Outsourcing is the practice of obtaining goods or services from an external source rather than producing them in-house. Outsourcing can refer to subbing out a wide range of activities, from manufacturing products to providing customer support, marketing, accounting, or IT services. The advantages of outsourcing are you gain economies of scale to reduce costs and efficiencies by sourcing from companies with expertise in areas where you don’t have skills in-house. In addition, outsourcing makes sense when you don’t have sufficient work to require full-time skilled staff. Below you can see the cost savings and efficiency you gain by hiring a digital marketing agency versus doing digital marketing in-house.
As you can see, outsourcing to an agency spreads the cost of expensive tools like content management software and marketing automation across a number of clients, which is much cheaper than paying for the software yourself. Meanwhile, staff employed by the agency have extensive experience and ongoing training in their skills in a world that’s constantly changing. For instance, Google’s shift to GA 4 as its analytics platform requires a considerable effort to glean insights compared with the older version of Analytics.
Outsourcing is often done by companies as a means of reducing costs, improving efficiency, or accessing specialized expertise. For example, a company may outsource its manufacturing to a country with lower labor costs or outsource its customer support to a company specializing in that service when they don’t face sufficient demand to employ a full-time staff. Outsourcing is also done when a company first moves into a new area, such as a new product, as a means to hedge their bets in case the new venture isn’t successful. Instead of immediately devoting huge resources to the new venture, the company can dip its toe into the venture before committing resources such as new machinery, new facilities, or other major investments.
These days, outsourcing is increasingly common due to advancements in technology and communication that make it easier for companies to work with external partners. Let’s look at some of the advantages of outsourcing that businesses gain from this practice.
Advantages of outsourcing
Cost savings
Businesses can reduce their overall costs by outsourcing certain activities, such as customer support, to countries where labor is less expensive. This process can reduce equipment, training, and other overhead costs associated with in-house operations even if labor costs weren’t an issue.
When a business outsources certain functions, it can avoid the costs associated with employee management. For example, if a company outsources its accounting (a commonly outsourced function for small and mid-sized companies that don’t have sufficient demand for full-time staff), it won’t need to invest in training new employees, hiring managers to oversee the support team, or buying equipment to support in-house operations. Expecting an employee to handle accounting as a part of other duties or without sufficient training can prove costly when your records don’t support business functions such as payroll, taxes, and managing accounts receivable.
IBM is a famous example of a global technology company that has been outsourcing various aspects of its operations for decades. The company outsourced IT services, software development and even some of its hardware manufacturing to countries like India with lower labor costs, allowing it to reduce expenses and increase profitability.
Improved efficiency
When a business outsources an operation, it can access a pool of experts with specialized knowledge and experience in that area. For example, a company that outsources its software development to a firm that specializes in that area can benefit from access to experienced software developers with a deep understanding of the latest technologies and best practices. Hiring employees with these skills is challenging in a tight labor market and these folks don’t come cheaply. Plus, if you don’t need employees with this specialized training on a full-time basis, you aren’t likely to find the most experienced staff, which results in damage to your business’s core functions. A vulnerability in your company network caused by inexperienced cybersecurity staff, for instance, is much more costly than hiring the right people or outsourcing this function.
Outsourcing to a white label agency is a great way to boost productivity for businesses. White-label agencies specialize in providing a range of services to businesses, including marketing, design, customer support, and technology. Outsourcing to a white-label agency allows companies to focus on their core competencies while leaving other tasks to those specializing in them, while the arrangement is invisible to their customers and clients. White-label agencies often invest heavily in technology and training, and they have a deep understanding of the latest trends and best practices in their respective fields.
This means that partnering with a white-label agency gives businesses access to a wider range of resources and expertise, allowing your brand to deliver its products and services more effectively and efficiently. White labeling means your clients and customers don’t know that you didn’t do all the work necessary to deliver a great product because the agency brands its efforts with your brand logo, images, and color palette.
International outsourcing
The advantages of outsourcing grow when you consider the option of international outsourcing. International outsourcing provides businesses with the ability to scale their operations quickly and efficiently, as well as providing access to new and innovative technologies. International outsourcing also brings a level of flexibility and adaptability that can be difficult to achieve in-house. By partnering with an outsourcing provider, businesses are able to respond quickly to changes in their market and to customer needs, with the ability to quickly pivot their operations as needed.
By outsourcing to local businesses in another country, companies gain not only expertise in certain areas critical for their business but access to local customs, laws, norms, and other aspects of culture in a particular market. For instance, outsourcing to a local advertising agency helps you avoid unfortunate violations of local customs.
What should businesses keep in mind before outsourcing?
Any business thinking about outsourcing needs to run a careful assessment of the tasks and processes that are involved in the workflow necessary to meet business needs to identify which tasks are best suited for outsourcing and which tasks they should keep in-house. There are risks to outsourcing important and confidential positions that every business should consider. By outsourcing, you may disclose intellectual property that makes you vulnerable if the firm decides to enter the industry to compete with you or sells your trade secrets at a profit.
Outsourcing also makes you vulnerable to the needs of other company. For instance, if you outsource product manufacturing, you must consider implementing contract clauses to ensure the quality of the products produced. For instance, you might add tolerances for critical aspects of the production process and inspections both of finished goods and during various stages of the process.
When outsourcing certain processes, ensuring that the quality of the services provided is consistent with current standards will be critical. For instance, if you outsource customer service, you might experience a declining brand image if the company fails to perform adequately. Outsourcing can also result in disruptions if the firm you outsource to experiences a disruption in its operations, such as a strike or other job outage.
Since cost saving is one of the primary reasons that businesses outsource, there is often tempting to choose options that are more affordable. This can be dangerous since the end result is failure to meet your business objectives or a worse experience for the customer, and the resulting loss in sales over time makes it a bad idea all around if the firm you outsource to hasn’t been properly vetted or changes management.
As you can imagine, this makes research on the companies that you are outsourcing to essential.
Conclusion
By subbing out certain processes, businesses can expand their operations into new geographic regions or new areas of operation without having to invest in the infrastructure and personnel required to support these operations.
This can provide a significant competitive advantage and help grow the customer base, and increase their market share. Of course, this is not without risks. Making the decision to outsource is a big one that, once made, sets the direction of logistics on a path that can be tough and expensive to steer. Regaining control is often a costly affair and involves going back to the basics.
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