A business may look like a “simple” thing, but the ground realities are always different. As a customer, you always get the final product, and you just pay for it; that’s it. But, do you ever wonder, is it that simple to make a great product? Well, the answer is NO.
Let’s take the simplest example, the smartphones. Now, you buy a cell phone, and it consists of hardware and software, right? But that is not it. A company had to do a lot of research (Research & Development) to create a design and features of that smartphone.
Then came other things such as manufacturing, assembling, software development, marketing, warranty claims, customer support, and a lot of other things. That is how a company made a smartphone and sold it to you.
It is virtually impossible for every business to manage everything from A to Z and to maintain the “impeccable” quality as well. This is where outsourcing comes in. Companies outsource some of their tasks to relevant experts to make sure everything comes with “perfection.”
What is Outsourcing
In business terms, outsourcing simply means hiring a third party (other company) to do the tasks for the hiring company. Outsourcing may include manufacturing, human resource management, marketing, or any other task the hiring company can’t or doesn’t want to do on its own.
The history of this business practice goes back to 1989, and it gradually became an integral part of the business world in the 1990s. However, outsourcing has always made it to top business controversies in the business world.
Those who are against this practice believe that it boosts job loss, especially when it comes to manufacturing concerns. However, supporters say that outsourcing is a great way to ensure maximum quality by hiring related experts. They also believe that it is a true depiction of the free market.
How Does Outsourcing Work?
It is a contract between two companies where the hiring/host company makes an agreement with another company. The company may hire the other company for one task or multiple. Moreover, the contract between the two companies includes several agreements related to quality assurance, brand name, and competitor affiliation, etc.
Also, the host company may work by following a different business model than the partner company. The hiring company can have its own staff and may operate from its own business premises.
For instance, Apple Inc. focuses on developing and selling its final product. Apple doesn’t do the manufacturing part on its own as they have hired Wistron for manufacturing. Apple works on a totally different business model, while Wistron has its own ways.
Outsourcing Vs Insourcing
|It is a flexible model that can help companies in reducing labor costs. Companies can hire low-cost labor from other countries as well.||Hiring your own labor can be costly because minimum wages are significantly high in many countries.|
|Outsourcing can leave the hiring company with no or minimal control over the partnering company.||Insourcing allows the companies to ensure better/complete control over the business activities.|
|It is a great way to hire experts in a particular department/field.||While following the insourcing policy, it can be quite difficult for a company to maintain professional expertise in every department.|
|Outsourcing may be a great tool to reduce labor costs and several other costs. However, it can be costly if a company partner with a company in another country. The host company will have to pay import taxes, tariffs, etc.||Insourcing, on the other hand, means the company does not have to pay these tariffs and import taxes.|
Why Do Companies Outsource?
Initially, the core objective of outsourcing was to reduce the overall costs and focus more on business goals and planning. However, with the passage of time, it has become an important tool, and cost-saving is just one benefit of outsourcing. Outsourcing has proved to be beneficial with many other attributes, such as:
- Outsourcing helps businesses on focusing their core objectives.
- It helps in improving service quality.
- It has significantly resolved capacity issues.
- Outsourcing ensures better access to intellectual capital.
- Outsourcing is an answer to a lot of business needs.
- It surely is a great way to reduce overall costs.
Types of Outsourcing
Outsourcing can be categorized into different types, and here are a few of them with examples:
IT outsourcing means a company hires a Tech company to do the related job for the host company. For instance, a restaurant may hire an IT company to create and manage a website and app for the host company. Or, a SAAS company may hire another IT company to store and manage its user data.
Manufacturing outsourcing means hiring another company for the manufacturing purpose. The cost of manufacturing can be very high in many countries. Therefore, companies often hire other companies from the same country or even another country for this purpose.
For instance, Wistron does the manufacturing for Apple, while Apple focuses on development and sales. Moreover, many companies outsource their manufacturing concerns to Chinese companies due to lower manufacturing costs in China.
Project outsourcing is another common form of outsourcing. When a company or a service provider finds it difficult to meet the exceeding demands from the customers, it outsources its projects to related specialists.
Freelancing is a very common example of project outsourcing. Or, sometimes, a law firm outsources its cases to freelance attorneys or another law firm.
Sometimes companies may outsource operational activities because of limited resources. These activities may include human resource management, supply chain, distribution, repairs, etc.
Process outsourcing includes a company hiring another company to handle one or more business process for the hiring company. For instance, a telecommunication company may hire a call center to answer or solve all the queries from the company’s customers.
Apart from that, other examples include accounting services, payroll, social media marketing, advertising, data recording, telemarketing, etc.
Professional outsourcing means hiring another company or even an individual for a specific purpose. For example, a company wants to create an effective sales or ad copy, but the company does not have a professional copywriter. A company may hire a professional copywriter for a specific task. Moreover, a company may hire a licensed auditor to evaluate the financial statements of the company.
Offshore outsourcing means the practice of engaging an external organization to perform business tasks in a far-off country (other countries). For example, Harley-Davidson Inc. is an American motorcycle manufacturer that has been offshoring its operations and opened several factories in India, Australia, and Brazil.
Advantages of Outsourcing
Outsourcing brings a lot of valuable options to the table, and here are some of them:
One of the most beneficial or the most important advantages of outsourcing is cost-saving. Outsourcing allows you to reduce your business cost to a great extent. For instance, there is a huge difference in minimum wages between Asia and Western Countries. Minimum wages are way lower in Asia.
A lot of companies hire Indian and Chinese companies to reduce their labor costs up to 60 percent. Most importantly, the quality of service in Asian countries is as good as you can get.
Outsourcing is a great channel to increase work efficiency. That said, when a company hires experts in a particular field, they bring their experience and skills to improve productivity and bring more efficiency to your cause.
Better Focus on Core Objectives
Outsourcing helps businesses to utilize their time and energy to focus on their core objectives. When a company outsources its non-core tasks to professionals, it not only brings efficient and top quality results, it also helps companies to focus on what they do best.
Outsourcing brings a lot of innovation to your business. When you hire professionals, they bring in their creativity, experience, exposure, and skills to even exceed your expectations.
Disadvantages of Outsourcing
Where outsourcing brings a lot of good “vibes,” it also has its cons as well:
Lack of control
Although outsourcing is great, at the same time, you will realize that you have no control over outsourced tasks/projects/processes. Companies operate with their own business models, and that gives less or no control to the hiring company.
Companies sometimes have to share their confidential or vital information with the partnering company. It can be a great threat to the company’s security.
Businesses can suffer huge losses if the partnering company fails to deliver on time. Not only it causes financial problems, but a company may also lose its loyal customers as well.
There can be a lack of communication between the hosting and partnering company. It mostly happens when there is a huge time zone difference between both companies.
Examples of Outsourcing
Nowadays, almost every other company outsources one or more of its tasks. Here are some examples:
As mentioned above, Apple does not manufacture its phones. It only does research and sales while Wistron does all the manufacturing for Apple. It is a good example of offshore outsourcing.
It may sound strange to you, but it was a Russian developer Igor Solomennikov who developed this app. The Founders of WhatsApp found Igor Solomennikov on RentACoder.com and outsourced the app development to him.
Skype is another company that you might familiar with and uses its service. It introduced the idea of communication via phone, chat, and video session with anyone and anywhere in the world. Skype outsourced its backend development to the Estonian development team and later, these developers became the partner.