What is Outsourcing and How Does it Work?

Industries and organizations in today's business environment strive to be efficient. Whether this efficiency is concerned with costs or productivity, it all leads to ensure that their business processes are profitable. Outsourcing is a strategy that many organizations use to achieve these goals.

What is Outsourcing?

Outsourcing is the practice of hiring third-party contractors or specialists to provide certain business processes or functions. They will provide value by conducting tasks for an organization, often without them being based in the same country. When an organization can't provide a process or function themselves, they can choose to outsource this to a third party to complete it for them.

The third-party contractor will do the work on behalf of an organization hiring them. The cost of the completion of this work by the third party will typically be lower than it would cost the organization to complete itself. As well as this, it also allows the organization to access skills they wouldn't have otherwise.

By outsourcing, an organization can save on labor costs and expenses. The opportunity to do this is taken by organizations as they won't need to invest time, money, and effort to hire, train, and maintain internal workers. Here are some business processes and functions that are frequently outsourced:

• Human resource management
• Customer support
• Programming
• Accounting
• Research
• Content writing
• Website design
• Facilities management

The Types of Outsourcing

In this article, we will look at three types of outsourcing. There are several approaches to outsourcing, so it is up to an organization to decide which one they prefer. Here are the three types of outsourcing there are:

• Onshoring

  Onshoring is when an organization decides to relocate work or services to a lower-cost location in the same country as the organization.

• Offshoring

  Offshoring is when an organization decides to relocate work or services to a third-party provider overseas.

• Nearshoring

  Nearshoring occurs when an organization relocates work or services to third parties nearby, in bordering regions and countries.

Depending on an organization's needs, they can choose which of these types of outsourcing is best for them. While many will choose to keep it local, just as many will see the benefits of outsourcing overseas. There is an opportunity to network through outsourcing, so whichever approach an organization chooses, there will be the chance to build relationships.

Pros and Cons of Outsourcing

Outsourcing brings both pros and cons to an organization. Although outsourcing can give an organization lower costs, it can also present challenges. Understanding the reasons for this and why they happen is vital for an organization considering outsourcing as an option.

Pros

By outsourcing, an organization can free up the resources they have. These resources include money, personnel, and facilities. By doing this, staff and money can be invested into different areas of your organization that need addressing.

Organizations also find that a third party will produce a higher quality yield in comparison to if they completed the task themselves. Outsourcing can also lead to shorter production times for organizations. Streamlining this allows for a quicker turnaround with a better-quality product for organizations that choose outsourcing as a strategy.

Outsourcing also helps organizations:

• Focus on strategy
• Increase staff flexibility
• Ensure business continuity
• Develop internal staff
• Keep operational control

Cons

One of the biggest challenges with outsourcing is that organizations need to adequately manage their contracts and relationships with third parties. Ensuring that everyone is on the same page and working in the same direction can take a lot of effort. The resources and effort to manage these relationships can mean that the benefits of outsourcing have been negated.

Organizations may also lose control over what they are outsourcing. When this occurs, the quality of the task being performed may reduce. This can then lead to an organization losing money and having to find a new provider for what they need.

Other issues that could arise with outsourcing include:

• Potential security risks
• Poor communications
• Hidden costs
• Unable to fulfill contracts
• Current employee's morale may be damaged

Outsourcing is a Common Business Practice

Outsourcing is a popular business practice, for organizations of all sizes and industries. The benefits will usually outweigh the drawbacks for many organizations, which leads to outsourcing occurring all over the globe. As organizations strive to gain a competitive advantage, it is fair to assume that outsourcing practices will continue to grow in the future.