Why do Companies Choose to Outsource Work? Top Reasons

Last Updated
March 7, 2024
Why do Companies Choose to Outsource Work? Top Reasons

If you happen to be a small business owner or a start-up owner, who has just started, things may seem out of place in the beginning. There are a lot of repetitive day-to-day tasks.

Moreover, if you keep concentrating on them, you may not be able to go about all your strategic tasks. If you are in the same boat, as above, then it makes sense to outsource a few tasks.

Most small and medium-sized businesses are outsourcing their work to third-party vendors today. According to Statista, The largest share of global outsourcing returns was generated in the US at $62 billion in 2019. 

Defining Outsourcing 

Outsourcing is a business practice, in which services and tasks are hired out to a third-party contractor or firm.

In IT, this is the most predominant mode of operation. Firms often outsource development tasks to outside vendors, as the level of expertise they receive cannot be matched with in-house resources.

Some of the other services after software development that are outsourced are disaster recovery, QA testing, and network services. 

Companies choose to outsource work within their own country, which is called onshore outsourcing. Again, if the same is outsourced to a neighboring country, it is termed nearshore. If the work goes to a more distant country, then it is called offshoring. The latter two models mostly help in saving costs. 

Read More: Outsourcing by countries statistics

Reasons Why Companies Outsource Work 

There are multiple benefits of outsourcing work, which often go beyond just cost savings. Let us delve into the reasons and find out. 

1.Cost Reduction 

Many enterprises strategically leverage outsourcing to streamline operations and reduce expenditures. This practice is particularly common in industries with fluctuating demands, where maintaining a dedicated in-house workforce year-round proves economically unfeasible.

When outsourcing tasks to specialized firms or agencies, organizations benefit from immediate access to skilled personnel and established infrastructure. Consider, for instance, a software company operating within narrow profit margins.

Suppose this company aims to develop a software solution to address market needs. While initially assessing internal resources is sensible, a shortfall may necessitate external assistance. Hiring and training full-time employees under such circumstances can present substantial financial burdens.

Thankfully, outsourcing firms offer a solution by providing access to an extensive talent pool. In such scenarios, outsourcing tasks emerges as a pragmatic strategy to efficiently address business objectives.

If you're from tier-1 countries, you'll benefit significantly from outsourcing to developing countries as the wages there can be 40-70% cheaper. Take India for an example, the average salary package in India for a software developer is around $30,000 while for similar one in the USA would cost $100,000.

If you also want to know more about finding reliable partner in India, I would suggest to check this article where I have discussed extensively about how to outsource projects from USA to India.

2.Divert Focus To Core Competencies 

Outsourcing seems to be a very big option now, for many businesses. The reason being, that the outsourcer brings a lot of value to the table. 

Many activities in the business can be done, with external assistance, without adding on to the company operating costs. Furthermore, tasks such as accounts, human resources, and financial management can be handled by third-parties well.

These can often become distractions in the path of the original firm’s success. When such mundane workload increases, it leads to a shift in focus. Thus, the growth of the business is affected. Outsourcing helps businesses to focus on tasks that are more important. 

3.Unlocks Success By Leveraging Specialized Skills 

Only specialized skills can be a competitive edge to your business. The technological arena and business environment are both changing with breakneck speed. So, it might be difficult at times, difficult to keep up with changing requirements. 

When a company which deals in software for example, needs specialized functionalities in a piece of software, outsourcing seems to be a game-changer. It refers to expertise and capabilities, which are not available at that very moment in-house.

In the same domain, specialized skills can mean different things. They can be creative skills, technical knowledge, or knowledge-based abilities. Access to specialized skills through outsourcing is a strategic advantage. 

4.Helps In Scaling And Provides Flexibility 

Outsourcing helps provide businesses with scalability and flexibility options. These are crucial elements, if you want to grow your business. As the business grows, the demand for resources and an enhanced workforce also increases.

Outsourcing allows businesses to quickly scale up their operations, without hiring in-house. It also does not require any infrastructural changes. The outsourcing firms can adapt very quickly to fluctuating demands, and help you to scale up effortlessly. 

This sort of flexibility allows businesses to respond to market dynamics, with complete ease. It also helps companies handle the seasonal variations and seize the opportunities available. 

5.Increased Efficiency And Productivity 

There are many ways by which companies can increase their efficiency and improve productivity. The first thing that comes to mind, in such a scenario, is that it helps you to manage your time better. 

External vendors often specialize in repetitive tasks that you can let off. They will do the same better than you. This allows your own staff to manage their time in a better manner. It also gives you ample time and a chance to focus on your own brand.

Research shows that outsourcing gives internal employees more time to take that much-needed break and holidays, to improve work-life balance. It enhances productivity in the long run. 

6.Reduces Operational Risks 

Outsourcing offers companies a strategic means of minimizing their risk exposure. One significant advantage lies in addressing skills gaps within the internal team. 

Despite providing training, certain individuals may struggle to acquire specific skills in a timely manner. In such instances, outsourcing tasks becomes an efficient solution, enabling the organization to bridge skill shortages without significant investment.

Outsourcing allows employees to focus on critical tasks that cannot be delegated due to security considerations. By reallocating resources to core functions, companies can mitigate operational risks associated with internal capacity constraints.

During economic downturns, outsourcing provides a cost-effective alternative to in-house hiring. Rather than investing in new infrastructure, companies can leverage external expertise to maintain operational efficiency and flexibility."

This revised version aims to enhance clarity and coherence while maintaining the original message regarding the risk-reducing benefits of outsourcing.

7.Paves The Way For Global Expansion 

Outsourcing can help in opening the doors to international markets. When there is economic instability, software and other technology-oriented companies will benefit from the decision to outsource. 

It also helps in reaching out to new markets, it also allows government officials to achieve fiscal targets. When there is a trail of inflation, wages tend to increase. However, if any company brings in outside workers, it can help in saving money.

Customer service, bill generation, book-keeping, and record-keeping tasks can be easily outsourced. You can decrease labour costs in such situations, by hiring from countries where the regulations and compliance is less tough. 

8.Outsourcing During Recession 

Although it may seem contradictory, you must always see the bigger picture. You cannot just save costs by cutting costs. It is also about how you develop your product or service. 

Outsourcing in such situations helps assess the organization’s requirements in a new manner. You get easy access to a ready pool of talent, which can help in doubling the ROI. This is essential for the long-term growth of the company.

Risks Associated With Outsourcing 

Now, just like everything, outsourcing has a good side and a bad side as well. You should be aware of the cons as well, to make things easy for you. 

  • Outsourcing can make your internal staff uneasy. They might feel insecure about their position. It can also cause attrition. 
  • Outsourcing can definitely be a great way to get good talent and services. However, sometimes things can go wrong. You may end up getting bad services, if you did not run a thorough check of the vendor’s credentials. 
  • Outsourcing may also put some amount of internal data at risk. If you have a vendor, with whom you have a fallout, the incumbent may also leak your data or sell it. 
  • Additionally, there could be issues with time zones, communications, and language skills.

Commonly Outsourced Services for Business Optimization

Outsourcing services can vary widely depending on the specific needs and requirements of a business. Here are some common services that are frequently outsourced:

  1. Software Development: Companies often outsource the development of custom software, mobile applications, web applications, and other digital solutions to offshore teams to reduce costs and access specialized skills.
  2. IT Support and Maintenance: Outsourcing IT support services can include help desk support, system administration, network management, and cybersecurity services.
  3. Data Entry and Processing: Businesses frequently outsource data entry tasks such as data entry, data cleansing, data mining, and data processing to offshore teams to handle large volumes of data efficiently.
  4. Customer Support: Outsourcing customer support services, including email support, live chat support, and telephone support, can help businesses provide 24/7 customer service coverage and reduce operational costs.
  5. Digital Marketing: Companies often outsource digital marketing services such as search engine optimization (SEO), pay-per-click (PPC) advertising, social media management, content marketing, and email marketing to specialized agencies or freelancers.
  6. Graphic Design and Multimedia Services: Outsourcing graphic design services, video editing, animation, and other multimedia services can help businesses create visually appealing content for their marketing campaigns and branding efforts.
  7. Accounting and Bookkeeping: Businesses frequently outsource accounting and bookkeeping services, including payroll processing, financial reporting, tax preparation, and accounts payable/receivable management, to external firms or consultants.
  8. Human Resources: Outsourcing HR services can include recruitment, employee onboarding, payroll administration, benefits administration, and performance management.
  9. Content Creation: Companies often outsource content creation services such as writing, editing, and proofreading blog posts, articles, whitepapers, and other marketing collateral to freelance writers or content agencies.
  10. Translation and Localization: Businesses may outsource translation and localization services to reach international markets and ensure that their content is accurately translated into different languages and adapted to local cultural preferences.

Best Practices To Implement Outsourcing

Starting with proper research and planning.

You can gain all the benefits of outsourcing, if you do proper planning and research beforehand. Auditing your current position is the first step in this direction. It can help you to identify the bottlenecks, you will also understand your business needs. 

Setting a budget.

For almost all businesses, outsourcing is a strategic plan which is aimed at cost reduction. You can hire the best vendors and contractors in the market to lend a hand in increasing your revenue.

The main essence of well-researched and planned outsourcing is proper management of your finances. Therefore, you must set a realistic budget. Hiring offshore teams is extremely beneficial in such scenarios. 

Employ skilled workforce.

When you do strategic outsourcing, you tap into a pool of experts who already have the requisite skills and training. These factors help in streamlining your business. 

Develop an agreement.

Whenever you are outsourcing your project, you should always sign an agreement. Always do all the discussions, additions, and subtractions, before signing on the dotted line. An SLA is a binding contract for all parties involved. This contract mainly defines the returns, relationship, and scope of work. It also takes into account the business objectives and metrics of performance. 

Keep abreast of potential risks.

You must also take into account the risks that could probably come up. You ought to be protective about your privacy and security. Also studying the costs and pricing models will be helpful for you. Try to maintain some degree of control over your business. Additionally, you must be constantly interacting with the vendors. This helps to avoid surprises later on. 

How To Choose the Right Outsourcing Partner?

Now that you know the advantages and disadvantages of outsourcing, you must explore it. The first step in this direction is to be sure about what you are looking for. 

Make all your goals and aims clear to the outsourcing company, You must also check your vendor’s experience and testimonials. Go through their website’s review section. You might want to check personally with their customers. 

Here is a list of what you should undertake.

  • You must identify your business requirements. To do that, examine your current operations, business processes, and work status. The main goal here is to identify the loopholes. 
  • Decide which tasks to outsource. This is again very crucial for you. You must know what to give and what to keep. 
  • Search for outsourcing companies. You can go with recommendations or online suggestions. Create a list of prospects and finalize one that seems to be able to fulfil your demands. Study their industry experience and market data, as well. 
  • Screen your prospects properly, by considering their technology, work force, and facilities. 

Selecting the right outsourcing partner can make or break your business. 

Conclusion 

If you can make use of strategic outsourcing, it can be a game changer for your business. The strategy that you adopt will give you access to the best expertise available in the market, in your domain. The right choice will help you gain in numerous ways.