What is Outsourcing and How does it Benefit Businesses?

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Every generation has had their own business slogans and catchwords. During the 1950’s it was “plastic” as this new product was (realistically) seen as the future of business. Later on, in the last century, it was terms like the “sleeping giant” (China) and then “globalization” as companies and production became less localized and more globalized. If we speak about the 21st Century, two main catchwords come to mind: Outsourcing & Offshoring.

Business folks are forever debating the differences between these two words – and especially the pros & cons of each. In a nutshell, one can say that Outsourcing is having any company function (production, programming, finance/accounting, recruiting) performed outside core company departments and teams, while offshoring is the actuality of setting up a company location/team in another country. We will not “beat the dead horse” hereby debating the attributes of Outsourcing vs Offshoring, but instead speak about the advantages of the former, i.e. Outsourcing as a potential start towards Offshoring.

This first pertinent thing to mention regarding outsourcing is it’s most beneficial when speaking about short-term, non-critical tasks or projects. In this way, the company can keep its core teams working on key products and functions and delegate the less important ones to an outsourcing company. If a company is thinking in a “bigger” and “longer-term” manner, they should consider setting up an offshore company from the get-go (although we won’t cover that in this article). 

When considering outsourcing vs offshoring, it’s best to consider both what functions may be advantageous to outsource, and the short- and long- term of things. Many IT companies only need a small team of contractors at first, then later it may become necessary to outsource areas like legal, accounting, or recruiting to that outsourcing company in another country (with different legal structures and customs), in other words: offshoring.

Let’s start out by looking more closely at these outsourcing advantages:

  • Time zones – No longer are we stuck in one time zone; now we can have teams working in several zones, similar to when a factory has day/evening/night shifts, i.e. production can continue running almost all the time. One can easily see the benefit of completing projects in an expedient manner;
  • Additional material & human resources – According to many surveys, the US now has a shortage of hundreds of thousands of skilled workers, especially in the IT arena; whereas in many other countries (Eastern Europe / Asia), they are producing specialists in ever-increasing numbers. That’s a vast pool of skilled workers just waiting to be utilized remotely;
  • Mitigating risks – You just pay the outsourcing partner an agreed-upon fee and they do the rest;
  • Lower costs – Outsourcing could save you millions, as you decide the budget at the on-set and agree on this with a partner. Even if you don’t actually save in dollars, you can save in the many headaches involved in micro-managing a short-term, non-critical task or project;
  • Keep your inside team focused on the inside job – in other words, your key teams won’t get distracted trying to micro-manage other on-critical functions;
  • Fixed labor costs shifted to variable costs – i.e. you only pay for what you get!

Now that we’ve looked over a few of the short-term advantages of considering outsourcing, let’s look at the broader aspects of starting (from the beginning) to create a strategy of mitigating rising costs and increasing global market presence, or namely offshoring.

As already mentioned, outsourcing is better considered in the shorter term, yet that doesn’t mean it ends after the task is completed. The wise man looks at all future options as well, and the future may well be later transiting from just outsourcing to offshoring a company business center in another country – with your “own managers and team members” loyal to your brand and product – as you may have already ascertained, outsourcing does not provide for either of these important aspects.

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