Outsourcing corresponds to the organization of work, which allows a company to delegate certain business processes (usually tasks with low added value) to an external service provider. This new way of working is actively developing all over the world and contains countless advantages!
Advantages of Outsourcing
For customer companies, the advantages include:
- Reduction of expenses and overhead costs (no recruitment costs, reduction of the salary fund, attractive tariffs from outsourcing agencies);
- The gain is in the efficiency of the customer company;
- Control your expenses through attractive prices offered by service providers;
- Reduction of turnover time;
- The ability to reorient internal teams to the core business and delegate secondary tasks to an external team;
- Acquisition of new skills through the services of a specialized agency;
- Access to a specialized and skilled workforce;
- Increasing the flexibility of human resources;
- Improving the competitiveness of the company.
Limitations and Disadvantages of Outsourcing
Better flexibility, improved quality, cost control, and outsourcing seem to be an alternative to many problems, but it also has disadvantages. The risks associated with outsourcing include:
- Loss of privacy;
- Loss of autonomy;
- Skills and experience drain;
- Hidden costs;
- Dependence on the subcontractor company.
Various Types of Outsourcing
Outsourcing can have several names:
- Outsourcing;
- BPO (Business Process Outsourcing);
- Subcontracting.
In all cases, the principle remains the same, delegate the execution of all or part of the client’s production to an external structure.
“A key driver of this business growth is outsourcing, which has become a cornerstone of Poland’s tech industry. It contributes one-third of the overall IT services market revenue, amounting to $3.49 billion. This subsector is anticipated to maintain its strong performance, with forecasts suggesting it will expand to $5.78 billion over the next five years.”Quoted from the article IT outsourcing to Poland by Neontri.
A company wishing to use outsourcing will have a choice between 3 options:
- Onshore outsourcing: involves the use of geographically remote service providers.
- Coastal outsourcing: involves working through a company based in a neighboring or border country.
- Offshore outsourcing: the goal is to use the services of an agency located in the same country as the client company.
Conditions for a Successful Outsourcing Strategy
In order to peacefully take advantage of all the benefits of this working agreement, the customer company must know how to adapt and, above all, comply with these 7 rules :
- Identify specific needs;
- Choose wisely the operations that will be subcontracted;
- Write clear and effective specifications;
- Choose an experienced outsourcing agency recognized in the industry.;
- Write a privacy clause;
- Implement tracking tools (Google Drive, Skype, Dropbox, Trello, etc.);
- Require daily reporting from an outsourcing agency;
- Outsourcing in numbers.
Are All Sectors Compatible with the Organization?
Theoretically yes. From administrative tasks to chartered accountant functions, including customer relations, supply chain, human resources management, and many others. However, in the context of an outsourcing operation, precautions must be taken. Functions that are part of the main activity of the customer company should be distinguished from secondary functions. The first cannot be outsourced. The choice is still made in accordance with the market, competition, risks, and goals of the company.
When to Use Outsourcing?
In certain situations, outsourcing takes the form of “dying”: a company chooses to outsource systems at the end of its career in order to focus on implementing new systems. These new systems are designed to replace them, so the type of outsourcing contract is temporary.
But is this the only appropriate time to consider outsourcing a business? This is far from the case because it is a strategy that every company can adopt to achieve the imperatives and goals set over time.
The company may choose to outsource operations. This requires the service provider to manage, for example, a fleet of computers and provide their maintenance. This form of outsourcing is chosen by small and medium-sized enterprises that do not yet have the resources to carry out such important management within the company.
When outsourcing applications, the company entrusts the entire service and its applications to the service provider so that he can focus on his core business. This happens when the customer company wants to completely free itself from this management. Structures often develop in stages. First, one function is delegated, and if successful, another, and so on.
How to Outsource?
It happens that companies that have actively used outsourcing subsequently retreat. The main reason is insufficient preparation. In many situations, the company either did not define the goals well, or could not find a suitable supplier, and the expected benefits were not achieved. It may happen that too much importance is attached to cost reduction.
Prepare Your Outsourcing
Carefully choose your teammates for each battle, and carefully think over each strategy to win the war: rigor and appropriate skills are the keys to a successful outsourcing campaign! Rigor in choosing an external service provider and regular monitoring of contracts is the key to successful outsourcing.
Indeed, after signing contracts, problems can threaten businesses and SMEs. It is necessary to monitor the work of service providers on a daily basis. This vigilance needs to be increased when the company is small because the balance of power is not always on its side. Service companies, as a rule, leave the most advanced skills for the largest structures.
To maintain project management, the company may organize a weekly meeting to summarize the results. Many companies do not always have the time or sufficient internal skills to monitor contracts. Then they must transfer to one or more subcontractors only those functions that they are able to control.
Outsourcing Solution Matrix
There are several tools for the rational selection of works to be subcontracted. These include a decision matrix that allows you to evaluate each option based on predefined criteria. The outsourcing solution matrix provides a more synthetic vision, taking into account the strategic importance of the activity in question and its contribution to operational excellence.
To decide whether to buy or do it yourself, whether it’s manufacturing, functions (including “ancillary” functions such as administration), professions (commercial outsourcing, payroll outsourcing, etc.), etc., here’s a tool to help you make a decision. It is presented in the form of a matrix, where one axis represents strategic importance, and the other — a contribution to operational efficiency (or operational excellence).
“In many cases, companies outsource payroll because they’ve determined it to be more cost-effective than managing payroll in-house. This has historically been one of the main incentives for any kind of outsourcing, and payroll functions are no exception. If these functions are passed along to a payroll outsourcing provider in a country with generally lower salaries and wages, much of the difference in employee compensation is recouped by the client company and savings can be significant.”Chauncey Crail from Forbes.
Let’s clarify that using the tool implies carrying out a thoughtful and organized approach with a set of goals after diagnosis, observation, and problems. If you notice, for example, that your company is too diversified to be able to invest and continue to develop all key skills, then the question arises about choosing which activities will continue to be performed internally and which will be outsourced with the goal of focusing on your core business. This matrix will appear at the right time and help you think about all the consequences, including operational ones.
Construction and Interpretation of the Matrix
The procedure for constructing this matrix is very simple. Just take each action within a specific area and ask about its strategic importance (affecting the success of your business and/or posing a serious risk in the medium and long term) and its contribution to operational excellence in the short term.
For this stage, see the decision matrix for his rating system, then build a matrix by placing each action on two axes based on his score.
4 Quadrants Comply with the Recommendations
- Create a strategic alliance: If the strategic impact is strong, but you do not have the operational skills to ensure its production, it is strategically recommended to team up with a partner to maintain maximum control over this activity while optimizing costs.
- Integration: There are two axes – strategic importance and operational efficiency. This quadrant clearly demonstrates that you must ensure this activity within your organization.
- Outsourcing: Minor impact in terms of strategy, even if you control production. Outsourcing this activity will free up resources to focus on key activities. In any case, invest where there are real problems for your business.
- Give up: Should you really continue this activity? This is a question that you should ask yourself. Salvation can also come from reworking to turn it into a value-creating activity: a change of scale, a total revision, etc.
Competition is fierce for all players operating in their markets. To deal with the situation, there is no other miraculous solution except to be more effective and better than others.
One of the keys to achieving this goal is to focus on these strengths, honing them, developing them, and thus becoming even better. This pose involves decision-making. And it is often more interesting to entrust the management of some of your activities to companies that perfectly possess the relevant know-how. IT, HR (payroll management, recruitment), hiring, etc. naturally suffer from outsourcing.
Conclusion
It is obvious that outsourcing provides companies with significant advantages, including flexibility, cost reduction, and time savings. Therefore, delegating secondary tasks to external performers in this way is a good option when companies want to focus on their core business and increase efficiency.
However, when choosing outsourcing, it is important to carefully select contractors and monitor the completion of tasks in order to avoid potential risks such as loss of confidentiality or dependence on external performers.
