06 February 2020

Why Do Companies Outsource?

You might be wondering why any company would want to pay someone else to complete its business processes. There are, of course, some disadvantages to outsourcing, but this guide will also cover the benefits and provide practical tips on how to start outsourcing.

Business-Process Outsourcing

First off, we should define what we’re talking about here. Business-process outsourcing is the practice of hiring another firm to carry out a task that would otherwise have been completed in-house. Companies can outsource any process, from performing a particular service to actually making goods on its behalf. 

A common example is the use of third-party cloud-computing services such as Google Drive to store company data. Accomplishing this task in-house would be impossible for most firms as the cash required to invest in cloud-computing technology would simply be too much – given that it’s relatively cheap to store stuff on a cloud platform, there would also be very little point of bringing this in-house.

Think about another frequently cited example: manufacturing. Fashion brands like Nike outsources the making of clothes to companies abroad; computer companies such as Apple outsources the manufacture of particular components to third parties, and Johnson & Johnson outsources the production of many of its pharmaceuticals.

There have been much more unusual cases of outsourcing beyond the usual IT and manufacturing. In a bizarre turn of events, Canadian artist Drew Smith outsourced the production of his music video to a dance company based in India – at just $2,000, the video was undoubtedly a bargain, but you’ll have to check it out for yourself to decide if it was really worth it.

Benefits of Outsourcing

As you may already have gathered from the above examples, the biggest benefit of outsourcing is the potential for cost-savings. Lots of IT and manufacturing processes require a significant initial investment to carry out in-house, so are often outsourced. For this reason, outsourcing is often favoured by start-ups and smaller businesses that have limited resources and are looking to save cash.

Another pretty important perk of outsourcing is that it can make your business more efficient. Rather than your employees spreading themselves thinly over tonnes of different admin tasks, outsourcing enables firms to focus on what they’re really good at and become specialised as they grow. 57% of senior executives interviewed by Grant Thornton cited efficiency gains as their reason for outsourcing.

This point works both ways. Whilst your business will become really good at its primary processes now that staff have the time to focus on them, third-party companies have lots of experience carrying out a particular service and so tend to excel at it. Not only can outsourcing make you more efficient, but it can also boost the quality of your offering.

Disadvantages of Outsourcing

It’s not all good when it comes to outsourcing. It can, in fact, pose significant risks to your business if you’re not careful. With this in mind, there are certain precautions that you really ought to think about taking.

One pretty problematic aspect of outsourcing centres around intellectual property. When you outsource a particular process to a third-party, you’re going to have to share some important information about how you do your business in order for them to help you.

For example, you may need to hand over an important methodology or technology that you’ve developed. Depending on how close the outsourced process is to your core business function, this information could be critical to the success of your company.

Intellectual property can also be created as a result of an outsourcing partnership. If this is likely to happen when you outsource something, then have an ownership agreement in place from the outset. Either way, smart business people fully articulate their policy on intellectual property before they outsource.

You’ve probably already thought of the more obvious negative to outsourcing: you inevitably lose some control. Make sure you really trust the company you’re outsourcing to and can guarantee that they’ll provide the level of quality you’re after.

Some people view outsourcing as unethical in that it takes business away from your local area and gives it to other companies (usually abroad). For this reason, outsourcing can sometimes create a backlash against your firm and you should think carefully before letting the public know.

Practical Tips on Outsourcing

Now that you’ve had a chance to weigh up the pros and cons, it’s time to give you some practical tips on how to start outsourcing:

  • The first thing for you to think about is choosing the right partner. A lot rests on which firm you choose to outsource to, so do your research and check out plenty of different options. Make sure you don’t just select a company based on price. Take a look at their portfolio and vet them thoroughly.
  • Your business needs to have a good think about intellectual property before going any further. Make sure that your business's existing intellectual property is secured, in addition to anything that might be created as a result of your partnership.
  • Be super clear with your outsourcing partners about how long you expect the project to go on for and what you expect from them. 
  • Put all of this down in a contract. This contract should also outline specific milestones that must be reached before payments are made.

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Hannah Lloyd-Jones