. Here’s how it works in a few steps:

• Selection: The startup researches and identifies qualified outsourcing companies specializing in mobile app development. They consider factors like experience, portfolio, expertise in relevant technologies, and cost.
• Contract Negotiation: The startup negotiates a contract with the chosen outsourcing company. The contract outlines the project scope, deliverables, timelines, costs, communication protocols, and quality assurance processes.
• Project Kickoff: The startup and the outsourcing company hold a kickoff meeting to discuss the project requirements in detail. This includes user stories, functionalities, design mockups, and technical specifications.
• Development and Communication: The outsourcing company’s development team builds the app based on the agreed-upon specifications.
  Regular communication channels are established to ensure progress updates, address any concerns, and allow for feedback throughout the development process.
• Testing and Deployment: Once the app is developed, the outsourcing company performs thorough testing to ensure functionality and identify any bugs.
  The startup may also be involved in the testing phase. Upon successful testing, the app is deployed to app stores (like Apple App Store or Google Play Store) for user download.
• Maintenance and Support: The outsourcing company might offer ongoing maintenance and support services for the app, which could include fixing bugs, implementing new features, or addressing security updates.

Why Do Companies Choose to Outsource?

There are quite a few reasons why companies across industries decide to outsource. These reasons are explained below.

1. Accessing Specialized Skills

While your in-house team excels at their core functions, specific tasks may require expertise beyond their capabilities.

Take website development for example. A skilled web developer can create or improve your site faster and to a higher standard than someone without that specific knowledge.

By outsourcing such tasks, companies gain access to expert knowledge, potentially improving output quality and reducing costs.

2. Cost Savings and Growth Potential

Saving money is a critical strategy for businesses of all sizes, especially those focused on growth. Outsourcing frees up capital that can be reinvested in other valuable areas of the business.

Saving and avoiding high expenditures are particularly important during the initial stages of development. Outsourcing, whether through nearshoring or offshoring, can help reduce costs while maintaining project quality.

Furthermore, a focus on cost-efficiency through outsourcing can be viewed favorably by potential investors seeking companies that reinvest in income-generating areas.

3. Increased Efficiency and Reduced Burnout

Outsourcing repetitive tasks such as data entry, bookkeeping, or email management frees up valuable employee time and energy. This reduces burnout and allows your team to focus on core responsibilities that require creativity and strategic thinking.

Less multitasking also improves overall productivity and leads to higher-quality work, ultimately enhancing customer satisfaction.

4. Scalability and Flexibility

Business process outsourcing offers flexible contracts and pricing that adapt to your business needs. Growing companies can easily scale their outsourced resources up or down to accommodate changing workloads, market trends, or new business functions.

This flexibility allows you to access the right skills and expertise when you need them,  whether it’s administrative work, sales support, or project-specific needs.

5. Enhanced Competitiveness

In today’s dynamic work environment, remote work and the gig economy are increasingly prevalent. Companies that embrace outsourcing as a strategic tool can gain a competitive edge.

Outsourcing allows you to adapt and innovate quickly by readily accessing the necessary skills and resources at a cost-effective rate.

By freeing up your team’s time for core tasks, you can focus on activities that drive your business forward and stay ahead of the competition.

6. Risk Mitigation and Business Continuity

The business landscape is constantly evolving, and companies need to adapt to ensure survival. Outsourcing helps mitigate potential disruptions by guaranteeing core functions remain operational even during periods of change.

This frees up internal resources and management to focus on remaining flexible and adapting business strategies as needed. This sense of security is a major draw for companies considering outsourcing.

7. Ensuring Compliance

Even large companies can struggle with the financial burden of complying with ever-evolving regulations.

Many industries have stringent privacy and security requirements that necessitate dedicated staff and resources. Non-compliance can lead to severe financial penalties.

For smaller businesses lacking the resources to build a highly trained compliance team, outsourcing to a firm with relevant certifications (like PCI level 4 or HIPAA compliance) can offer significant benefits.

This not only safeguards your business but also protects your team from potential legal issues and reputational damage.

Read more: Staff Augmentation vs. Managed Services: How Are They Different?

What are the Major Types of Outsourcing?

There are various types of outsourcing, with each one offering specific benefits depending on your needs.

1. Professional Outsourcing

This involves contracting out specific professional services that aren’t necessarily part of your core business function. Common examples include accounting, legal services, IT support, or administrative tasks.

Businesses choose this route to save on costs by not having to hire full-time employees for these specialized roles, while still gaining access to qualified professionals.

2. IT Outsourcing

This type of outsourcing focuses specifically on delegating all or part of a company’s IT needs to an external provider. IT outsourcing can include a wide range of services, from software development and maintenance to network management and data security.

Businesses mainly find it more cost-effective to outsource IT needs, especially if they don’t require a full-time in-house IT department.

3. Project Outsourcing

Project outsourcing comes into play when companies face challenges managing internal projects. This could be due to a lack of skilled personnel or simply the cost-effectiveness of seeking external expertise.

In such circumstances, outsourcing to a project management company becomes a strategic solution. This can be more cost-effective than hiring and training additional staff, especially if the skillset needed is very specific.

4. Multisourcing

Multisourcing involves spreading outsourcing needs across several providers, each specializing in a specific function.

For instance, an e-commerce company might outsource web development to one company, customer service to another, and logistics to a third. This approach offers several benefits:

• Risk Diversification: By relying on multiple providers, the company mitigates the risk associated with a single vendor underperformance.
• Competitive Pricing: Multisourcing fosters competition among providers, potentially leading to more favorable pricing for the company.
• Access to Specialized Skills: The company can tap into the unique expertise of each provider.

5. Operational Outsourcing

Operational outsourcing is another outsourcing model that focuses on delegating routine operational tasks to external partners. This can include services like facility management, supply chain logistics, or housekeeping (e.g., a hotel chain outsourcing cleaning services).

This approach allows companies to:

• Focus on Core Activities: By offloading day-to-day operations, the company can dedicate resources to its core business functions.
• Cost Savings: Outsourcing is likely to lead to cost reductions through economies of scale or specialized expertise of the provider.

Why Outsourcing is Important to Businesses of All Sizes?

Outsourcing offers advantages for companies of all sizes. Let’s delve into the main reasons why both large and small businesses use outsourcing strategies.

Large Organizations

• Focus on Core Functions: By delegating non-core tasks like project management and administrative duties, large enterprises can free up internal resources to focus on their core business activities.
  This is particularly beneficial given the wider range of non-core functions they typically manage due to their scale and diverse operations.
• Access to Specialized Expertise: Staying competitive in today’s global market often requires access to specialized skills and knowledge.
  Outsourcing allows large organizations to tap into this expertise without the need for in-house recruitment and training.

Small Organizations

• Cost Reduction: For small businesses with limited budgets, outsourcing can be a game-changer.
  By partnering with third-party service providers, they can significantly reduce expenses associated with hiring full-time employees, such as salaries, benefits, and training.
• Risk Mitigation: Small businesses may lack the experience or in-depth knowledge to manage certain aspects of their operations.
  Outsourcing allows them to share risks and make use of the expertise of established partners, who can effectively manage and mitigate potential issues.

Read More: IT Staffing: All You Need to Know [Benefits]

The Other Side of the Coin: Risks and Challenges of Outsourcing

It’s important to acknowledge the potential drawbacks of outsourcing before making a decision.

Loss of Control

When you outsource tasks, a certain degree of control over those functions is transferred to the service provider. This includes both the execution and monitoring of the outsourced tasks.

While the provider is ultimately responsible for decisions they make on your behalf, there’s a shared element of risk. Any issues can lead to legal repercussions for both parties.

Therefore, thorough vetting and establishing trust with the service provider is crucial. A well-defined contract outlining clear terms and conditions, including actions or penalties for discrepancies, is essential to safeguarding your interests.

Management Challenges

One of the driving forces behind outsourcing is acquiring the necessary workforce for growth. However, managing remote workers can be difficult for companies, especially those without prior experience.

Here are some tips to avoid common pitfalls in this regard:

• Set Clear Expectations: Clearly define goals and desired outcomes for the outsourced work.
• Maintain Communication: Schedule regular check-ins and performance evaluations to stay on track.
• Build Relationships: Foster a positive working relationship with your outsourcing partner.
• Provide Context: Walk the remote team through your company’s user journey to give them a broader understanding of their role.
• Share Company Policies: Provide access to relevant company guidelines and policies.

Communication Challenges

Effective communication is vital for any successful partnership. Outsourcing can introduce challenges due to cultural and language barriers, especially when working with remote teams in different regions.

Misunderstandings and unclear expectations can arise more easily with remote communication. To bridge this gap, companies can leverage technology like instant messaging, video conferencing, and collaboration tools.

Moreover, outsourcing to regions with a shared language can help minimize language barriers.

Potential For Quality Issues

While outsourcing companies aim to be profitable, their quality standards may not always align perfectly with your expectations. Despite the potential benefits, outsourcing can introduce risks to the overall quality of deliverables.

To deal with this risk, clearly define your expectations and desired outcomes for the outsourced work. Implement a system for regular reviews of outputs, providing constructive feedback along the way. Frequent communication and early error detection are also essential when it comes to maintaining quality control.

Intellectual Property Concerns

A major risk in outsourcing is the potential mismanagement of your company’s data or intellectual property.

To mitigate this risk, thoroughly research the reputation and track record of potential outsourcing companies, particularly how they handle data security and client confidentiality.

A Non-Disclosure Agreement (NDA) should be a mandatory part of any outsourcing contract. Stay informed about the provider’s practices and capabilities for safeguarding your data and IP as well as their ability to deliver the agreed-upon quality of work.

Best Practices For Outsourcing

Now that you’ve explored the pros and cons of outsourcing, let’s take a look at a few practical tips that will help you maximize its benefits for your business.

• Aligned Goals and Expectations: Setting clear goals and expectations from the outset is crucial. This ensures you and your outsourcing partner are on the same page from day one. It also lays the foundation for a smooth and productive working relationship.
• Detailed Specifications: Finding the right outsourcing company isn’t enough. For them to assemble the perfect remote team for your needs, you need to provide comprehensive specifications and details about the project or tasks being outsourced.
• Effective Remote Communication: Open communication is paramount when working with a remote team Clear instructions and information flow are essential to avoid misunderstandings.
  Building a positive and open working relationship with your outsourcing partner fosters collaboration and creates opportunities for continuous improvement.
• Equip Your Team For Success: Onboarding your remote team effectively is vital.   Walk them through your workflow and processes to prevent disruptions and errors. Providing the right tools and materials will further improve productivity and efficiency for everyone involved.
• Regular Assessments: Regular evaluations allow you to provide constructive feedback to your remote team and assess whether outsourcing remains the best approach for your evolving needs.

Final Words: Is Outsourcing Always a Good Idea?

As we highlighted in this blog post, outsourcing offers numerous benefits for businesses of all sizes. Access to specialized expertise, cost savings, and improved scalability are just a few of the potential upsides.

However, do not forget the fact that there are inherent risks involved, such as potential loss of control, communication challenges, and quality concerns.

The decision to outsource should be based on a careful evaluation of your specific needs and goals. By weighing the pros and cons, and following the best practices that we outlined above, you can take advantage of outsourcing strategically to accomplish your business goals.