If you are just starting your business, it may be confusing trying to understand the concept of outsourcing and its benefits and limitations. In this Business Kitz blog, we will explore what outsourcing is and why businesses do it.
What is outsourcing a business?
The term outsourcing refers to when an organisation chooses to hire a third-party provider to carry out tasks including, but not limited to, business operations, technical support, finance and application development. Typically, this is seen as a more cost effective method or takes place when an organisation does not have the expertise to carry out said tasks themselves. Outsourcing can be interchangeably used with ‘contracting out’ or ‘business process outsourcing’.
The ideology behind outsourcing is that third-party providers have a deeper understanding and resources for the outsourced task and would therefore exhibit higher levels of productivity. In terms of cost, businesses do not have to deal with hiring employees and paying for benefits such as transport cost, health insurance, housing etc. Furthermore, the cost of purchasing, storing and maintaining equipment can also bear high costs. Outsourcing allows organisations to be flexible based on available expenditure in hiring smaller or larger organisations who specialise in a particular area.
A survey conducted by Deloitte in 2016 suggested over 35% of organisations are shifting to outsourcing to increase organisational innovation.
What are the different types of outsourcing?
Nearshoring: This refers to when an organisation chooses to outsource to a provider in a geographically nearby region or country.
Onshoring: This is when a business relocated its operations or services to a low-cost area within the same location such as more remote or rural locations.
Offshoring: This type of outsourcing refers to when an organisation shifts to third-party providers located overseas.
Advantages vs disadvantages of outsourcing
- Organisations have the ability to manage resources more tightly and focus their workforce to operations of their expertise and that have a direct impact on the organisation.
- It might be easier to execute a myriad of projects at the same time as tasks are diversified. This could have a positive impact on how an organisation is viewed by its consumers.
- It is easier to change third-party providers if things are no longer working out or need modification. Internal matters take time as departments are built on top of each other and therefore, addressing one issue might require inspecting all departments to solve an issue. For the same reasons, it may be difficult to dissect where the issue is taking place due to the interconnected nature.
- Companies may also benefit from economies of scale if they have continued and longstanding relationships with third-party providers.
- In the recent years, outsourcing has provided organisations with greeted flexibility and the ability to adapt based on market conditions.
- There is noted risk involved with data breach and autonomy over confidential information.
- Organisations lose control over management and communication hierarchies which could result in miscommunication, potentially damaging the business as a whole.
- Third-party providers are not obligated to the same mandates and regulations as the organisation. Therefore, failing to adhere to agreed upon terms and conditions could result in the financial loss and slow down business operations. This is especially true when a business chooses to outsource to multiple providers.
- Organisations need to have a dedicated taskforce to manage contractual obligations which could be time consuming and expensive. This mean that it could take away from the main reasons behind choosing to outsource in the first place.
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