Advantages And Disadvantages Of Outsourcing
Outsourcing is a common practice that allows businesses to tap into the benefit of getting certain skills at reduced economical costs. It involves hiring independent contractors for specific tasks and projects.
Thanks to technology, it is easier to outsource different jobs to independent contractors (freelance workers), making this available to SMEs as well. However, there are benefits as well as risks involved, and you need an efficient outsourcing strategy that suits your business.
Outsourcing advantages and disadvantages: benefits and risks
Being aware of the benefits and risks of outsourcing is essential to take any business decision. For example, some jobs where people share classified information can not be outsourced. On the contrary, it is common to hire a third-party contractor to build a promotional campaign.
Before taking any action, it is better to balance outsourcing pros and cons regarding expenses, workforce management, time saving, and security. A good strategy will come from an informed decision.
Benefits of outsourcing
High specialized skill: Outsourcing allows companies to be able to access highly specialized skills that they lack in-house. This access breaks geographical limitations with near sourcing and outsourcing.
Reduced overhead costs in liability: For many companies, the first reason they look towards outsourcing jobs is that it reduces the overhead cost for employing an in-house professional. This is true for both large and small businesses.
Reducing risks and taxes: By offshoring, companies can reduce the number of risks, liabilities, and taxes they would bear if they were to hire in-house staff. With the nature of an outsourcing relationship, companies will not have to pay for things like pension, health insurance, etc. that they owe their staff.
Distribution: Supply chain can be a very tasking part of product-based businesses that affect costs and efficiency. As witnessed in the technique used by Nike and Apple, outsourcing can help solve different distribution problems and be of huge economic relief for businesses.
Save time: Next to the reduction of cost, saving time is the next most common advantage of outsourcing in business. Independent contractors can easily achieve results in a shorter time due to a performance-based reward system that instills Laser-sharp focus while the company can dedicate that time to other affairs. Overall, more is done in a shorter time.
Targeted efforts: Targeted efforts on any outsourced job results in higher effectiveness. Take Slack as an example — had they tried to do it all in-house, there might have been too much to do and manage for a young startup.
Simplify business relationship: Relationship between brands and independent contractors are usually very simple — it is purely professional. For this reason, emotional attachment that grows among employees, which slows down the work pace, is avoided.
Ease in managing projects: When using certain freelance platforms like Upwork, it is easier to manage jobs that are outsourced to freelancers. You enjoy the benefits of reminders and a clear set-out timeline and payment system for every job.
Outsourcing disadvantages and risks
Although outsourcing has a lot of benefits, it is pertinent that you go through the documents and consider the possible disadvantages as well.
Ethics: With offshore outsourcing, you might be met with different cultural values that affect workplace collaborations. Sometimes these values affect how much you can demand from your independent contractors. Therefore, you should make sure you understand the different cultural values of remote workers.
Control: Outsourcing means that your company will lose some control over some aspects of the jobs you outsource. Regardless of how nit-picky you are, companies that outsource successfully understand this and have learned to work with it. They usually balance it out with quality controls or with reward systems.
Security: Outsourcing comes with a risk of losing privacy sensitive information leaking out. This means you will spend extra care on data protection and be careful to check the background of the independent contractors. Unfortunately, since a lot of outsourced jobs are done online, the potential of a hack should be considered.
Disrupt inbound employee balance: The moment some employees figure out that you will be outsourcing some tasks, they automatically get thrown into a panic state. We have heard of several instances where employees are skeptical about the security of their jobs, rightfully so because outsourcing is addictive, and many companies eventually let some staff go. Therefore, skepticism can make workers complacent.
Hard to go back: When you start to outsource certain jobs, it is often arduous to eventually convert and make them in-house. This is because the benefits of outsourcing can often become addictive and present the potential for high-profit margins. There are exceptions — in cases where it is factored. Then you have to face the challenge of maintaining the same skill level and efficiency.
Quality control: Outsourcing jobs means that you need to spend more resources on quality control to maintain a level of standard. Nike, for instance, makes use of strict quality control procedures to ensure that all manufacturing points produce according to standard. If care is not taken, the cost of quality control can creep up, or it can be hard to maintain set standards.
Problems from the public: Different companies have faced a backlash from the press and community at large when they decide to outsource. Because the decision usually comes with a perception that they are solely profit-oriented and do not care about the jobs or welfare of the community.
8 big companies that benefit from outsourcing their services
The rise of outsourcing in business has created numerous remote jobs especially foreign outsourcing. In this case, these are jobs that can be done online and from home. We have compiled a list of companies that outsource.
Google outsourcing (google contractor jobs): It is safe to say that we can attribute a huge part of Google’s global success to outsourcing tech and customer service jobs. Through a combination of local and foreign outsourcing, they have been able to reduce costs and access highly specialized skills.
An early example is Google AdWords that allowed them to employ 1000 customer care reps around the world. Now we have Google contractor jobs employing remote workers as developers, engineers, operations managers, etc.
Alibaba outsourcing: With tough internet restrictions in China, Alibaba was able to scale by outsourcing segments of its IT requirements to developers in the US.
Therefore, gaining access to a sustainable build and IT skills that were somewhat unavailable in China at the period of launch. Jack Ma was able to apply offshore outsourcing to get his business what it needed while he focused on other parts of the job.
Slack outsourcing: While many other companies outsourced non-essential tasks, Slack built a business from a collective effort of many remote workers. From the aesthetics to web design and beta testing, they outsourced most functions to remote freelancers/independent contractors in different countries. This way, they were able to build an infrastructure that could appeal to a diverse market and, in response, gained a high volume of users.
Walmart outsourcing: To be able to keep up with changing customers’ needs, the company’s value system of providing items at cheaper prices, Walmart made changes to business operations. To be able to do this, Walmart’s supply chain was outsourced to China while IT operations were outsourced to Indian independent contractors.
Amazon outsourcing strategy: To achieve its status as the largest retail chain in the world, amazon outsources its inventory management. This way, it can focus on logistics and an efficient supply chain while brands and sellers handle the inventory. While this is great for Amazon, it is also crucial for brands, as proper inventory contributes to the ranking of products on the website.
Skype outsourcing: As a startup, Skype was an amazing idea by a team of people who discovered that they would get better website development if they outsourced. With this decision, they were able to focus on other business components like operations and marketing while they had a skilled developer bring their ideas to screen. A few years after, this startup was able to grow to be worth billions of dollars.
Apple outsourcing: To reduce overhead costs and save time, the company decided to focus on creativity and outsource the manufacturing process to different countries in Asia. Therefore, Apple devices are labeled to be designed in California, rather than manufactured. Offshore outsourcing, in this case, does not just reduce overhead costs, it also solves distribution and supply problems.
Nike outsourcing: While Nike focuses on creativity and strict quality checks, it outsources a lot of its manufacturing. Therefore, there are different production factories located in locations around the world. This model allows them to maintain high creativity and design quality while they keep costs low.
From the above list, it is quite clear that outsourcing isn’t just popular, it is a strategy some brands use to scale and maintain their service value. The question of why big corporations outsource can be answered when you look at the advantages and disadvantages of outsourcing listed below.
Outsourcing in the USA
In the USA, outsourcing is a common business strategy for private companies and government agencies alike. There are no limits to what operations businesses outsource, therefore the high-level adoption of this practice.
Given the benefits of outsourcing — tax and risk sharing, reduced overhead cost, etc. it is easy to see why this is common. Besides, the USA is yet to enforce any particular law or policies that specifically target outsourcing as a practice.
However, because every profession has its code of conduct and policies in the USA, outsourced jobs are usually supposed to comply with laid down regulations.
This usually does not comprise regulations that involve tax percentage or set wages in offshore outsourcing since independent contractors are not bound by USA laws. However, moral and professional codes must be followed.
For example, client confidentiality in legal and medical procedures is a policy that must be obeyed regardless of whether these jobs are done by in-house or foreign workers. In addition to data management and safety policies, there is the issue of moral responsibility, copyright laws, third party management, and so on.
Therefore, outsourcing does not eliminate the need for certain due diligence. In the USA, industries like customer representatives, IT, and manufacturing have the highest adoption of outsourcing, followed by legal services. And many businesses use freelance platforms to find independent contractors.
Although there are proposed bills that would affect the outsourcing industry if passed, these bills are yet to be approved. North America is a great spot for companies that outsource different services.
In April 2020, due to the coronavirus lockdown, we saw a spike in the number of searches related to Independent contracting in the United States.
Outsourcing strategy and types of outsourcing
As mentioned earlier, outsourcing comes with some uncertainty and risks. Bad outsourcing strategies may lead to a profit decline rather than an increase. It must be done with careful deliberation in order to stimulate business growth.
At the end of the day, the best types of outsourcing strategy will depend on your goals or what problems you intend to solve. Some companies may approach this from different perspectives, and it is common to select your strategies based on your competencies and the possibility for growth or improved service delivery.
Rather than from a place of increased profits, other advantages of outsourcing can be more important. Perks like better time management, ability to be focused driven, and access to skills that you cannot curate and develop in-house.
Types of outsourcing
Depending on the expectations and the budget, companies and small business may choose to hire a contractor in a defferent location. Here are the three types of outsourcing:
- With nearshore outsourcing, contractors are close to the employer’s home countries. This allows to operate within similar cultures and to reduce the cost of quality control
- With offshore outsourcing, the independent worker is in a different country than the company offering a job. It has the benefits to work with experts all around the globe. It is excellent to find specialized workers while keeping low expenses.
- With onshore outsourcing, the freelancers or contractors are in the same state as the person offering the job. It is often easier to control outsourced procedures and easier to check on operations offline.
Outsourcing categories and outsourcing companies
Here are the eight outsourcing categories:
- Professional Outsourcing
- Project Outsourcing
- Business process outsourcing
- Manufacturer Outsourcing
- IT Outsourcing
- Process-Specific Outsourcing
- Operational outsourcing
What a company outsource depend widely on the workforce available and the financial benefits. Some businesses may also limit what they outsource due to security reasons. It is the case for many government agencies and industries dealing with sensitive information.
Human resources outsourcing (HR outsourcing)
HR outsourcing transfers part of the employee management to a third-party worker. A contract binds the contractor and the employer. HR workers are essential to a company’s success because they can affect how the other workers work and the overall productivity. With the recent pandemic, many companies are looking for skilled contractors that can perform HR tasks.
Impact of outsourcing on developing countries
On a broader view, outsources impacts the economy of nations. When looking at developing countries, local citizens can benefit from offshore outsourcing from brands in other nations.
That means their skills do not end up untapped, rather, they can harness them and work on a multinational level. It goes without saying that it has broadened the employment and earning capacities of developing countries beyond their borders.
Therefore, growing the GDP of nations and reducing unemployment levels through the creation of freelancers that work online. For countries with policies to tax this group of workers, they witness revenue growth.
However, the benefit is not limited to the workers alone, but also companies based in these countries. They can easily become strong competitors for other larger companies as seen in the case of Alibaba because they can use the same level of skill and workers that these top firms use.
In conclusion, outsourcing is a common business strategy that has helped businesses scale and sometimes has made all the difference. Luckily, it is open to different business sizes — SMEs and larger cooperation. Sometimes it is a leveling factor for these industries, and of course, a great opportunity for independent contractors to become prolific freelancers.