Why Companies Outsource

Definition & Examples of Outsourcing

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Outsourcing is when an entity uses outside resources to perform activities that could've been handled by internal staff and resources. A company outsourcing work may hire contractors to perform functions that were previously performed by employees.

Here's what you need to know about outsourcing, and why so many companies do it.

What Is Outsourcing?

The term "outsourcing" is often associated with companies that fire domestic employees and hire remote contractors overseas to do the same job for cheaper pay. While that certainly does happen, it is only one example of outsourcing—and it's one of the most extreme forms of outsourcing.

Outsourcing is when a company hires an outside contractor to do what an employee could. The outside contractor could be overseas, or it could be someone who lives just down the street. Outsourced work could include everything from janitorial duties to IT help to customer service.

In some cases, employees may not lose their jobs. The outsourcing could involve the transfer of employees from the original company's payroll to an outsourcing company that will handle payroll taxes, benefits, and other issues for those employees. The employees' day-to-day work won't change significantly, but their paychecks will technically come from a different entity.

Pros and Cons of Outsourcing

  • Reduces and controls operating costs

  • Improves company focus

  • Expands talent pool

  • Shares risk with another company

  • Employees could feel threatened

  • Standards could differ

  • Communication issues could arise

  • Threats to security

Pros Explained

  • Reduces and controls operating costs: Outsourcing is often cheaper than hiring a new employee, and it also takes away some level of uncertainty about costs. The contract will determine exactly what will get done and for what price.
  • Improves company focus: By outsourcing less important tasks, you increase the company's focus on tasks that are deemed more vital.
  • Expands talent pool: Rather than relying on the talents among your employees, outsourcing allows you to draw from a virtually endless pool of potential talent.
  • Shares risk with another company: The contractor or contracting company will share some of the responsibility for completing the tasks that are assigned to them.

Cons Explained

  • Employees could feel threatened: If employees watch their coworkers get replaced by contractors, they could worry that they'll be replaced by outsourcing next. This could crush morale and productivity.
  • Standards could differ: When you outsource a task, you're trusting the contractor to live up to your idea of quality. If you and the contractor differ on standards, you could get a very different product or service than you had in mind. If you outsource to a different country, you need to ensure that their regulatory standards are similar to those in your home country.
  • Communication issues could arise: When you outsource work, checking in on the people performing that work becomes more difficult. You can't just walk across the office, you'll have to write an email or make a phone call and hope the contractor is available at that moment. If you're outsourcing to another country, you may have to consider time differences and language barriers, as well.
  • Increases threats to security: The more people who have access to a company's networks, data, and resources, the more security threats exist. Adding any workers to your company comes with a risk, and when you use an outsourcing company, that whole company could have access to sensitive information.

Requirements for Successful Outsourcing 

Critical aspects of a successful outsourcing program include:

  • Clear goals, visions, and plans
  • Careful vendor selection
  • Relationship management
  • Properly structured subcontract and vendor agreements
  • Open communication with stakeholders
  • Executive support
  • Careful attention to personnel issues
  • Short-term financial justification

Of these, three aspects are particularly important for ensuring a successful outsourcing experience. Find more details on open communication, executive support, and relationship management below.

Open Communication

Open, clear, and consistent communication is fundamental to the success of the program. Any changes that need to be made on the fly will be more successful if the contractor and company can clearly communicate about the changes. Stakeholders should also clearly understand their role in the process. Communication channels between all parties should remain open.

Executive Support

Strategic objectives, such as outsourcing initiatives, must come from the top echelon of a company. Senior management must articulate the goals and objectives of the outsourcing initiative, and they must communicate how the process will benefit the organization.

Ensuring the success of outsourcing initiatives does not stop when the ink has dried on the contract, so executive leadership must continue to be engaged as contract work continues.

Relationship Management

Just as executives should remain engaged with the goals of outsourcing throughout the contract work, the person managing the contractors must continue to cultivate a good relationship with the contractors. This includes checking in on work, ensuring good morale, and addressing any issues that arise.

Not only should there be a clearly defined escalation procedure, but senior management should meet at appropriate intervals to discuss the outsourcing relationship. Meetings also should be held at the operational level to address the working of the outsourcing contract in practice, to identify and resolve any problems that have been encountered, and to agree on changes to ensure continued satisfaction.