Learn Why Companies Outsource

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Outsourcing can be defined as “the strategic use of outside resources to perform activities traditionally handled by internal staff and resources."

Outsourcing is a strategy by which an organization contracts out major functions to specialized and efficient service providers who ultimately become valued business partners. In some cases, outsourcing involves the transfer of employees from the company to the outsourcing company.

Outsourcing at a Glance

There have been many calls to bring jobs back to the United States. This was a big component of Donald Trump's election campaign, as well as his presidency. But according to some statistics, outsourcing is still front and center for many corporations.

American companies increased the use of outsourcing by 57% in 2016, according to the most recent data from Micro Sourcing, while only 9% terminated an outsourcing contract in the same period.

The top three countries for outsourcing industries were India, China and Malaysia.

Why Do Companies Outsource?

There are many reasons why a company may choose to outsource certain business functions. Some of the most common reasons include:

  • Reducing and controlling operating costs (the largest driver)
  • Improving company focus
  • Gaining access to world-class capabilities
  • Freeing internal resources for other purposes
  • Streamlining or increasing efficiency for time-consuming functions 
  • Maximizing use of external resources
  • Sharing risks with a partner company

But these reasons aren't enough to implement a successful outsourcing program. In fact, companies must ensure they consider every component and are able to meet the requirements for successful outsourcing. 

Downfalls of Outsourcing

While there are viable reasons why outsourcing can be effective, many companies often have to weigh the disadvantages, which can be difficult to manage. Here are some of the biggest cons associated with outsourcing:

  • Existing staff may feel disposable or threatened
  • Redundancies in staff
  • Issues with product/service quality (standards may differ geographically)
  • Problems with communication (language, time zones)
  • Loss of control over policies and procedures
  • Threats to data security

Who is Outsourcing?

Outsourcing didn't become popular until the 1990s, when cost saving became a big issue for many companies. At that time, resources that were outsourced were required by a company, but didn't necessarily have a big impact on its core business. A big chunk of these were customer service-related jobs that were handled over the phone. And that still exists today.

Some of the key industries that have outsourced, and continue to do so today, include financial services, retail, IT, pharmaceuticals and manufacturing, and computer technology and software. Of course, this isn't an exhaustive list, but it does represent key players that outsource.

Requirements for Successful Outsourcing 

In the early days, cost and headcount reduction were the most common reasons to outsource. Today, the drivers are often more strategic and focus on carrying out value-adding activities in-house where an organization can best utilize its own core competencies. The critical areas for a successful outsourcing program include:

  • Clarity concerning company goals and objectives
  • A strategic vision and plan
  • Vendor selection
  • Relationship management
  • Properly structured subcontract and vendor agreements
  • Open communication with stakeholders
  • Senior leadership support and involvement
  • Careful attention to personnel issues
  • Short-term financial justification

Let's dive a little deeper into two of these requirements: open communication, and executive and senior leadership support.

Open Communication

Open communication and executive support are particularly important to a successful outsourcing process. Additional consideration should be for a workable Service Level Agreement (SLA), which is openly available, to all staff involved.

Whatever the outcome of the outsourcing arrangement, managing change is fundamental to the success of the program. Assessing stakeholder requirements is the first part of this process, and having open channels of communication during this time is vital. Everyone concerned should be involved in the process.

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 communicate how the process will benefit the organization.

Today’s managers are looking ahead and recognizing that the responsibility for ensuring the success of their enterprise’s outsourcing initiatives does not stop when the ink has dried on the contract, but unfortunately, this has not always been the case.

How to Avoid Failed Outsourcing with Relationship Management

The combination of uncertainty and lack of attention to critical details has created a present day scenario where outsourcing contracts will be renegotiated or canceled within three years. Ongoing management of the relationship is important. Senior management must stay involved during the implementation of the contract.

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