Outsourcing is a process where one business hires another, or an independent contractor, to perform work or complete tasks on their behalf. It is most often done when a business does not have the internal expertise or time to complete a required item necessary for forward progress.
An outsourcing relationship can be formed domestically or internationally. International outsourcing may sometimes be referred to as “offshoring.”
Every business responds to the pros and cons of outsourcing in a different way. Many brands look to outsource specific tasks which take up a lot of their time. Some look to outsource specialty tasks because there is no internal knowledge about what to do. When these relationships are correctly formed, the benefits are often immediate.
List of the Pros of Outsourcing
1. You do not need to hire more people.
Outsourcing does not require the costs of hiring an employee. You are certainly paying someone to complete the work for you when you outsource. What you get as a benefit here is the removal of benefit costs. Independent contractors or outsourcing firms don’t have the costs of healthcare insurance, vacation days, and similar benefits that come out of the pockets of your business. There are fewer training costs as well.
2. You gain access to immediate talent.
When you hire locally, you only have access to local talent. Even if you receive applications from a different state or province, you’re still forced to screen those applications to determine if there is enough skill and talent for your open position. By choosing to outsource your work, you gain immediate access to the exact skills you require. That person can be located in any part of the world, providing you with the specialized help you need for the short- or long-term.
3. You can pay lower labor costs.
One of the biggest expenses a business absorbs each year is the cost of labor. For some companies, payroll costs could be more than 40% of their overall budget. Choosing to outsource allows you to access a global pool of talent where the financial standards of living may be very different. An IT professional in the United States, for example, earns about 5 times more in salary from an entry-level position as an IT professional in India.
4. You get to move fast.
With an outsourcing relationship, you’re able to immediately tap into the exact knowledge base you require for movement or growth. Because you have access to more overall wisdom in the specific field where your business is deficient, there is the possibility of experiencing better innovation too.
5. You can deliver services faster.
When you outsource specific tasks, you are freeing up your managers and staff from completing those tasks internally. They get to focus on the core elements of the project or job, using their core competencies, instead of being stuck with routine duties or matters which fall outside of the reasons for hire. When you have everyone using their strengths to reach a common goal, your delivery speed naturally increases.
6. You can terminate the relationship.
Assuming you’ve built some sort of termination rider into a contract for lack of service provision, it is much easier to disentangle yourself from a bad outsourcing arrangement than it is to remove an employee with production or disciplinary issues. You will have a much lower risk of experiencing a labor dispute. Unemployment hearings go away. When properly structured, you can let outsourcing relationships go whenever you need to let them go.
7. You get to create an efficient team.
Outsourcing allows your business to be functional throughout the day. Time zone differences do create challenges in communication. They also create opportunities. If a business in New York decides to establish an outsourced team in Singapore to continue job tasks, the 12-hour time difference creates a scenario where someone within the brand is almost always working. That level of efficiency helps to inspire hire levels of productivity.
8. You can align your costs.
Outsourcing improves your bottom line. When you have fewer expenses to pay throughout your value chain, then the final cost of goods or services provided can be lower. That process makes your brand more competitive at the consumer level.
9. You gain immediate technology upgrades.
You’re receiving more than talent when you decide to outsource. You’re also receiving access to the technology resources required to continue growth. Not every firm or contractor may use current technologies, which is why the selection process is so vital when establishing a relationship.
List of the Cons of Outsourcing
1. You lose some of the control you have.
With outsourcing, you’re always in control of the relationship. You choose to sign contracts with companies or individuals. You keep those relationships, or you choose to get rid of them. Where you lose some control is over who is actually working for you. An independent contractor might decide to sub-contract some work. You don’t get a voice in the hiring process for outsourcing firms. That may lead to future complications.
2. You might not be able to terminate the relationship.
Most outsourcing firms are professionals who work the way they do for their own reasons. Their efforts are as good, if not better, then what you’d receive from local talent. Unlike local talent, however, you have fewer options to terminate a poor relationship. You might be stuck with a contract you no longer want or need. Always read the terms of any contract very carefully to ensure you have options to terminate it for substandard work.
3. You may encounter communication issues.
Although outsourcing can happen domestically, most of it occurs internationally. That is how a business saves money on their labor expenses, after all. When hiring an international firm, you may encounter several different communication issues. There may be a language barrier in place. You might find yourself dealing with a difficult time zone issue. You might encounter cultural perspectives that make it difficult to do business. It doesn’t always happen, but if it does, it can affect the quality of your work.
4. You must be proactive about quality.
When you hire an outsourcing firm or an independent contractor, you’re forced into a position where you must let the other party complete the work on their own. In some situations, if you dictate how work should be completed outside of the contract agreed upon, that firm or contractor might be considered an employee. You must stay proactive about the quality of work you receive. Always talk about your expectations on quality during the negotiating phase of your relationship.
5. You can see a negative impact on your company culture.
It is easy enough to justify an outsourcing relationship if it saves you plenty of money. It is important to remember, however, that not all employees may be on-board with the idea of outsourcing. If you’re willing to outsource one position, they may think you might outsource their position one day as well. Include your people in the decision-making process to avoid low morale.
6. You might experience a sluggish response time.
If you have someone down the hall from you completing a task, then your response time is almost immediate. You just check-in with that person to see how the project is going. With an outsourcing relationship, the response times can be more sluggish. You may find delays of 24-48 hours are considered “normal” for some firms or contractors. If you experience slow responses, then there’s a good chance that you’ll have slower issue resolution process to contend with as well.
7. You may encounter intellectual property privacy concerns.
In the United States, there are specific rules regarding IP and privacy that must be addressed by all business owners. If you decide to do some offshoring to save money, however, you may find that those laws are not present, not followed, or not followed in a way you’d expect. You must use contracts and agreements to protect your IP when outsourcing, only offering items when they must be used to complete work. If you don’t put protections in place, you may not have a legal case to make if someone takes your IP.
8. You may increase local unemployment rates.
When you outsource jobs to other companies or contractors, then your local community loses an open position. Your company saves money, but other companies in your area will lose it. Fewer people requiring supports for their employment means fewer restaurants, coffee shops, clothing retailers, and other local businesses. As a general rule, every job you move to a new location throughout outsourcing will prevent another business from hiring a new worker as well.
The pros and cons of outsourcing depend upon more than cash flows. They are a set of advantages and disadvantages which must be carefully weighed by each brand. Many companies benefit from this process when they take the time to find a firm or contractor with similar values. If you rush the process, then you increase the risk of experiencing a subpar relationship.
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.