What is Outsourcing in Business: Definition, Types, Advantages, and Disadvantages

What is Outsourcing?

What is outsourcing in business? Outsourcing is a business strategy wherein a firm employs a third party to carry out duties, offer services, or manage operations for the business. 

Now, what is an outsourcing company?

The external firm, often referred to as the service contractor or third-party provider, is the outsourcing company. They make arrangements for their own personnel or technological infrastructure to carry out the duties or offer the services either on-site at the premises of the employer business or remotely.

Business process outsourcing is another name for outsourcing corporate functions. Today, businesses can outsource various jobs or services, from Information technology services, programming and application development, technical assistance, call center operations, manufacturing procedures, and human resources duties, to financial duties. Companies can opt to outsource a whole department or simply specific functions.

Businesses can significantly decrease their labor costs by outsourcing to independent contractors or BPOs. Companies can be able to shell out lesser capital in outsourcing because their outsourced company has already established its own remuneration schemes and handles its own finances. This finally makes it possible for the firm that chooses to outsource to reduce its labor expenditures.

Moreover, because of outsourcing, businesses can also cut back on overhead costs to better concentrate on their core competencies because another organization can complete these minor jobs more effectively than the company itself. Outsourcing non-core operations can increase productivity and efficiency.

However, the practice of outsourcing has its own drawbacks. For example, if a third party gains access to a company's sensitive data and experiences a data breach, then there's a security threat. 

Read through this blog to learn about outsourcing in business, the different outsourcing services, and the pros and cons of outsourcing.

Types of Outsourcing

1. Business Process Outsourcing

The most prevalent form of outsourcing is Business Process Outsourcing. But what is the process of outsourcing? Here, you employ a third-party service provider to manage your business functions. Customer service and administrative responsibilities are among the repetitive tasks that BPOs are most frequently outsourced for. Additionally, most BPOs are also contracted to handle technical or nontechnical business operations.

By outsourcing to BPO companies, businesses can acquire some degree of freedom in carrying out their essential tasks. And, in effect, strengthen their global presence. 

They can increase their effectiveness and performance through outsourcing because they can now focus on more important tasks that are critical for scaling their business.  

2. IT Outsourcing

Over the years, outsourcing IT services has grown significantly. More businesses are now inclined to utilize IT services since technologies have dominated the world. And IT services, especially artificial intelligence, Robotic Process Automation, and cloud computing, have been anticipated to dominate soon.

With outsourcing IT services, you have access to a pool of developers equipped with the necessary resources to begin working on your project immediately. With this, you can avoid extra expense in upskilling your current team just to handle programming and web development projects. You can now delegate software development to a specialist to concentrate on other duties.

3. Professional Outsourcing

Professional outsourcing allows you to delegate complex duties to an expert or a professional for a certain task. Most of the time, companies hire professionals for a task requiring further education or a professional license. A major advantage to professional outsourcing is that you only have to pay for the services the professional will deliver. Tasks or jobs requiring professional help, such as accounting, legal consulting, purchasing, engineering, and other fields, may be professionally outsourced.

4. Project-Based Outsourcing

Switching between projects might be tedious for your team. The quality of the output may suffer due to the lack of concentration on the project. When faced with this dilemma, outsourcing the project is the best course of action if you lack personnel.

You can save money by using project-based outsourcing because it reduces the time needed to finish the job. More so, allowing a professional to manage your project will also shorten the time frame. And finally, once you hire a specialist for your project, you’ll be assured that only quality work will be produced by them.

5. Manufacturing Outsourcing

Manufacturing outsourcing can offer you several financial advantages if your company is involved in designing and producing physical products. Compared to creating the goods on your own, your third-party provider can do so for less money. It is quite expensive to pay factory workers and buy raw supplies by yourself. For this reason, the majority of businesses opt to outsource manufacturing.

6. Advantages of Outsourcing

Before, outsourcing was just considered an option by businesses for them to reduce costs. However, in today's business landscape, outsourcing has been recognized as a vital innovation tool. Firms have now been relying on automation to complete tasks. And because of this, BPOs are now on the rise. 

So, if you're thinking about outsourcing some company functions, read further as we outline the main reasons why you should start outsourcing as soon as you can.

7. Costs are Lesser than In-House Processing

The opportunity to substantially cut costs is one of the primary motivations for businesses to outsource. BPOs were used in the past for mundane tasks like data entry and report preparation. However, as time passed, the choice to subcontract grew even more dependable and well-liked. Companies that outsource their work constantly innovate and adapt new ways to deliver their services while saving their clients money, time, and effort. Any reliable outsourcing provider may offer core and non-core services for lesser cost while maintaining the same degree of effectiveness and quality.

8. Allows you to Concentrate on Scaling your Business

It's not easy to run a firm especially if you do all the repetitive work internally. You risk devoting excessive time and energy to management and operations, leaving little to no time or energy for strategy and growth-oriented pursuits. In this regard, outsourcing is the ideal course of action if you wish to prioritize growth.

9. Increases Productivity and Efficiency

The majority of businesses typically outsource non-core aspects of their everyday operations. Planning events or occasions, advertising, recruiting candidates, data entry, and administrative tasks are just a few examples of the non-core tasks that are frequently outsourced because they take too much time or are tiresome. Outsourcing those above tasks give internal team members more time to concentrate on crucial jobs. They can devote more time to forming connections, creating new products, and performing other important tasks.

10. Helps you Integrate Innovative Tools into your Processes

BPO firms are constantly searching for cutting-edge technologies. By outsourcing, you can keep up with the rapidly changing technological landscape without prohibitive prices, time-consuming installations, or intensive staff training.

11. Guaranteed Expertise in Almost Every Field

The assurance of expertise is another aspect that appeals to most businesses in outsourcing. There is no need to acquire internal talent or spend money on training because it is assumed that the experts handling your business's functions are qualified and experienced.

Disadvantages of Outsourcing

When you finally realize that you need more assistance in managing your business, you'll have to decide whether to internally hire staff members or employ the services of BPOs. There are advantages and drawbacks to outsourcing, depending on the kind of business you own. However, these reasons below might make you think twice about outsourcing particular tasks.

1. Confidentiality

For a business, the hired outsourcing company must adhere to the same standard and quality of output, especially if it is produced from trade secrets or if it pertains to client confidentiality. Sure there are non-disclosure agreements to safeguard those secrets. However, to assure security, one must still be aware of the personnel training and monitoring procedures of the outsourced organization or individual. In addition, if your business does not have tight online security, then electronically kept offsite information could also be compromised. In this regard, some outsourcing companies might not be accustomed to upholding such quality.

2. Quality Control

Regardless of who you outsource for a particular task, you are still in charge of the caliber of the work they produce. Thus, when a task is being completed externally, it is frequently more challenging to control the quality. In this case, it takes longer to review an outsourced task compared to when done by an employee in-house. And most importantly, it is your reputation that's on the line if the sub-par products reach the clients or customers.

3. Liability

Aside from its implications on your business operations and reputation, outsourcing can also leave legal effects. For instance, if your outsourced employee made mistakes or produced work that negatively affected your clients, you could be legally accountable for it. Maintaining important company functions in-house makes it easier for you to monitor these processes.

Conclusion

Now that you have gained additional information on what outsourcing is in business. While it makes financial sense to outsource some business functions, consider the potential effects it could have on growing your business. Before you decide whether you'll outsource or not, weigh the advantages and disadvantages of recruiting internal workers versus outsourcing to a third-party organization.

But if you have decided to outsource to a third-party such as a virtual assistant agency, check out SmartVAs. You do not have to be anxious about maintaining work quality as they have experienced virtual assistants who can handle your tasks. When it comes to expertise, SmartVAs can also offer professional virtual assistants from accounting, and web development, to digital marketing. How to get started? Book a discovery call with us!