Whether we are discussing payroll management and HR, customer support, or entire production facilities, outsourcing is a common practice across all sectors and scales of the global industry. Today, we are going to take a brief look at the top seven reasons why companies outsource, so that readers can identify whether their own entrepreneurial ventures can benefit from the practice.
Lowered Operational and Labor Expenses
The primary reason why people outsource is that they wish to save on operational expenses, which primarily include lower labor costs. If a company can successfully lower its operational costs without letting it impact the quality of the output, it can lower selling prices to boost revenue generation, and still maintain a higher profit margin.
Better Utilization of Core Resources
Small and medium-sized businesses have a limited amount of core resources to bank on, which includes employees, business assets, and funds among other things. Outsourcing administrative duties to an external partner allows the business to focus its limited core resources on the most important aspects of the business.
Since outsourcing admin duties is cheaper than hiring full-time employees to do the work, more money can be put into growing the company’s core strength further for better business performance. As G&A Partners explain, HROs/ASOs and PEOs are each distinct types of HR outsourcing and the company management needs to make sure they choose the right type to partner with. Wrong decisions in this regard can end up being unnecessarily expensive for the company, despite it outsourcing the work.
Accessing a Global Market
Now, there is a difference between outsourcing and offshoring, although the core idea remains the same. Outsourcing is a broad term that can be attributed to any work contracted out to a third party, irrespective of whether the company is American or not. Offshoring is a comparatively specific term that refers to work that has been outsourced to companies/individuals located in nations outside the company’s nation of origin. The advantage of outsourcing while keeping your offshoring options open is that it allows the business to access a much larger pool of potential business partners and even recruits.
Expanding to a Target International Market
When a company is ready for international expansion, it will need to set up local connections, establishments, and a local workforce. Keep in mind that this isn’t exactly the same as setting up a local outlet for selling international goods. Instead, this would be a full expansion, complete with facilities that will in the future become capable of self-sustenance.
Such expansions usually take time to start and even more time to get established, but self-sustenance is important because only that can allow the manufactured products or company services to be provided befitting the local economy, without incurring heavy import duties and taxes. Before the complete expansion can be cemented though, it must start with outsourcing and localizinga portion of the business.
Saving a Company
There are several companies across the world today that would have had to scale down their operations severely or go bankrupt if all their outsourcing links were cut off. The easy access to affordable labor that globalization has provided to small and large enterprises remains critical to maintaining a healthy, global economy.
On top of that, outsourcing is also essential to keep the lights on for a large number of local companies. In the past, several companies have had to either raise the cost of their products to absurd price tags or perish in the process of managing with local labor only. To keep the cost of the final products affordable for a larger section of the population, as well as to keep a sustainable profit margin, outsourcing is often the only option.
Growing the Capacity to Hire Locally
As explained earlier, the goal behind outsourcing jobs is multifaceted. One of those goals is certainly that of lowering operating expenses and getting access to affordable labor. However, the second aspect of outsourcing some of the work is to focus the company’s limited local resources on the business end.
There is also a third aspect, of course, which is that of channeling the funds saved from outsourcing right back into growing the company’s core resources. This is the part that creates local jobs and allows small businesses to become stronger and bigger, while simultaneously boosting the local economy. To better understand the principle at work, go through this post on Forbes.
Improving Quality/Speed of Work
As already mentioned, outsourcing is not the same as overseas outsourcing, aka offshoring.This is quite relevant because a company will often decide to outsource a part of the work by partnering up with another local company, simply because they need better supplies/parts/products/employees than the ones they are currently capable of producing/hiring in-house at the moment.This allows growing businesses to provide better quality without going bankrupt in the setup process.
Manufacturing would be the most common example in this respect because the cost of setting up a highly advanced manufacturing unit is almost always too high for small entrepreneurial ventures. Established businesses in the same sector usually offer bulk rates for high-quality products, on which they can rely until they become financially capable of manufacturing on their own.
An example within the service sector would be that of HR and payroll outsourcing. Renowned local HR companies will often handle the entire administrative responsibilities of several new and/or smaller companies, which makes it possible for the smaller businesses to improve their prime business model and grow their core employee strength.
IT is another example, with IT functions often outsourced by smaller companies.
These are the main reasons why outsourcing is so important, not just for companies or the employees who depend on those jobs, but also for maintaining the global economy. Responsible outsourcing can indeed create jobs, irrespective of whether the work is being to be outsourced to outside nations or not. From the sole perspective of a small business though, outsourcing to at least some degree is essential for them to survive in this highly competitive market.