Outsourcing is the practice of hiring another individual or company to do certain tasks, provide services or handle operations, which are usually done by the company’s staff and employees. In outsourcing, the third-party provider, or the service provider, is called the outside company. The outside company assigns its workers or systems to do the tasks. These tasks can be done at the hiring company’s facilities or at some remote location that both parties have agreed upon.
These days, companies can outsource several tasks or services, such as IT services, application development, technical support, programming, web design, etc. Companies also often outsource call center and customer services, as well as bookkeeping, accounting, payroll, and human resources, to name just a few. Sometimes, outsourcing is referred to as business process outsourcing or contracting out.
Companies outsource for any number of reasons. It can be to improve efficiency, acquire speed, or to cut down costs. However, most of the time, companies outsource because they lack the expertise for a certain task or service, or they don’t want to invest in training personnel to do the job. It is also generally cheaper, faster, and not to mention, better, since the third-party service provider is able to focus on the particular task.
When outsourcing is handled by third-party providers who are overseas, that is known as offshoring. Nearshoring, a term less common, is when a company engages a third-party provider who is near bordering regions.
Outsourcing has become, for various industries, “big business,” which has brought up a number of ethical issues. Some critics view outsourcing as a practice that could impact workers in a negative way. Companies that use outsourcing frequently are criticized for making their actual employees feel insecure about their jobs, with many employees concerned that they might lose their jobs to workers who are, often times, much cheaper.
Many US-based companies have been on the receiving end of negative publicity just because they made the decision to outsource. Critics see this practice as a move to cut wages and benefits of the company's actual employees and, especially when outsourcing to an off-shore provider, as a way to dodge safety, environmental, or financial regulations.
Some companies that choose not to outsource often decide to “insource” instead. This practice means that the company will have in-house workers that will handle the specific tasks that would otherwise by handled by outsource contractors. Insourcing may mean that the company would need to hire new employees, generally on a temporary or contractual basis but, if the task is a long-term one, perhaps even as a permanent hire. With insourcing, the company may need to invest in hardware or software, or in new equipment in order to execute the task.
Outsourcing is a familiar concept to many businesses, regardless of size. For small companies, outsourcing for payroll processing, product distribution, accounting, and other important functions are done simply because there are not capable of doing the tasks themselves. Big companies, on the other hand, usually use outsourced services as a means to cut costs.
However, not many entrepreneurs understand how outsourcing can really benefit their businesses. Outsourcing can be a real money-saver, but it is not the only reason to outsource. Outsourcing had become very popular in the early 1990s, and the popularity continues to this day. However, some firms have made the unfortunate discovery that too much outsourcing can be a detriment to a business, even more so than not outsourcing at all. Nevertheless, handled appropriately, outsourcing can provide numerous benefits to a business.
Increased efficiency. If, as a company, each and every job or task is handled in-house, you could very well end up having higher staffing, marketing, research, development and distribution expenses. These expenses will, of course, be passed on to your customers. Your company will gain a competitive advantage by using a third-party company’s economies of scale and cost structure.
Keep capital costs under control. While this may not be the only reason to outsource, cost-cutting is one of the major factors. When you outsource, fixed costs are converted into capital costs, which means you can use the money elsewhere. Outsourcing also keeps you from spending too much in the early stages of operation and allows you to use the capital for revenue-producing activities, which will eventually attract investors.
Lower labor costs. For companies, it is very expensive, as well as time-consuming, to hire and train staff, particularly for only a short-term project or task. You could decide to hire temporary employees, but don't be surprised if, because of their lack of experience and training, they do not meet the company's expectations. Outsourcing a task allows you to focus on more important things.
Faster project turnaround. A specialized outsourcing makes starting a project quicker and easier compared to handling the same project in-house. Hiring staff might take weeks or even months, and then you will need to train the employees you hired while, at the same time, provide the needed support for each task.
Focus entirely on your business. We all know that businesses do not have access to unlimited resources. Moreover, a manager's time may also be limited. With outsourcing, you are able to shift your complete attention to the things that will serve your customers and improve the business from its core, without having to worry about other less important things.
Minimize risk. Investing in business inherently comes with a certain level of risk. Many entrepreneurs experience sudden changes in the market, government regulations, competition, technologies, and financial conditions, to the detriment of their bottom line. Third-party service providers are less likely to experience these anomalies because they are more adept in assuming and managing these risks, given that you are hiring the “expert” in the field.
Being able to run a small business is an empowering experience. And while it is not a small task, having an idea and converting it into a successful business will certainly make you feel confident and content. But, one of the most common mistakes entrepreneurs tend to make is to become over-confident of his or her own abilities. In many instances, they believe that they, and they alone, should handle all business-related matters. It may be great to be in control, but that may not necessarily be the best way forward. In order to be more effective and efficient, you have to learn to delegate tasks to the individuals or companies that can do them expertly.
While outsourcing was once associated with job displacement, it has become a more acceptable practice. Moreover, it has become empowering for companies and individuals alike. With outsourcing, businesses are capable of using the highest quality service available.
Small businesses are still not fully utilizing all of the benefits of outsourcing. Some believe that it is too costly, while some fail to see the advantages. Contractors and freelancers can make your life easier and, if you have some tasks that you simply cannot do, it would be prudent to hire help.
Here are the five most common services that small businesses should outsource:
1. Bookkeeping, Accounting and Payroll
For any business, bookkeeping, accounting and payroll are among the most tedious, time-consuming and complicated tasks for someone without a strong finance-related background. Bookkeeping, and to an even higher degree, accounting, involves keeping track of the payable accounts, filing taxes, filling out timesheets, paying invoices, as well as many other responsibilities. Doing these tasks yourself can not only take away your time and focus on other important business aspects but, done improperly, can be more costly than necessary.
You can break free from this tedious job by outsourcing bookkeeping, accounting and payroll services. You will no doubt find that there are quite a few specialty firms that you can outsource which will, in the long run, be more efficient and less costly. Especially during tax season, you will be surprised how much better it is to have an expert at your beck and call. If you are not adept in dealing with your business books, it is best to have someone to do it for you. It will be easier and you will also have a peace of mind knowing that your finances are handled by experienced hands.
Outsourcing your payroll duties is also highly recommended, especially given the various tax laws, regulations and other requirements—at all levels of government—that you will have to have current knowledge of. Payroll is not as simple as adding up your workers’ hours and paying out your employees. It is much more complicated and can even cost you thousands of dollars in penalties with but a single mistake.
2. Content Curation and Social Media Marketing
Any small business owner should know that, while marketing is crucial, it can be very tricky. Developing the right strategy and ways to ensure that you get the best content possible to your target audience can be too much to handle, especially if you are also managing the business. A poor marketing strategy could easily result in higher costs with very little in the way of positive, quantifiable results.
Fortunately, you can also hire someone to handle marketing for you. Several marketing agencies offer specialized marketing, like Facebook advertising or Google ad placement, which are very effective. Getting help from a third-party service provider can be a great help in disseminating your message, thus increasing market potential. Plus, in the long run, it can be a real money saver.
3. Customer Service
The marketplace is very competitive, and having a solid customer service team is critical, particularly for startups and small businesses. A good customer experience is very crucial at this point and you have to make sure your customers find it pleasant and productive if they do business with you. However, maintaining good customer service can be quite expensive, especially as customers typical expect to see 24/7 service. Needing round-the-clock operations for your company's customer service is not very cost-effective as you will also need to establish your own call center in order to operate, and this is an almost impossible undertaking for many small businesses.
Many large companies hire third-party contractors to provide their customer service, but this outsourced service is not exclusive to them; even small companies can avail themselves of this service and benefit from it. There are lots of professional firms that provide customer service and you can easily find one that will meet your budget and requirements.
4. Administrative Assistants and Receptionists
Having a good administrative assistant to run your office tasks is crucial in keeping your business running smoothly. However, for small businesses, it also means an additional expense. Thankfully, there are ways to cut costs without cutting down on the quality of service.
For mundane office tasks, you can outsource a competitive virtual assistant through a number of freelancing sites. You can have the virtual assistant manage your schedule, handle administrative tasks such as checking and responding to email, completing forms, creating documents, or other repetitive tasks.
Because your virtual assistant is hired on a contract basis, you are not obligated to offer them typical employee benefits, thus, saving you money. You can even hire contractors at a per hour rate, so you only pay for hours actually worked. Of course, if you want to keep your more-than-capable virtual assistant happy and engaged, you could always throw in a few sweeteners.
5. Consultancy or Expert Advice
While you may be the owner of your business, it doesn’t mean that you know everything about it. Once your business starts to grow, you may start looking for expert advice that will take your small enterprise to the next level. This is advisable, but not feasible most of the time, since this can be quite cost prohibitive. Full-time CEOs and CFOs generally earn high salaries; small businesses simply cannot afford them. Nevertheless, you can hire one as your company’s consultant. They bring with them much-needed knowledge of the successful running of a business and can help raise the profitability of your own company.
You could consider hiring a consultant for just a few months to gauge whether his efforts will have a positive impact on your business. All in all, hiring a consultant is a great way of getting the expertise you need without using up all your resources.
Outsourcing is a great way to get all the services you need in an efficient and low cost way. You don’t need to be a big company in order to use some help from an outside source, as even small companies can benefit from this fast-growing practice. If you are strategic with your outsourcing, it can even support your core functions. Soon, you will realize that outsourcing is actually a major factor in making your business a successful one.