Every company strives to stay on top of the competition but no business can be an expert at everything. Strategic outsourcing is the perfect solution to help companies optimize business processes and see immediate benefits. In this article, we will explain strategic outsourcing and what value it can bring to your company.
According to Grand View Research, the global outsourcing market size was valued at USD 261.9 billion in 2022 – an impressive number which only continues to rapidly grow. Moreover, the global outsourcing survey conducted by Deloitte in 2022 stated that 76% of executives confirm that they outsource some or all of their IT operations.
But even with those stats, in our decades long experience we’ve seen many businesses hesitate about whether or not they should do outsourcing. And while it’s common knowledge that not all outsourcing stories are success stories, at OMI we believe that strategic outsourcing is something that is at least worth considering.
Our team knows how to do it correctly and in this article we’d like to tell you all about strategic outsourcing – its types, pros, cons as well as when you should outsource and when you shouldn’t.
What Is Strategic Outsourcing?
Strategic outsourced services represent a set of operations that are delegated by a company for management to a third-party service provider. Most commonly, this process is associated with small companies that do not have enough resources to manage all tasks themselves. Outsourcing is also widely used among mid-sized companies and large enterprises. With the help of strategic outsourcing, companies across various industries can leverage a partner’s expertise gained through years of practice and research. As a result, a company can improve its business state in several areas.
The primary purpose of strategic outsourcing is to use external resources in the best way by leveraging the latest technologies and industry trends, along with a high level of expertise to improve the efficiency and competitiveness of the company.
The ultimate result of the successfully outsourced project or team is the development of a value chain, where all stages of internal business processes are delivered at the highest quality and accuracy with minimal cost.
It is also important to formulate your strategic position in order to identify the need of outsourcing different components of the value chain. According to Michael Porter, the strategic approach to outsource and project is by implementing the five important principles of strategic positioning:
- Company image;
- Competitiveness of goods and services;
- Sales opportunities;
- Technical characteristics of the company;
- Financial condition of the company.
Types of Strategic Outsourcing
Business Process Outsourcing
Business Process Outsourcing, also known as professional outsourcing, is one of the most popular types of outsourcing, that allows companies to save a huge amount of cost of maintaining an in-house team of experts and tools.
For most businesses, it is very common to outsource specific business operations to companies that are specialized in that particular service and maintain a well established infrastructure in their field of work. Business process outsourcing includes marketing, accounting, hiring and recruitment, legal, public relations, and many more specialized services that require a dedicated team of experts.
Such types of contract help companies to avoid developing a high-level process of business operations internally, that are beyond their capacity (economically and technically). Process-specific outsourcing allows businesses to pay for services and gain access to high quality resources, while significantly reducing the overhead costs.
IT Outsourcing
IT outsourcing is one of the most common strategic outsourcing today, that involves subcontracting activities to fulfill your business’s IT needs. IT Outsourcing includes services that range from development to maintenance and support.
Almost every type of business today works with technology on some level. Every business has certain IT needs depending on the nature, size, and type, making it the most commonly outsourced department.
Services of a certified IT specialist are not cheap. Being one of the most highly paid jobs in the world, it is far less expensive for companies to outsource a third party IT team, as compared to building an in-house one. While most smaller companies often outsource the entire IT activities, enterprises often outsource a portion of IT functions, such as data management, customer support, etc.
Manufacturer Outsourcing
Manufacturer outsourcing, also known as production outsourcing services, are usually quite industry-specific. For example, an automobile manufacturer might outsource certain components or parts of a vehicle such as making and installing windows. These types of outsourcing contracts help the company to reduce production cost and improve assembling time.
Despite several advantages of manufacturer outsourcing, there are several potential risks in this type of outsourcing – such as quality issues, or service delivery that may hinder the overall production process. But in most cases, manufacturer outsourcing is necessary for small and medium size businesses to survive in a competitive market.
Many businesses, especially the small and mid-size businesses, simply lack the capital to scale and compete with big players. Most of the companies don’t have enough capacity to invest in all the aspects of the business, that includes latest technology, personnel, equipment upgrades, and continuously evolving business processes. This makes it nearly impossible for companies to grow and develop all the business departments and stay 100% self-sufficient.
Without the help of third-party companies, it is very difficult to sustain and compete in today’s market, where product life cycles are shrinking rapidly.
Benefits of Outsourced Services
When handing over operations to an outsourced partner, a company can leverage the following strategic benefits of outsourcing:
- Reduced costs. One of the main reasons why companies use strategic outsourcing is the desire to cut costs. You can fully rely on a partner’s knowledge and experience rather than hiring specific personnel. Automation and optimization commonly go along with outsourcing, thus allowing businesses to save on operational costs.
- More time to focus on core business. Outsourcing helps companies get rid of an array of routine and repetitive tasks, thus giving more time to manage their major specialization and business challenges that require human interaction and judgment.
- Better risk management. When trying to solve challenges yourself without the required expertise, you are likely to make costly mistakes. Even attempts to acquire said expertise could be in vain. You might hire the wrong person, or there is not enough consistent workload to keep this person in house on a full-time job. However, when you outsource the work to experts, you can better manage risks across the entire organization.
- Improved resource utilization. Many companies employ out-of-box software and might not take maximum advantage of its use. The reason for this is that these systems are not adjusted to the specific company’s needs and goals, and they can’t be. But outsourcing software customization and integration to third party experts, helps you leverage its full potential.
- Gain competitive advantage. The above-mentioned advantages bring us to the main benefit delivered with the strategic outsourced services. Every business desires to be the best in its market and own a competitive advantage over other players. Transformation across an array of areas in your business will help you become more flexible, drive growth, manage costs and stay on top of the competition.
- Access to a global knowledge base. You can’t be an expert in everything. But you can easily access a pool of resources and knowledge when partnering with various service providers. Companies that specialize in outsourced services spend their time and money to provide you with the best specialists in the market allowing you to benefit from their expertise. Because just like you, they want to stay competitive and provide the best services at the best possible price.
Challenges of Outsourced Services
Despite the advantages, outsourcing may involve some risk:
Loss of Control
Your managers and decision makers may feel that they have lost total control over the company’s activities. For instance, those concerns may include issues with upholding corporate regulations, maintaining quality standards, and guaranteeing data security. To make sure that your business performance isn’t out of your hands, make sure at the vetting stage that the outsourced team you hire offers transparent communication and lets you know what their solutions to possible problems are before they arise. On top of that, you should have clearly defined KPIs, so that the team knows what exactly the benchmark for successful work with you is. Finally, it’s always a bonus if the outsourced team offers additional training for your internal team to better deal with tasks and tools that you collaborate on.
Hidden Costs
Outsourcing costs vary between different activities and are not always made clear before a business agreement is struck. Some common problems connected with that are surprise extra costs and little transparency in invoicing/billing. This can be avoided if you do your due diligence at the contract signing stage, outlining all services, how much they cost, and what the maximum amount of additional unexpected charges can be. You may also consider adopting a performance-based payment model, if the outsourced team agrees to it – this way, you only pay for clear results, not the amount of work done (which isn’t always high quality). Lastly, don’t forget to perform regular audits whilst you’re working with an outside team; organize meetings where together you will break down your expenses for a certain period of time and forecasted spendings in the next month/quarter/year.
Low Quality
As good as outsourcing can be, it’s also true that some outside team might not have enough claimed knowledge to perform your tasks for you and end up providing low-quality services. Unfortunately, there isn’t a guaranteed way to safeguard yourself from poor outsourced team performances, but you can minimize those risks by a very scrutinous vetting process – ask the team for the proof of their expertise, certifications and past success stories. An aforementioned performance-based payment model can also protect you from getting poor results for big money.
Even though the above-mentioned risks exist, they directly depend on what service providers you choose and how streamlined your communication is with them. As long as you partner with reliable specialists that have gained a certain level of trust in the market, these risks can be avoided.
Why and When Should You Outsource?
The number of reasons that lead companies to outsourcing is endless. Some of them are willing to benefit from time and cost savings, others simply don’t have enough resources to perform certain tasks. But how do you decide when it’s time to address third-party service providers for help?
The best way to understand whether outsourcing is a good option for you is to analyze your current business state and compare the cost and time spent on different options. Calculate how much it will cost to complete the task with the help of internal vs. outsourced resources. Identify whether it’s a one-time job or it’s a long-term goal that requires continuous support.
If you decide that outsourcing is the most cost-effective solution for your business, make sure to have clear goals and deadlines in mind. The better you explain your needs to the partners, the better results you get.
