June 18th, 2020

How Outsourcing Works and Its Advantages

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A complete guide to outsourcing, definition, type and how it works.

Outsourcing has helped a lot of businesses grow exponentially. It works phenomenally. It helped shape our modern economy into a more competitive place for all sorts and sizes of businesses. Yes, you read it right! Even start-ups can make it into the global competition with the help of outsourcing. In fact, 37% of small businesses currently outsource a business process. There are a lot of economic benefits you can get out of it.

When you are a start-up trying to prove yourself to the world, or a mid-size business thinking of expanding globally, staying on top of your competition can be a difficult job. You might find yourself overwhelmed with managing your growing people while juggling the projects and initiatives of improving the competencies of your core business functions. Not to mention the increasing expenses that go with it.

If you want to know the million-dollar question of why companies resort to outsourcing, keep on reading.

 

What is Outsourcing?

Outsourcing is a strategic decision a company takes to ensure business continuity and growth. It is a practice wherein companies acquire products and services from a third-party company, freelancer, or contractor that is otherwise being done in-house.

The services or products being outsourced are often those non-core or non-critical business functions that take a lot of time and effort. The tasks or projects that need highly skilled experts are often too expensive for companies to hire. Additionally, for special projects, those that are not done regularly, hiring a freelancer or contractual is seen as more practical rather than getting one in-house.

 

What business service can be outsourced?

Companies can outsource one individual, a part of a department, the whole department, and sometimes, an entire business functions to instantly expand the business skillset. Because of this, they can also acquire the services of big companies to take care of their logistics, IT department, customer service, technical support, marketing, procurement, and even HR functionalities. Check out this article to learn more about what business processes can be outsourced. 

Sub-contracting jobs have been recognized since 1989 and it has turned into an integral part of the business economy ever since. Its popularity has grown as more and more businesses, regardless of their size, consider the benefits. It changed the way companies did business today. It allows them to minimize their expenses and gain that much-needed capital to improve and attract investors. 

 

What are the Different Types of Outsourcing

With the evolution of outsourcing through the years, different types arose to cater to the ever-changing nature of businesses and their needs. For you to optimize the advantages in business and use it as leverage to stay competitive in your industry, first, you need to assess your business needs. Knowing which part of your business needs spinning off to external resources, the next step is to find out which type of outsourcing will work for you.

Location and relationship are the two primary perspectives. From these two, derived the different outsourcing types. Let us take a look at their definitions and how one differs from another.

Location-based Outsourcing

Location-based outsourcing is an aspect that is mainly defined by the distance from the client (a business that acquires a third-party service provider) to that of the outsourced resources.

  1. Onshore Outsourcing
    • Sometimes referred to as onshoring defined as a type of outsourcing where a company relocates jobs or acquires an outsourced service provider locally. It is in the same country as its headquarters. Onshore outsourcing is also known as domestic outsourcing. 
  2. Onsite Outsourcing
    • Onsite outsourcing or onsite is a service acquire from a local company to send experts to the office to work for an agreed fixed period.
  3. Offshore Outsourcing
    • Sometimes referred to as offshoring is contracting or acquiring a part of your business process in a distant country. It is a strategy to lower down labor costs and take advantage of a broader pool of experts. Check out this article to learn more about offshore outsourcing
  4. Nearshore Outsourcing
    • Also known as nearshoring is the relocation of work or jobs in neighboring countries that are geographically close to its headquarters. Businesses that want to lessen the delay in shipping and time allocation take this route. 
  5. Multisource Outsourcing
    • Multisource outsourcing or multisourcing involves various location-based models. Businesses use different location-based simultaneously. It combines the advantages that go with onsite, onshoring, nearshoring, and offshoring, as well as fighting its risks.

Relationship-based Outsourcing

Relationship-based outsourcing is a perspective that focuses on the management of ownership and agreement between the business and the BPO service provider.

  1. Staff Augmentation Model
    • The staff augmentation model is also known as extended teams or co-sourced teams. This model allows you to lease workers from your BPO partner to help with the project or job. You have complete authority and management over the work done for you.
  2. Managed Team Model
    • The managed team model is a project collaboration between the client and the BPO partner. You get to unload some of the management and decision-making regarding the project to your service provider. The tasks depend on the agreement between parties. Your outsourced team works independently from your in-house team. A point of contact- outsourced project manager will be the one to do all the communications from the provider’s end. Your BPO partner gets to share the risks of the project.
  3. Project-Based Model
    • The project-based model is the traditional approach to outsourcing. It is where you hand off the responsibility of a project to your BPO partner.

Other Types of Outsourcing

  1. Business Process Outsourcing
    • Business process outsourcing or BPO is the most popular type of outsourcing. BPO companies are growing in numbers as more businesses are gearing toward outsourcing. It is the contracting of non-core business functions to a third-party service provider. It deals mainly with repetitive tasks like customer service, technical support, and other administrative tasks.
  2. Professional Outsourcing
    • Professional Outsourcing is the contracting of services in a specific professional domain from highly skilled experts to work for you and your business. It includes accounting, legal, purchasing, information technology (IT), or administrative support, and other specialized services.
  3. Manufacturer Outsourcing
    • Manufacturer outsourcing is acquiring the manufacturing business processing from a third-party service provider. It includes the production of goods or parts that your business needs.
  4. Process-Specific Outsourcing
    • Process-specific outsourcing is the contracting of specific tasks, processes, or internal procedures, from a third-party company, service provider, or unit that specializes in that particular field. The turning over the control of civic services such as fire, police, armed forces, and the likes of not-for-profit corporations is also called Process Outsourcing.

 

Importance of Outsourcing

Outsourcing is an important business decision that creates a significant impact on an organization. It offers significant versatility without compromising quality. A business will have access to talents not available locally with an accelerated hiring rate. It can easily hire a team of experts or a specialized professional for a fixed time and cost, letting the business grow at its own pace.

The availability of the global workforce is within reach without the pressure of spending above and beyond their means. Tapping on experienced and highly skilled talents is done conveniently with outsourcing. Outsourcing is vital for businesses’ fast-paced processes or operations. It offers cost savings, a solution to capacity issues, convenience, flexibility, an increase in productivity, and faster-growing sales.

 

Advantages of Outsourcing

Outsourcing brings significant gains to businesses. Most businesses outsource to save money from labor and operational cost. Cost optimization is not the sole reason. Outsourcing is more than minimizing expenses. Find out why companies do outsourcing and how it can help your company.

  • Global Pool of experts

    Outsourcing expands your workforce and labor flexibility. It offers broad access to highly skilled professionals and specialists globally. It provides the expertise you need without incurring the costs of additional training or hiring new staff in-house.

  • Increase Economies of scale

    If you are looking for experts in a specialized domain, outsourcing can help you get them. It’ll save you time and effort, and your productivity and efficiency will increase too. It will mean higher profitability for your business.

  • Business Adaptability

    Outsourcing your business ensures swift response, flexibility, and adaptability to the dynamic environment of the business world. Transitions are a lot easier, as you can hand your tasks, projects, and other operational functionalities to specialized third-party companies.

  • Expands Your Business Offering

    It helps businesses explore new markets and expand their offerings with the availability of specialized skills and extensive resources. It helps you flourish at your own time at the amount you can afford without overspending or stretching your resources to lengths.

  • Increased Efficiency and Promote Growth

    It promotes efficiency and an increase in profitability and productivity as specialized skills experts handle the tasks for you. It promotes business growth and competitive advantage in the global market by supplementing a team of experts for your expanding business.

  • Improve Competitive Niche

    It helps businesses focus on their core functions by taking the load of their non-critical tasks. It gives businesses more time to concentrate on improving their core competencies’ strategies and stay on top of the competition.

  • Bridge Skill Gap and Delivers Competitive Advantage

    When you are a start-up or a small business testing the industry’s competition, managing people is challenging. Outsourcing will help you gain access to management and close the skill gap by providing the expertise that otherwise not available in-house. Your BPO service provider will take care of the management and your workforce. Imagine the time, effort, and overhead cost you will save in the long run.

  • Control of Overall Cost

    Companies usually choose to outsource because of its cost-effectiveness. BPO service providers have high-skilled professionals in their respective specialized domains. They can do tasks efficiently with twice the productivity. The BPO service provider will give you the ability to hire experienced freelancers and contractors on your terms without having to go through the expenses and obligations of hiring an in-house employee. Talking about saving time, costs, and efforts!

  • Risk Management

    Managing and assessing risks is crucial for every business. Depending on the agreement made, the business process service provider will share the liability and risk of the business process, tasks, or project. It will give companies more time to improve and focus on critical business areas.

  • 24/7 Production

    How convenient it is to sleep knowing your business runs smoothly in the background? Outsourcing gives exactly that advantage. With a global team that is situated in different time zones,  your business production can operate round the clock, and customer service 24/7 support, IT, goods production, and the likes will be covered. As a result, it gives you and your business higher value with a lower overall cost.

How much do companies save by outsourcing?

The digitized economy created very steep competition for all businesses. A sustainable business model and business adaptability are crucial to survival. It helps to alleviate the challenges the modern market brings. Many companies find reducing operational costs as their primary motivator to outsource. Let us find out how much do companies save by outsourcing.

  • In 2019, the global outsourcing market amounted to 92.5 billion U.S. dollars, according to Statista.
  • According to research and on average, a company can save about 60% of operational costs with an outsourced individual.
  • According to Deloitte 2019 Global Shared Services Survey, the majority of companies achieve up to 15% annual productivity savings from their SSCs (shared services centers).
  • 80% of the respondents achieved up to 20% savings through their SSCs automation programs.

Learn more about how outsourcing can help your business reduced overall costs. Check out the article: cost-benefit analysis of outsourcing.

Get Onboard!

To get ahead of your competition, an organization needs to be decisive and proactive. The global market competition is getting tougher by the minute. Your business needs to shape up and strengthen its competitive edge. Do not risk getting left behind, let Unity Communications help you get started with your outsourcing journey. Call us!