The 11 Types of Outsourcing Explained

Types of outsourcing

Laura Holton

Laura is a professional writer specializing in content aimed at small businesses and entrepreneurs. She has helped countless startups find the information they needed to take their ventures to the next level.

Through outsourcing, you can find a wide range of services to improve operations at your company without needing to hire more employees. This may enable you to cover skills that your current workforce doesn’t possess. As you have a huge number of options, it’s a good idea to understand the different types of outsourcing before you get started.

Types of Outsourcing Services

First, let’s look at the various types of outsourcing services you may like to consider for your business.

1. Professional Outsourcing

The category of professional outsourcing encompasses all specialized services, including accounting, purchasing, administration, legal, CAD, digital marketing, and anything else that’s too complex for your team. Many of the services included under the umbrella of professional outsourcing require a license or several years of training.

With professional outsourcing, you can access a wide range of services, paying just for those you need. This is excellent for scaling your business as well as for receiving one-off services. For instance, you may need legal support just when setting up your business.

If you’ve already established a business, the likelihood is you’re outsourcing at least some professional services. You may not even think of it as outsourcing because these services are essential.

2. Multi-Sourcing

Another way to combine the services you outsource is through multi-sourcing. Typically, multi-sourcing provides you with a mix of IT and other business functions. It’s usually more suitable for large companies that want to outsource a variety of IT operations and infrastructure to different vendors. However, multi-sourcing is also a good option for any business that wants access to top specialists, is looking for an outcome-based approach, and wants transparency around its IT projects.

Bear in mind, though, that you’ll need to have to have a strategy in place before you get started with multi-sourcing. For instance, you need to know what metrics matter to your business and you’ll need to have a system of governance.

3. IT Outsourcing

It’s also possible to contract a provider just for IT. If you have specific IT needs or you are a small business, this could be a better option. Even startups need some IT support to maintain security, keep licenses up to date, and manage their networks, and this is an affordable way to receive those services. With IT outsourcing, you can receive support with anything from infrastructure to app development.

4. Process-Specific Outsourcing

With process-specific outsourcing, you contract a provider for a specialist service — it can even be something quite niche. There are three types of process-specific outsourcing.

The first is knowledge process outsourcing (KPO). This is for improving products and services through research and data analysis.

The second is legal process outsourcing (LPO), which can cover regulatory compliance, litigation, and other legal needs.

Finally, there’s recruitment process outsourcing (RPO), covering everything related to recruitment. You can receive support for job postings, shortlisting applications, and evaluating candidates.

5. Business Process Outsourcing

One of the most common types of outsourcing is business process outsourcing (BPO). You can use BPO to handle your more mundane business activities, such as administration, correspondence, and scheduling. You can also receive customer service and lead generation through BPO.

6. Manufacturing Outsourcing

Manufacturing products in house can be out of reach for small businesses, particularly when demand starts to increase. In fact, outsourcing is often the only way to compete with large companies that have more resources, can afford to hire large teams, and have the funds to upgrade equipment on a regular basis.

Besides, even large corporations like Apple outsource manufacturing to reduce the costs of paying for a factory, workers, equipment, infrastructure, and raw materials. As product life cycles in many industries continue to shrink, manufacturing outsourcing is becoming a necessity for companies of all sizes.

The good news is, since manufacturing outsourcing is so widespread, it’s easy to find a specialist in your industry. This is important for speeding up production times while retaining high quality.

7. Project Outsourcing

It’s possible to outsource all aspects or even just a portion of a project to a provider. This is a common strategy when a business lacks the time, skills, or funds to complete a project. Some types of project outsourcing include website redesign, creation of a large piece of content, and marketing campaigns.

8. Operational Outsourcing

Operational outsourcing is particularly common in the manufacturing industry, as it covers services like equipment repairs. However, service-based companies can also benefit from operational outsourcing for tasks like landscaping and delivery.

Types of Outsourcing Strategies

It’s also important to consider types of outsourcing strategies. For instance, where will you find your provider?

9. Local Outsourcing

Contracting a provider within your country is called local outsourcing or onshore outsourcing. A benefit of this option is that you speak the same language, have the same cultural background, and are in a similar (if not the same) time zone. It is also much easier to meet in person on occasion.

A major disadvantage of local outsourcing is that you’ll likely spend more than outsourcing to another country. This is true for companies based in the U.S., Canada, and most of Western Europe. Plus, you cannot assume that, just because the provider charges more, the quality will be higher.

10. Offshore Outsourcing

Another option is offshore outsourcing. These types of contracts mean working with a provider some distance away. It’s often the best way to save on labor and material costs. In addition, offshore outsourcing can enable you to access a specific skill set that is better in a particular country than anywhere else in the world. Finally, you may be able to avoid regulations imposed in your home country.

The problem with offshore outsourcing is a lack of reliability, particularly when you choose a budget provider. This is avoidable by reading reviews of the provider before agreeing to a contract. However, you may find that you end up paying more for the services than the low rates you initially saw. Distance can also be a big issue. For instance, it may take a long time to communicate with the provider: if you send a message after early morning, the work day where your provider lives will be long over.

11. Nearshore Outsourcing

Somewhere in the middle of local outsourcing and offshore outsourcing is nearshore outsourcing. This involves contracting to a provider who is out of the country but still nearby. If you’re in the U.S., nearshore outsourcing would be to Latin America, whereas offshore outsourcing would likely be to Asia.

Nearshore outsourcing allows you to gain the advantages of both onshore and offshore outsourcing — while, at least to an extent, diminishing their disadvantages. For instance, you’ll be in a similar time zone, but you’ll benefit from the lower costs of running business in the other country. Plus, there is a lower risk of delays when shipping products. Lastly, nearshore outsourcing is useful for entering neighboring markets, which is often the logical next step for businesses.

Advantages of Outsourcing

The reason so many businesses are choosing to outsource is the huge number of advantages of outsourcing. These include:

  • Lower operating costs, especially when you just pay for the services you need. Unlike with an employee, there’s no need to pay for a set number of hours (even when there’s no work to do) nor for things like benefits or equipment.
  • Reduce the pressure on your team and free up time to focus on core business activities. As a result, you’ll complete tasks faster.
  • Save on office space — or never even rent an office at all. It may be possible for you and your employees to work remotely if you’re outsourcing.
  • Receive expertise and skills that none of your employees possess. There’s no need to spend time trying to learn new skills in house.
  • Access talent from anywhere in the world. You’re not restricted to professionals in your local area — you can even contract the best in the industry (provided you can afford them, of course). Alternatively, you can find talent in a country where living costs are lower and workers charge less.
  • Turnover is simplified if you decide you’d rather work with a different professional or firm. When you start working with a provider, you can often choose from various types of outsourcing contracts, including project-based and fixed-term contracts that last only a short amount of time. This means you can just decide not to renew the contract once it’s over and quickly find someone else to take over.
  • Access technology without needing to pay for subscriptions yourself. The professionals you outsource will also know how to use the tech without any training. Plus, if they ever do need training, you can expect the provider to take care of it.

The above types of outsourcing can cover a wide range of business activities. Once you understand your options, you need to figure out what tasks your company will most benefit from and choose the right services for your business. Then, think about aspects like communication, quality, and cost to ensure you choose the right type of outsourcing strategy for you.

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