What Is Outsourcing at Work? (With Types and Advantages)

By Indeed Editorial Team

Published November 5, 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Whether to reduce costs or increase efficiency, there are various reasons why a company may want to participate in outsourcing. Regardless of the reason, outsourcing is a good business strategy available to both companies in the public and private sectors. By understanding what outsourcing is and how it works, you can help the company thrive. In this article, we learn the answer to "what is outsourcing?", discover how it works, explore the types of outsourcing, reveal the advantages and disadvantages of outsourcing, and consider a few examples.

What is outsourcing?

If you're wondering, "what is outsourcing?" it's when a business makes the decision of hiring a separate entity to perform parts of the company's business processes, such as manufacturing, marketing, and services processes. Outsourcing is a strategy used when a company is attempting to reduce costs or feels their internal staff aren't specialists at certain tasks. Here is a list of a few business functions companies frequently outsource:

  • facilities management

  • human resource management

  • customer support

  • accounting

  • supply chain management

  • research

  • content writing

  • website design

  • legal documentation

  • engineering

  • diagnostic services

  • marketing management

How does outsourcing work?

Companies may outsource the tasks their internal staff don't have the skills to complete instead of investing money, time, and effort to train internal employees to do them. When companies outsource, they enlist the help of an entity without previous affiliations to them to perform business functions on their behalf. The company called upon for help often sets up a different compensation structure with their staff than the outsourcing company. This gives them the ability to complete the work for less money. This is beneficial to the outsourcing company as it lowers labour costs and saves unnecessary expenses.

Types of outsourcing

Here are three major types of outsourcing, which mainly vary by location:

Onshore outsourcing

Onshore outsourcing is acquiring the help of another company located in the same region for certain business processes. This type of outsourcing means the third-party company has skilled employees without any cultural or language barriers. The cost of operation for onshore outsourcing is high when compared to the other two types of outsourcing.

Nearshore outsourcing

Nearshore outsourcing is when a company outsources business functions to an adjacent country. Outsourcing to an adjacent country means delegating operations to another company with similar culture and language. This makes communication easier and opens up the possibility of frequent onsite visits.

Offshore outsourcing

Offshore outsourcing is outsourcing company services to another company located internationally. This outsourcing is more difficult to accomplish as the third-party company usually has a different culture and language. Offshore outsourcing is generally preferable as gains access to skilled labour at a higher savings rate.

Related: Leaving a Job After 3 Months (With Risks Involved)

Advantages of outsourcing

Here's a list of benefits a company can gain when engaging in outsourcing:

Better company focus

The core focus of different companies varies by industry. Whenever a company experiences rapid growth, more often than not, the focus of the company changes. This growth may mean more focused labour or human resources and financial resources on different tasks. It's up to the decision-makers to determine which tasks are less important, and give the internal staff a better chance to focus on more important tasks. Giving internal staff full focus over the core activities can help ensure the company isn't compromising the quality of their products.

Bigger skill pool

With only the internal staff's expertise to rely on, a company can limit itself when it comes to growth. Outsourcing helps to access a vast group of experts. As a company's outsourcing needs can be seasonal, they can increase their options whenever they deem necessary.

Cost-cutting

Due to increased growth, a company can find itself in need of expansion. This may be an expansion of space, equipment, or personnel, and undertaking these expansions can be costly. For example, if a company grows exponentially, instead of building a new branch in a different location, they can simply outsource the tasks that may get done in that new branch to another existing company.

Efficiency

Varying by industry, companies have different difficulty levels for certain processes. For a company with a complicated manufacturing processes, the need for producing at a larger scale can arise at any time. If the larger manufacturing scale is impossible using a reasonable amount of resources, it can be in the company's best interests to outsource that particular process. This helps the company increase productivity and profitability in other aspects of the business.

Gets tasks done faster

Smaller-sized companies tend to have a directly proportional workforce size. It's safe for those kinds of companies to outsource time-consuming tasks to external companies. During that period, if the internal staff also work towards accomplishing their assigned functions, the company can see different projects get completed much faster than they did before.

Development of staff

On-shore outsourcing is a great chance for internal staff of the primary company to develop their skills. This is simply letting the internal staff work beside the outsourced staff for a while to acquire a new skill set. For example, if a company project requires a certain type of software which the current staff have no knowledge about, it's advisable to outsource usage of that software and let the internal staff work on-site to help learn the software.

Related: How to Train Employees More Effectively (With Tips)

Disadvantages of outsourcing

Here are some disadvantages of outsourcing work for you to consider:

Threat to security

During outsourcing, it's important to try to limit the number of sensitive files, such as employee medical records or payroll data, handled by non-company employees. If the release of sensitive information is unavoidable, extra measures, such as a legally binding contract, can protect this information. A good lawyer can uphold these measures and they can help in putting the company and employees at ease.

Communication barriers

Outsourcing can put a strain on any company when difficulties arise in communication. Receiving progress updates or news about any sudden obstacles can turn into a chore, especially when the type of outsourcing in place is offshore. The difference in time, a language barrier, or even an unavailable head contractor are factors that can make simple communication an issue.

Related: How to Build a Successful Team in 8 Steps

Sub-standard quality of results

When hiring an external agency for outsourcing, it's important to know how they handle work given to them. While a third-party agency may have a good reputation, it may not deliver results that meet the original company's expectations. This is a risk that's present even when using on-shore outsourcing, which is why it's important to provide clear and concise guidelines to the third-party agency before proceeding with any agreements.

Threat to employee morale

It's important to note the effect of outsourcing on the internal staff's morale. Most of the time, outsourcing replaces a number of employees with contractors. This can have a negative effect on the remaining employees that witnessed their former coworkers lose their jobs. This effect can hinder the company's productivity as a whole. It's best to enlist the help of the HR department to inform the employees of such changes.

Hidden charges

Outsourcing is a concept that's more familiar to external freelance agencies than it is to original companies. During the process of outsourcing, if a good lawyer isn't representing the original company, it can be difficult for someone without the proper training to notice hidden charges in a contract. It's important to know that costs that aren't included in the contract can appear as additional charges in an invoice.

Examples of outsourcing

Here are a few examples of companies that can outsource different aspects of their business:

  • Internet service provider: An internet service provider may outsource its entire customer service to an agency with trained attendants.

  • Financial advisory firm: A financial advisory firm can outsource its marketing processes to a company of freelancers to focus soley on keeping up-to-date with the financial markets.

  • Personal computer manufacturer: A personal computer manufacturing company may choose to purchase internal parts of its products from another company to save on production costs.

  • Cryptocurrency exchange service: A cryptocurrency exchange service may outsource its entire content writing operation to a freelance writer.

  • Law firm: A law firm may save and back up its documents using a cloud service provider that gives them access to digital technology without spending money to actually own the technology.

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