Should you consider outsourcing for your business and if so, what are the main outsourcing advantages?
I have long predicted the break up of the traditional business model, and where business locations and operations have become de-centralized and non-core business functions are transferred to specialist companies and individuals with the aim of streamlining costs, improving efficiencies, and allowing the owners and management team to focus on what they are best at.
But what are the pros and cons of outsourcing and is it right for you?
I’m going to give you my perspective on outsourcing and from my own business experiences of using outsourced services, as well as my big-picture view of the concept.
The gig economy has been developing over the years as far as seeing the rise of temporary or freelance workers and my main business, which was in the telecom staffing industry was founded on the basis of a growing demand for a more flexible workforce solution which was in response to an increasing “project economy.”
A flexible workforce of this nature was able to be scaled up or down in demand to short, medium, and long-term projects across the globe in the then-booming demand for telecom infrastructure, systems, and services.
At the other end of the scale, you have larger organizations who are simply looking to reduce their costs, improve business efficiencies to maintain and grow profits in an ever-increasing economic world of volatility and hyper-competition.
Then, of course, you have the start-up entrepreneur who to me, is the life-blood of the economy and who has the advantageable to rapidly scale up their business by using freelancers or more formalized outsourcing solutions.
My overall view on outsourcing is that it can be a powerful way to grow your company…but you have to proceed with caution, as if you get it wrong as I have on a couple of occasions, it can prove costly and at worst, cause damage to your brand and reputation.
Before I go on, let’s first get a definition of outsourcing.
Here is a good definition from Entrepreneur, com:
“The practice of having certain job functions done outside a company instead of having an in-house department or employees handle them; functions can be outsourced to either a company or an individual.”
It’s a simple enough proposition, but like everything, there is a whole lot more behind the simplicity.
The definition is from a short article on outsourcing and you can read the rest of it here.
Outsourcing advantages: History of outsourcing
The concept of outsourcing as we know it today was believed to have been discussed after the second world war.
In an effort to more rapidly grow their companies, owners added more and more layers to their management structure and decision-making was now spread across the organization which created “pillars” or silos.
I know from my own business experience that when you create divisions based on business functions, such as sales, marketing, finance, technology, etc. you run the risk of creating “mini empires,” where the leadership of those functions can effectively operate as a “business within a business.”
In outsourcing terms, it is easier to outsource a silo than a part of a fully integrated company where everything is seamlessly interconnected, not just in being part of the same brand, but a deeper, or a more emotional interconnection.
I will give you an example and also how I first came to understand the concept of outsourcing in my business life:
In the 1980s, I worked as a recruitment consultant for an information technology (IT) consultancy in London.
I was dealing with a broad range of large corporate clients here in the UK and the traditional approach to these companies would be to talk to the head of IT operations and discuss current and future staffing needs.
On one call, I was told that the company I was calling was about to outsource its entire IT operations to an outside company that would assume the full responsibility of operating that division, including the recruiting of staff, a function that I had a vested interest in.
This new outsourcing company was gaining popularity and it was obviously successful because it was later acquired by the IT outsourcing giant Electronic Data Systems (EDS).
Later and when I started my own telecom staffing company, I experienced another outsourcing trend — the outsourcing of mobile communications operations from companies like Vodafone, to manufacturing and service providing companies such as Ericsson.
This was a significant development for the industry as it saw manufacturing companies, who traditionally only provided equipment and support services to their customers morph into fully-fledged services companies, in the same way, that the computer manufacturing giant IBM, had done the same to re-invent itself in the early 1990s.
The above examples concern large corporations and it came down to reducing overall operating costs and improving efficiencies — a large retail company should focus on their main business of selling retail goods and not running IT operations…and a telecom operator should focus on delivering the latest solutions to their customers, delivering innovation and the best customer experience.
By outsourcing their respecting functions, they will no longer have the headache of worrying about their non-core functions, at least in theory.
The leadership teams get a break as well — from a financial perspective, there will now be a fixed cost for running the service (depending on the arrangement); the issue of staffing and associated problems will not be a concern for human resources and time will be freed.
So what about small businesses?
As a business coach and mentor, I see a variety of companies as you would expect and many are small-start-ups that depend totally on outsourced labor and solutions.
One such company is a web design, marketing, and support agency that literally runs from the core-expertise of its two founders, who are both web-designers and they outsource the other functions related to marketing and support.
They are free to take on as many clients as their outsourced people can handle — this type of company is heavily reliant on the gig economy and thankfully there are many freelancers in this space.
Now the difference between the two examples — the large corporations and the small businesses is immense, but here I am not talking about the size of the companies, just the principles and now we need to go deeper and discuss the main advantages and disadvantages.
Please bear in mind that I can only scratch the surface here and I hope it will inspire you to research outsourcing advantages further
What business wouldn’t want to take advantage of reduced costs and improved efficiencies, with the added bonus of reducing a major headache?
Or what start-up wouldn’t want the ability to take on a large number of clients from day one of launching?
Outsourcing can be a crucial strategy for rapid business growth, especially as you start to employ more and more staff, as you may not always get the performance return for each staff member that you enjoyed when your team was small, simply due to shared responsibility of roles.
When your organization is small, it is easy to see the differentiation between the roles of each member of staff…but as you grow, there can be lines of confusion as people start to share their time among other staff members and this is only human and natural.
Take a look at this article: “How to grow a small business to a company with 50 or more employees.”
Growing a company to fifty or more employees requires a ton of effort and hard work and it’s something I’ve been through and looking back, there were a lot of staff roles that were duplicated, some that were overlapping, and some that could have easily been outsourced to individuals or companies.
There are 4 main stages to the outsourcing procedure:
- Define your outsourcing need
- Select your outsourcing partner
- Agree and approve the outsourcing strategy
- Design a service level agreement (SLA) and a period of operation and measure performance
Define your need
When I was operating 4 companies in the US, I had a small in-house human resources (HR) team, looking after the interests of all of the companies — we operated each company as an independent entity, but they all shared a centralized management and support function that covered finance, marketing, technology, HR, and administration support.
We found that the HR function, although operated by a small team, was also occupying a lot of the management time of finance, so we made the decision to outsource the entire function to an outside HR provider.
They would now take care of all of the HR functions and for a fixed annual cost, which was way less than the cost of running the team, plus it freed up the finance department from the involvement.
You may simply want to outsource a single business function or if you are setting up a company like a web design company I talked about above, then you will look to individual freelancers.
Select your outsourcing partner
This is perhaps the trickiest part as you will be subjected to a barrage of sales pitches and you have to really try to ignore them and get to the heart of the matter — look at the real-life case studies and talk to the people who can back them up.
You also need to look at the stability of the company and to make sure it has the financial capability to handle the business of multiple clients and maintain the agreed service level agreements which follow the strategic discussions.
Make sure you speak to at least 3 companies and design pre-selection criteria to follow before you spend the time to meet with them — look at financials, years in business, the management team (if applicable), and any other relevant information.
If you are simply outsourcing one part of a function, say search engine optimization (SEO), for your marketing department, then adjust accordingly because you will have the same questions, but rather than a company history and detailed financials, you will probably be dealing with an individual cv/resume and a few testimonials.
Remember this is a key decision and one that you should never take lightly because any outsourcing provider will be ultimately a representation of your business.
What is your outsourcing strategy?
You must have a strategy for outsourcing and I’ve seen too many businesses take the plunge and then pay dearly for the pleasure, including myself when I made a couple of wrong outsourcing decisions.
It has never been easier to outsource since the break up of the traditional employee model to the gig economy and the increasing number of freelancers, but you still have to remember that your business will be operating under its own brand and it will still have the ultimate responsibility to your customers.
I remember a large corporation over twenty years ago, suddenly deciding to outsource over one-hundred key employees to an outside organization without even telling them until the last possible moment!
They had a directive from the leadership team to reduce headcount immediately, but they needed to maintain the service delivery obligations to their customers, so they outsourced their people to a third-party, taking them off their balance sheet as a fixed cost and then adding them back as a variable.
The leadership team was satisfied and the costs were reduced because there were no associated costs of employment such as payroll taxes, healthcare benefits, etc., and the new arrangement was far more flexible…but it was not strategically planned and could have been executed much better.
Outsourcing advantages for start-ups
If you are starting from scratch and building a business that is dependent on outsourced workers for growth, it is much easier to design a strategy because you are starting from a clean sheet — you must ensure, however, that your outsourced individual or company is fully bought into your own business strategy and most importantly, understands your own company value proposition statement.
If you are planning to outsource a business function, then you must plan for it and make sure that if you are transitioning employees to the new company, they are informed well in advance.
Whatever your outsourcing strategy, it is crucial that your levels of customer service and experience remain seamless.
The service level agreement (SLA)
This is the big one — the agreement between you and your outsourced partner and one that will define the scope, operation, and pricing of the services provided, plus the penalties for non-service delivery or lack of service quality.
It is not possible to go into detail on the creation of an SLA in this article, plus there can be are a ton of legal and contractual issues that must be handled by a lawyer, depending on the size of your company, the function you want to outsource and the monies involved.
Even if you are a one-man business and you are looking to bring on an outsourced worker, then you must take legal advice and look at the same factors that you would if you are designing a multi-million dollar outsourcing agreement, as the principles are the same.
The SLA is the most important agreement for both parties and I have entered into some, without thinking hard about the longer-term effects and ensuring that the penalties for non-service delivery or loss of quality were not severe enough.
Also, you have to make sure that you can break the contract if things go wrong, so please take enough time to cover all aspects of this process and make sure you get the correct legal and financial advice.
Now, I am going to talk you out of outsourcing, so to speak, and give you the other perspective, and having been through both sides of the coin myself, I wish I had looked at some of the disadvantages more closely.
The main disadvantage concerning outsourcing, in my opinion, is the aspect of control.
No matter what type of outsourcing deal you do and whether to one person, or a large outsourcing specialist, you are at the risk of losing some type of control.
You are putting your trust into a third-party and you are reliant on that party to deliver the service or part of the service that you provide to your customers.
Here are some others:
This is where you have to read the small print of your SLA and where your lawyer and accountant will earn their money.
Outsourcing agreements are lengthy and detailed — you want to make sure there are no unexpected cost surprises that can fall on you and even if you are drawing up a contract with an individual freelancer, make sure you cover issues concerning time and penalty costs.
This is more applicable to freelancers than dealing with larger organizations and you must ensure you are not violating any country employment legislation when it comes to deducting tax at source for employees.
Make sure you also check the evidence of the legal entity of the freelancer and that you check with your lawyer, tax advisor, and accountant before you commit to any contract.
Security and data protection
These are two issues that need more and more consideration in today’s economy, especially the digital economy, and again, it comes down to the issues of legal and compliance, so you are back to the lawyers.
We’ve all experienced those customer service calls that are handled in different countries and the communications barriers, that are frustrating for both parties.
But quality control issues are not just restricted to face-to-face customer service and they can occur at any point of your business operation.
Make sure your outsourced partner has a full understanding of the service quality expectation; that they can deliver against it and that you have a fair and reasonable penalty clause in your SLA for delivery failure.
There are many other components to outsourcing and as I said, on balance, I believe it is a great way to grow your business, improve efficiency and increase your profits.
But don’t do it purely for the money, as you may find that you pay in other ways!
Last modified: February 6, 2021