Outsourcing is on the rise, and it will continue to be one of the most important solutions a company can use for decades to come.
Why is outsourcing crucial?
The simple answer is because that is where the experts are – outside the organization. Creating an organization that will be a satisfying home to teams of people from varied backgrounds and with a multitude of values and lifestyle preferences just isn’t possible in practice.
Instead, organizations are choosing to outsource to experts outside the organization who will do their best work because they have the flexibility and opportunity to choose their lifestyle, office style, and work style.
Let’s take a more in-depth look at what outsourcing means, why companies outsource, jobs that are outsourced, and what all of this means to the future of outsourcing for company success.
What is outsourcing, and how does it work?
In simplest terms, outsourcing is a business strategy. Companies choose internal staff to complete core business functions, such as crafting and directing the company vision. Absolutely any other set of tasks or activities may be placed in the hands of external contractors, partners, and outsourcing companies. It’s up to the individual organization to decide what outsourcing means to them and how they will implement this strategy.
In the not so distant past, companies outsourced low-level tasks to unskilled workers. Meanwhile, headhunters would have to find talent who would not only fit the description of the ideal candidate. Talent also had to be willing to relocate, work full-time, and dedicate their career to a single company.
Now, outsourcing is a powerful tool used to expand the hiring pool to a global landscape while attracting skilled talent from all over the world.
New workers don’t have to be willing to relocate. Signing bonuses and other incentives aren’t nearly as important or motivating as they used to be when trying to attract and lock in the right candidates.
And many outsourced positions are limited to the actual hours a company needs. Those limited hours ensure the company only pays for what they need while allowing the worker to craft a more flexible lifestyle from varied locations, and add multiple employers to their portfolio.
Why do companies choose to outsource work?
With so many options between what to outsource and who to outsource to, organizations have a myriad of reasons to reach outside the standard employee-employer relationship. Why companies outsource is worth examining further.
Reducing costs is one of the most significant driving factors when a company decides to outsource. All companies can typically find ways to control operating costs and reduce expenses by 10% if they really look at inefficiencies.
However, a whopping 20-30% of costs can be saved with outsourcing. Some of the reasons include saving on payroll because you only pay for hours worked and skip federally mandated employee taxes, reduced overhead because of home offices, and lower in-house training because of lower turnover.
Time saved because smaller tasks and time-consuming unskilled tasks are outsourced is another driving factor. Many C-suite level leaders, managers, and more can get bogged down with overflowing inboxes and basic administrative work.
Organizations have found they can save significant mental effort on lower-level tasks while saving their brainpower and expertise to invest where it matters. This time and energy investment has become a powerful way to scale and keep vital intellectual capital engaged in doing what they love.
Risk sharing is an attractive strategy. It’s one thing to place all the responsibility on the organization and their leadership, but as machines, AI, and automation take over a significant workload, intellectual capital becomes an increasingly valued asset.
Reaching out to other partner companies, adding to the overall intellectual capital and sharing risks is simply good business. It can also mitigate our human tendency to always want to reduce uncertainty in order to take chances. Risk sharing and outsourcing provide emotional relief that leads to more creativity and resourcefulness.
Access to Top Talent
World-class talent can be captured and utilized, which means companies are much more likely to succeed. When you don’t have to spend long periods and loads of money on recruitment and hiring bonuses, you are suddenly open to hiring people from all over the world.
By taking advantage of your access to the best you can afford, you are able to lean on advice from true experts, academics, scientists, thought-leaders, and more. You don’t need to woo them for a full-time career. Just pay for access, whether for a few hours of crucial number crunching or 40-hours per week, access to the best is priceless, and finally, attainable.
Re-focus and gain forward momentum. When there are in-house staff, these employees create an ecosystem and company culture that can be difficult to manage. They can also become a drain on company focus by pulling leadership’s watchful eye to off-mission projects.
When each outsourced person is focused on their tasks, leadership is free to stay at the helm and guide the proverbial ship. That means keeping an eye on the company vision, watching for key opportunities, and being able to detect threats in advance of problematic market developments.
By asking the question, why do companies choose to outsource work, the top benefits make it clear that early adopters were onto something decades ago. It’s only a wonder that the upward trend didn’t take hold sooner.
How companies find their outsourced workers
Outsourcing can be a way to describe a workforce that is strictly independent contractors and contracted employees. It can also be a way to describe the setting of a globally employed company citizenry.
Some will simply convert their existing employee payroll to independent contractors. Jobs that are outsourced are so widely varied that companies have experienced very few challenges taking this route.
Small businesses are more likely to hire one-off freelancers for specialized tasks and activities that require irregular or periodic work. They might use job boards, word-of-mouth, or freelancer platforms, such as Upwork or Fiverr.
Some companies specialize in matching outsourced talent, whether organizations or people, with your company culture and as well as the necessary work. These typically match you with specific industry talent such as virtual assistants, security, customer support, and finance.
And there are companies that specialize in specific types of work. For example, you might slim your supply chain by outsourcing your entire manufacturing, compliance, and shopping to one company that specializes in your particular industry.
Companies that outsource and their most commonly outsourced jobs
It turns out that more than one-third (37%) of all small businesses outsource at least one business process. As of 2019, more than half (52%) plan to outsource one or more business processes.
Small businesses often outsource specialty work, such as copywriting, digital marketing, and graphic design. Hiring freelancers as the major source of tasks and activities have led many attorneys to abandon law firms and courtrooms to serve small businesses and freelancers as a form of an outsourced legal department. One of the most common ways small businesses scale is with the help of virtual assistants.
This growth is a significant signifier of the growing reliance on outsourcing. These numbers are also a clear sign that outsourcing will continue to have a vast impact on the global economy.
Small businesses are not the only ones using the outsourcing strategy as a resource for growth and cost savings. Prior to small businesses capitalizing on the outsourcing feature, large companies were exploring outsourcing for a variety of tasks and activities.
Like many retailers, Nike outsources its manufacturing, winning a 47% market share over its big-name competitors.
Alibaba, GitHub, Google, IBM, Lexmark, Microsoft, Slack, WhatsApp, and more giants outsource their software development.
Security, customer support, and finance, such as bookkeeping and accounting, are some of the most common jobs that have been outsourced for decades. They continue to be increasingly placed outside the organization for companies of all sizes.
Pros and cons of outsourcing
The many reasons companies choose to outsource are clear, but despite the increasing trend, there are pros and cons of outsourcing that every company needs to consider.
We’ve discussed cost savings, time savings, risk sharing, access to world-class talent, and the benefits of an organization’s ability to focus on its core competencies.
Additional benefits of outsourcing include increased efficiency, significant staffing flexibility, and better operational control.
Companies who outsource can also invest their resources in developing the internal core staff, rather than the entire workforce.
Outsourcing doesn’t come without a few downsides. Managing dispersed teams presents a real challenge. Things like quality control, communication, idea generation and collaboration, culture, and loyalty can all take a back seat without actively working on these areas.
Quality is something that is expected up-front and at all times. However, distance and less oversight can mean that quality can wane if it isn’t supervised, or at least checked and tested regularly.
The lack of face-to-face communication, time zone challenges, and preferred methods of communication can all end up being a challenge, particularly to companies that are converting from a traditional work environment to a dispersed workforce. Finding the right tools, resources, and developing high-quality communication habits are crucial.
Idea generation and collaboration are no doubt some of the most significant losses when a team no longer has an in-person hub, such as a breakroom, cafeteria, or company gym. Having a relaxed environment where staff can casually blow off steam, chat about challenges and wins, and think critically together is where some of the most brilliant company ideas and solutions are generated. This pooled intellectual mining is a top reason some organizations, such as Aetna, Bank of America, Reddit, and Yahoo! Have recalled their remote workers and reduced outsourcing efforts over the past decade.
Finally, culture and loyalty can be negatively impacted when companies who outsource fail to pay due attention. A positive, relaxed vibe can quickly become inefficient and lazy. A highly professional, competitive, fast-paced culture can become cut-throat and petty. Properly engaging people and keeping them motivated can be challenging.
In a traditional setting, all of these considerations can be tough to manage, but the effects are amplified when managing a dispersed model. Outsourcing, particularly less than full-time, can also lead to questions about loyalty. Outsourced people may end up managing a multi-client portfolio, to include working for competitors.
The bottom line
When companies choose to outsource, it is never a lightly made decision. The pros and cons of outsourcing are significant. Luckily, any organization that selects one over the other will be making the best decision for their specific needs and goals.
The choice to outsource does bring opportunities to catapult a business into a dominant market share, scaled growth, and newly revealed revenue opportunities. For companies that decide outsourcing is the best strategy, there are plenty of tools and resources, as well as cautionary tales, to help anyone navigate those murky outsourcing waters.