Why do Companies Outsource their Work?

What is outsourcing?

In simple terms, outsourcing is the practice in which businesses engage an outside third party to take care of one or multiple functions of the business. Outsourcing can be done to an individual consultant or to companies or agencies who specialize in that particular domain. However, generally speaking, it’s the second scenario which best represents the practice.

What are the types of outsourcing?

While there are multiple domains like manufacturing, IT, designing, multimedia etc which are outsourced (VE itself works in more than 150), these will still fall under, two broad categories. Primarily, the two types of outsourcing are-

  1. Domestic outsourcing- Where in you outsource to an entity within the geographical borders of your country
  2. Offshore outsourcing- Where in you outsource to a party in a different country or overseas territory.

Why do companies outsource their work?

There are several good reasons. I have the top 5 reasons why companies outsource below.

  1. Reducing operational and management costs
  2. Reducing, by sharing, employee and operational liabilities
  3. Access to better or bigger talent pool
  4. Increasing focus on core business functions
  5. Access to new and expensive technology

While some might point out to other points too, and sure there are several other reasons, these five are the actual driving forces behind any company’s decision to outsource.

Reducing operational and management costs

While offshore outsourcing brings down actual employee remuneration costs, domestic outsourcing might not always do that. However, any kind of outsourcing does bring down actual operational and management costs significantly. This is because, salary or remuneration is just one facet of the costs involved while hiring in-house. The cost of the work-space, potential supervisory hiring, medical insurance and HR are also part of costs incurred on in-house employees, though it might not always be apparent. Outsourcing helps keep in-house teams smaller, thus ensuring less overheads in terms of infrastructure and employee management.

Reducing, by sharing, employee and operational liabilities

Any in-house hiring entails certain liabilities, some potential, while others necessary. Keeping abreast with latest employment regulations and putting in place necessary safeguards like liability insurance to protect against wrongful termination lawsuits, injury claims etc are just some of these. The bigger the team, the more the liability. Safeguards like liability insurance also do not come cheap; and while paying the premium for insurance is much more preferable to damaging lawsuits, the premiums still steep enough to act as deterrents to small business owners. Outsourcing ensures that you do not have to face these liabilities, since technically in most cases you are paying for a service and not hiring an employee/s. In certain cases, the liability might also be shared between you and the third party to whom you have outsourced.

The scalability of teams also improve dramatically in an outsourced model, thanks to reduced liabilities and increased resource flexibility.

Access to better or bigger talent pool

It is not always possible to source the best talent for a company due to long-term financial, geographic and demographic challenges. Hence companies look to outsource work to a 3rd party which has the suitable talent at its disposal. This is especially true to for jobs which are extremely in nature and require a high degree of skill and expertise. Jobs like website design, PHP, CAD drafting etc. Over the last ten years, the nature of offshore outsourcing has changed significantly, with companies now looking at “value-addition” as an important parameter while outsourcing and choosing vendors- almost as important as cost reduction.

Increasing focus on core business functions

Most businesses want to concentrate on its core revenue making functions. Functions like HR, finance and payrolls, data management etc, while being important, are not exactly revenue generators. Few amongst these functions require an entrepreneurial spirit to sustain. The core team of any business will obviously want to focus on and develop their idea/product so that its revenue potential can be maximized. In small businesses, entrepreneurs often run the risk of spreading themselves thin across different arms of the business. Outsourcing can help dispense with non-core and non-revenue generating functions in a business and bring focus and stability back into the team. There is also peace of mind, since by outsourcing you would have given these responsibilities to hard-boiled professionals who would do a great job, being experts in that domain.

Recent trends however indicate that companies are increasingly comfortable in outsourcing even core components of their business too. VE itself has several such clients and their numbers keep growing. That however is subject matter for a whole new piece altogether.

Access to expensive or niche technology

Many a time, it’s not possible or feasible for a business to invest in niche and expensive technology, even if the requirement part of the company’s core functions. This is especially true for short-term projects, which are often the mainstay for small business. It simply does not make business sense for say a custom automobiles company in the Midwest to hire a graphic designer full-time for designing its website, even if its sales depend on the site. In such a case it makes sense to outsource the requirement, either locally or offshore. This is also the reason why even construction giants outsource work like tunneling to specialist vendors. Buying a tunnel boring machine (TBM) for just that one task will seem foolish, wont it?

I hope I was able to explain all the points to you appropriately. Outsourcing is a useful tool, when used correctly, and with the right intentions. By all indications, in an increasingly fluid world, outsourcing terms like virtual assistant and remote employees will become everyday lingo.