The outsourcing industry is continuing its trek towards growth as it changes the way business is done. Many companies have contributed to the gradual increase of outsourcing services for many years. With the reputation of a dependable service provider, there are some things companies must consider before hiring an outsourcing firm.
Deciding to keep what companies are good at in-house and to outsource the rest is just the beginning. In theory, this seems like a logical way to decide whether outsourcing is beneficial.
Outsourcing has good, bad and risky components for companies who have goals to meet and profits to make. Aside from saving overhead costs, concerns about proprietary information, communications and the quality of service cannot be overlooked.
Generally speaking, outsourcing is when a company decides to contract one or more internal business processes to a third-party firm. For most, outsourcing is an effective cost-saving strategy when applied to the right processes. Like most business decisions, choosing to hire an outsourcing firm is a line item choice. In many cases, it is more affordable for a company to lease services from firms with comparative advantages than to absorb those costs internally.
Some people get confused between outsourcing and offshoring. While these two terms are not mutually exclusive, there are some similarities and basic differences. As mentioned previously, outsourcing is hiring a third-party firm to perform internal duties. Offshoring is hiring workers overseas to work for a company. The best illustration of offshoring is when a company in America establishes a call center in India.
Typically, companies use outsourcing firms to cut expenses without foregoing essential processes. Outsourcing also gives companies access to employees who have a special skill set. Unlike offshoring, companies do not need to hire a firm from a separate country. Local third-party firms and workers are available. However, outsourcing can occur outside the company’s country of origin.
Like outsourcing, the decision to use offshoring cost-saving is the primary reason most companies use this strategy. Bigger challenges such as management style, recruiting and culture clashes are likely to occur with offshoring.
There are times that the costs of running a company is cheaper than operating in the company’s country of origin. As a result, the company will move operations abroad to reduce expenses and offshoring becomes a subset of outsourcing.
Some functions such as printing materials, legal services or health insurance are obvious for companies to outsource. Other functions, however, are not so obvious to select. The deciding factor for some companies is to select functions based on in-house expertise.
However, the owner having an accounting background is not an automatic reason to file taxes and manage the books internally. Hiring an outside firm with an objective viewpoint might be the better option. Generally, there can be significant differences between deciding to keep certain functions in-house and hiring a professional.
Some of the common human resources related functions that companies may outsource include: • Benefits administration • Recruitment and staffing • Payroll, compensation and retirement plan administration • Relocation services • Training • Background and reference checks • Employee Assistance Program
Functions related to other areas of business operation that might be outsourced are: • Information technology (Network, software platforms) • Customer service • Manufacturing • Website design and hosting (Internet, Intranet) • Accounts receivable and accounts payable
There are key factors that lead companies to outsource certain business processes. A lack of expert labor in-house is a common reason that the outsourcing industry is a growing service in the business community. Staffing agencies offer cheap labor without compromising quality for some tasks that are necessary to keep the doors open. Another reason many companies cite is that outsourcing functions – both essential and nonessential – frees their ability to concentrate on crucial processes.
To be certain, there are some outsourced tasks that make good business sense. An illustration of this is using a temporary agency to hire a receptionist. While a receptionist is not classified as a senior level position, the roles and duties of this position are critical to most companies, particularly those in the service industry.
Someone has to answer the telephones and hiring an employee through a temporary agency that specializes in recruiting people with the skills and experience to handle the job may be the better option. Usually, the rate a company pays the temporary agency is much less than the cost of advertising, interviewing and hiring a full-time employee. If the person hired through the agency does not work out, the temporary agency will happily send a replacement – at no extra cost to the company.
Perhaps the biggest benefit that companies gain from outsourcing is being able to save money. The amount saved largely depends on the size of the company and the functions being outsourced. Consider, for example, the cost of hiring a full-time IT department compared to the cost of outsourcing help desk, maintenance and support services. Most companies will pay significantly less with an outsourcing firm.
As a company grows, it is a good idea to reevaluate the decision to outsource. Larger companies could save more by hiring an in-house staff to manage critical IT functions. Security issues and proprietary information may also change the dynamics for companies that outsource IT services.
Another benefit to outsourcing includes access to expert knowledge. Most outsourced tasks are performed by firms that specialize in a particular field. In addition to people knowledge, these firms have access to specialized equipment and resources that are better than the outsourcing company. Tasks are completed more effectively without losing quality output.
Just as some companies have good reasons to outsource, many others do it for the wrong reasons. Hiring an outside company when management is frustrated with certain tasks or simply does not know what to do are never justified reasons. Not having a business purpose for hiring an outsourcing firm is another worst case waiting to happen.
Even if companies have good reasons for hiring an outsourcing firm, some make the mistake of hiring a firm that is not a good fit. The wrong decision does not remain hidden for long. In a short time span, problem areas are at the fore such as stretched delivery time frames and sub-standard quality output. Regulating these problems is much easier when they arise within a company than with an outsourced firm.
Another bad experience for some companies is dealing with hidden costs from the firm. In many situations, outsourcing is a cost-effective solution. This changes rapidly when there are hidden costs in a legally binding contract.
One thing companies have to watch carefully is how an outsourced firm deals with customers. A lack of customer focus can mean death to a company that relies heavily on customer satisfaction. Firms that cater to multiple businesses might lack the customer care focus that the company desires.
There are crucial aspects related to the business model that companies may not want to outsource. A disadvantage to outsourcing is placing part of the company into someone else’s hands. If the outsourcing firm does not resolutely grasp the vision and goals of the company, this could mean disaster for the company’s future.
This is not to say that a company cannot recover from a bad partnership. Recovery is possible, but not without risking the loss of customers and a positive reputation in the process.
Trust is crucial between a company and the outsourced firm. If there are any questions about the firm’s solvency, a company should look for services elsewhere. Adapting to changing needs of a company is another concern before hiring an outsourced firm. A company should look for one that offers foresight and ingenuity for the company’s industry.
There is also a risk to exposing confidential data and trade secrets. When outsourcing payroll and recruiting services, for example, the company should be mindful of personal data changing hands. An outsourced firm should have the resources and systems that will secure confidential information on the same level as the company.
Hiring an outsourcing firm to handle customer issues can eliminate direct communication between the company and its customers. This could prevent solid relationship building and could lead to customer dissatisfaction.
Clearly, outsourcing is not for everyone, even if the industry is growing each year. Some companies have to deal with internal employees fearing looming job losses after the decision to outsource. On the other hand, some companies may become over dependent on outsourcing services. Ultimately, companies should weigh the benefits against the risks and make decisions based on what is necessary, and not on what is popular.
If outsourcing is going to work for a company, the first thing is to select the right partner. The name alone is not a guarantee that the firm can really do the job. A company should ask for and receive references from other companies that have used, or are using, the firm’s services. Basically, the company should know which industries the firm serves and the type of work load it can handle. If functions are deadline critical, the company needs solid reassurances that the firm can meet each deadline.
Anything that is critical should be outlined in a contract. Everything that the company expects should be written clearly with both parties understanding and agreeing to expectations. Deliverables should be documented and the company should have legal counsel review the contract before signing.
Some specifications in the contract should state the beginning and ending dates of the contract, early termination penalties, at-risk fees to reinforce standards, data security and the escalation process for handling disputes.
Preparation occurs internally and externally for outsourcing. A company should have a rationale for using an outsourcing firm, develop a strategy and communicate the plan to employees to optimize chances for a successful partnership.