Outsourcing means delegating certain functions by an organization on the basis of a concluded contract to third-party experts in a relevant field, such as IT outsourcing, HR outsourcing, or customer support outsourcing.
This model of cooperation appeared in the 1950s, and in the 1980s it was recognized as a profitable business strategy due to the popularity of the “focus on core competency” concept.
The evolution of outsourcing covers the following stages:
Traditional (early to late 1980s) – transferring some operations to external providers to reduce costs.
Strategic (early 1990s – early 2000s) – expanding the company's internal capabilities to improve working methods.
Transformational (2000s – present day) – introducing technology and adaptation to changing needs to reconstruct business processes.
Why do companies outsource? This opens up real prospects for them to improve their operational efficiency and, as a result, competitiveness in the niche.
From the article, you will learn about the features of this cooperation model and its benefits for business.
Why Do Companies Choose to Outsource Work? 3 Key Reasons
The desire for efficient operations and increased competitiveness makes modern companies look for new ways to organize and manage their business. Outsourcing is one of the most common methods of saving resources and optimizing business processes.
Let's look at three main reasons why companies switch to outsourcing.
Reason 1: Economic Efficiency
The most important reason why companies outsource work is reducing labor costs and operating costs.
There is no need to create a new work unit within the company and provide the equipment and space for activities. You can save on renting office space, buying equipment and licensed software, organizing workspaces, etc.
According to Forbes, outsourcing allows you to save on everything, from tax issues to employee training.
Reason 2: Experts at Your Complete Disposal
Outsourcing gives you unlimited access to the skilled workers and resources worldwide that you need for your business right now.
You don't have to search for specialists in your area or train your in-house staff for a long time. Experts from anywhere in the world can come to your aid and get the job done quickly, efficiently, and at an affordable price.
Reason 3: Focus on Core Tasks
Many companies outsource work to stay focused on their core business functions and increase overall productivity and therefore generate more income.
Third-party specialists save you from the need to manage all processes. This is especially true for small businesses, where outsourcing allows you to concentrate on key areas and spend your resources more rationally.
Advantages of Outsourcing: Opportunities and Benefits
Why do companies outsource, and what do they get from it? Someone is interested in cost savings, and someone is looking for specialists with skills that their in-house employees don’t have. Of course, cooperation with skilled professionals makes businesses more competitive and cost-effective.
Increased Productivity
This business model is quite effective and has high productivity because a whole team of experts is interested in successful implementation of a product.
Let's look at 5 factors that influence increased efficiency:
Reducing the risk of errors. Outsourcing helps to avoid mistakes and improves execution accuracy.
Cost savings. Costs are reduced because a quality product is produced.
Flexibility. Ability to change or add a task at any stage.
Creativity. Thanks to outsourcing, unique ideas can emerge, and unique products can be created.
Resources. Possibility of uninterrupted operation and access to resources 24/7.
Why would a company outsource? For the company to operate effectively, it is essential that multitasking does not dominate the main activity. It leads to another advantage of the outsourcing strategy.
Scaling Tasks
Scaling your business by outsourcing non-essential operations frees up time and resources for other, more important tasks. Simply put, you can fully focus on your core business without being torn between dozens of different activities.
In order for scaling to truly benefit your business, you need to assess all of your company's needs and priorities. Then choose your external provider, contract with them, and hand over control of tasks.
Freeing up your budget and focusing on the core business functions (without restrictions related to in-house full-time employees and without the need to invest in infrastructure) provides considerable financial benefits and business growth opportunity.
Mitigating Business Risks
When doing business, there is a great likelihood of encountering many risks, from market volatility and regulatory changes to operational disruptions and cybersecurity threats. Such events may affect your financial stability unfavorably.
Often the main motivation for a company that decides to outsource is to mitigate or completely minimize risk. Of course, no one can completely eliminate it. But qualified specialists will provide additional control, verification and protection of those company functions that do not meet your core competencies.
What Companies Outsource
It is impossible to be an expert in absolutely all fields and be well versed in dozens of different technologies. Entrepreneurial activity must be profitable due to the high quality of the product or service. To cope with time-consuming tasks, you need professionals.
IT Outsourcing
This refers to a wide range of works related to the realization of digital projects. Firstly, it concerns the creation of software solutions, their testing, support, maintenance and updating.
The IT outsourcing (ITO) market is the largest market for IT services. According to Statista, ITO revenue is projected to grow from $430.53 billion in 2023 to $587.3 billion by 2027.
Why do organizations outsource IT services? It allows you to improve operational efficiency and overall productivity, reduce the risk of cyberattacks, and avoid financial losses associated with the creation or development of a project. It is also a good opportunity to keep technology up to date.
Most often, IT outsourcing is used to solve the following problems:
setting up infrastructure;
IT consulting;
technical support;
remote administration.
IT services are often outsourced due to their specificity and important role in the activities of each organization.
Outsourcing of HR Functions
HR outsourcing means hiring an external provider for administration, personnel records, and operational management.
HR outsourcing is used for:
calculations and payments of salary;
benefits management;
hiring employees;
training and development of personnel.
Such services reduce overall costs, increase efficiency, and gain specialized expertise that may not be available in other ways.
Outsourcing of Customer Support Service
The business strategy of outsourcing customer support offers several key benefits.
Why do organizations outsource these services:
Cost savings. There is no need to hire staff or invest in infrastructure.
Flexibility. You can scale your helpdesk based on your needs.
Availability 24/7. Providing 24/7 support.
Global coverage. Possibility of providing services worldwide.
All these factors raise customer satisfaction and operational efficiency.
Disadvantages of Outsourcing: Problems and Their Solutions
You may encounter some difficulties in the process of remote collaboration.
Communication Barrier
Usually, these obstacles are associated with natural, social, and psychological factors, such as another timezone, language, or cultural differences.
To avoid them, it is necessary to clarify and discuss all the nuances that you may encounter during the work. It is better to do this even before you sign the contract. From the language of communication with the team to the work schedule and communication channels – clarify all the points in advance.
Problems With Quality Control
When a business delegates tasks to an external service provider, some difficulties may arise in managing processes.
These include:
lack of personal quality control;
unpredictability in the work of the service provider;
delays on the part of the contractor;
late submission of reports.
To prevent poor service quality and schedule interruptions, develop a system for regular checks and data exchange.
Why do companies outsource if this model has many disadvantages? The fact is that all issues are quite easy to avoid if you approach the choice of contractor responsibly and discuss all the conditions in detail.
Outsourcing Is a Strategically Important Step for Businesses
Generally, why do companies outsource and select this business model? It is not always possible to rely on your internal team, for example, due to a lack of specific skills, especially when it comes to long-term work on a project or numerous tasks.
Outsourcing can become the main strategy both for the successful development of a startup and for the scaling of a medium or large company.