Outsourcing is a business practice in which services or business functions are provided to a third party for them to perform services and handle operations for a company.
The outsourcing company hires workers to do the tasks or services on-site at the hiring company's own facilities or at external locations. Companies can outsource many tasks or services.
They often outsource information technology services, including programming, application development, and technical support.
They outsourced customer service and called service functions. They can outsource other types of work, such as manufacturing processes, human resources tasks, and financial operations. Companies can outsource entire divisions, such as their entire IT department, or just parts of a particular department.
Outsourcing was first recognized as a business strategy in 1989 and became an integral part of business economics during the 1990s.
There is a lot of controversy surrounding the practice of outsourcing. Critics argue that the tax increase has caused the loss of jobs in the manufacturing sector.
Supporters of this measure say that it stimulates businesses to allocate resources in the most productive way and that outsourcing helps maintain free market economies on a global scale.
How Does Outsourcing Work?
When a company is outsourcing services, it is important to focus on the business relationship as much as the logistics.
Outsourcing is more about relationship management than service-level agreements and is a partnership, not a procurement venture. One of the most important things to do when outsourcing is to maintain a healthy and trust-based relationship with your suppliers. This is more complicated than just setting service levels and relationships.
Some experts recommend putting extra emphasis on the exit clause of a service agreement. It is important for companies to know when the contractual agreement will expire and make sure that the involved parties fulfill their obligations and stay until the contract is up.
Outsourcing has been used by many businesses since the early 1990s. Most freelancers or outsourcing providers fall into one of the following categories:
- Inbound Customer Service
- Outbound Telemarketing
- Web Design & Development
- Online Marketing
- Back Office / Admin Support
- Virtual Assistant Services
- Accounting and HR Management
- Marketing & Sales Support
Some companies outsource their phone customer service, which is done in countries where the price is lower than in the United States.
The three countries with the highest levels of outsourcing activity are India, China, and Malaysia. Cloud services are responsible for a third of the outsourcing market, and that number is growing. These services are offered by traditional outsourcing providers and others.
Why Do Companies Outsource Services?
Outsourcing can help companies significantly reduce labor costs. When a company uses outsourcing, it enlists the help of external organizations that are not affiliated with the company to complete specific tasks.
External organizations usually set up different compensation structures with their employees than the outsourcing company, allowing them to get the job done for considerably less money. This enables the company that outsources to lower costs\labor costs by outsourcing.
Businesses can also avoid expenses associated with overhead, equipment, and technology. Companies can use outsourcing to improve their focus on the key aspects of their business.
Outsourcing non-core activities can increase efficiency and productivity because another entity can perform these smaller tasks better than the company itself. This strategy may help you achieve faster turnaround times, increased competitiveness within an industry, and the cutting of overall operational costs.
Types Of Outsourcing
There are several ways to outsource a business process, and depending on the process, one may be preferable over another. There are a few different types of relationships based on how far apart the two people are in terms of distance. These types are:
* Offshore outsourcing: Relocating work or services to third-party providers overseas. Offshoring means outsourcing business operations to far-off countries. For example, American companies outsourcing business operations to India
* Onshore outsourcing: Relocating work or services to lower-cost locations in the company's own country. Also called onshoring or reshoring, this outsourcing type involves outsourcing business operations to the same country as the company’s headquarters. For example, a company in New York outsourcing business operations to California.
* Nearshore outsourcing: Relocating work or services to people in nearby, often bordering regions and countries. Nearshore outsourcing hires business operations to geographically close countries. For example, American companies outsource business operations to Mexico City.
Outsourcing agreements can vary greatly in scope. If you're looking for certain types of work, hiring freelancers on a job-by-job basis may be a better option. If you're looking to outsource your entire IT department, you'll need to be sure that you have clear requirements in place.
Outsourcing Pros and Cons
Outsourcing can help avoid the time-consuming process of hiring and training new staff while allowing businesses to grow.
1. Lower costs: Outsourcing can sometimes reduce costs. A company may want to reduce their labor costs by hiring freelancers, who do not receive benefits or require office space and are therefore cheaper than full-time employees. Companies can reduce labor costs by outsourcing operations to a location with a lower minimum wage. Overall this is the most prominent advantage!
2. Flexibility: Some companies know it may be more cost-effective to hire short-term outside contractors when demand is high than to hire new employees who may not be able to afford them during times of less demand. An e-commerce retailer may outsource customer service during the winter holidays in order to save on costs.
3. Specialization: Outsourcing firms tend to deal with more than one business at a time. These firms run operations day in, and day out, working on their specific part of the process.
As with the division of labor, they are able to really focus on and enhance their capabilities. For example, security firms are much better equipped to train and source qualified personnel, as opposed to the local supermarket. This is because the security firm will already have processes and structures in place – such as training personnel and manuals.
4. Better focus: Outsourcing makes it possible for companies to temporarily expand when demand is high while allowing their teams to focus on the aspects that made the business successful in the first place. This is especially true of startups, which often operate on a smaller scale.
5. Constant service: By outsourcing production, particularly abroad, the firm is able to operate on a 24-hour basis. For a firm that needs a contact center open to customers all day, this can be seen as a crucial advantage. Customers may need assistance during the night, so having someone on hand to help is important if it wants to maintain a high level of service. Because other countries have different time zones.
1. Loss of control: When outsourcing, the company essentially loses control over what is being produced and it's quality. The 1,000 units the company receives must be of the highest quality. The firm is at the mercy of its outsourcing partner, which can make or break it. If a key part of the business is outsourced, the firm has little negotiating power to move – largely because a move may have a significant impact on its business.
Large companies like Nike and Apple may have more influence over their outsourcing partners, but smaller firms may find it harder to get what they want. When a firm wants to outsource new products from a partner, it's important to be very careful. They may want their partner to develop a new product, but because of their size, they are not able to.
2. Communication issues: Adding a third-party provider can create new communication and logistics issues if the companies have different business practices, company cultures, or project management styles. If you don't have direct oversight, it can be harder to catch these problems in the early stages, and they may be more difficult to fix than internal problems. This is especially relevant when working across time zones.
3. Security vulnerabilities: When outsourcing key aspects of the business abroad, there is a potential risk to intellectual property rights and other aspects of security. At the moment, China presents a real and credible threat to the firm’s intellectual property rights and wider security. In fact, research by CNBC found that Chinese firms stole from 1 in 3 US companies.
4. Slower turnaround times: When outsourcing, the partner firm will have many other customers to work with. A fast turnaround time is important, but it's also important for the other clients. When the partner firm falls behind on meeting deadlines, it can lead to increased pressure from the partner firm's clients to see that the firm meets its commitments. This can be difficult to do, due to other commitments. It is likely to lead to slow turnaround times.
5. Hidden costs: When hiring independent contractors, can save a company money. However, if outsourced services are used, they may come with hidden costs, such as last-minute changes in the supply chain. It may be more costly to outsource services on a project-by-project basis than to hire someone full-time to do the work.
Business process outsourcing (BPO) is an overarching term for the outsourcing of a specific business process task, such as payroll. BPO is often divided into two categories: back-office BPO, which includes internal business functions such as billing or purchasing, and front-office BPO, which includes customer-related services such as marketing or tech support. Information technology outsourcing (ITO), therefore, is a subset of business process outsourcing.
While most business process outsourcing involves executing standardized processes for a company, knowledge process outsourcing (KPO) involves processes that demand advanced research and analytical, technical, and decision-making skills such as pharmaceutical R&D or patent research.
IT outsourcing clearly falls under the domain of the CIO. However, CIOs often will be asked to be involved in — or even oversee — non-ITO business process and knowledge process outsourcing efforts as well. CIOs are tapped not only because they often have developed skills in outsourcing, but also because business and knowledge process work being outsourced often goes hand in hand with IT systems and support.
Outsourcing IT Functions
Typically, outsourced IT functions have been in one of two categories: infrastructure outsourcing or application outsourcing. Infrastructure outsourcing can include service desk functions, data center outsourcing, network services, managed security operations, or overall infrastructure management.
Outsourcing may involve new application development, legacy system maintenance, testing and QA services, and packaged software implementation and management. In today's cloud-enabled world, outsourcing can also include relationships with providers of software-, infrastructure-, and platforms-as-a-service.
Cloud services are becoming a large part of the outsourcing market, and this is destined to grow. These services are increasingly being offered not only by traditional outsourcing providers but also by global and niche software vendors or even industrial companies offering technology services.
IT outsourcing models and pricing
The appropriate model for an IT service is typically determined by the type of service provided. Traditionally, most outsourcing contracts have been billed on a time and materials or fixed price basis. But as outsourcing services have matured from simply basic needs and services to more complex partnerships capable of producing transformation and innovation, contractual approaches have evolved to include managed services and more outcome-based arrangements.
The most common ways to structure an outsourcing engagement include:
* Time and materials: As the name suggests, the clients pay the provider based on the time and material used to complete the work. Historically, this approach has been used in long-term application development and maintenance contracts. This model can be appropriate in situations where scope and specifications are difficult to estimate or needs to evolve rapidly.
* Unit/on-demand pricing: The vendor determines a set rate for a particular level of service, and the client pays based on its usage of that service. For instance, if you’re outsourcing desktop maintenance, the customer might pay a fixed amount per a number of desktop users supported. Pay-per-use pricing can deliver productivity gains from day one and makes component cost analysis and adjustments easy. However, it requires an accurate estimate of the demand volume and a commitment to a certain minimum transaction volume.
* Fixed pricing: The deal price is determined at the start. This model can work well when there are stable and clear requirements, objectives, and scope. Paying a fixed price for outsourced services can be appealing because it makes costs predictable. It can work out well, but when market pricing goes down over time (as it often does), a fixed price stays fixed. Fixed pricing is also hard on the vendor, which has to meet service levels at a certain price no matter how many resources those services end up requiring.
* Variable pricing: The customer pays a fixed price at the low end of a supplier’s provided service, but this method allows for some variance in pricing based on providing higher levels of services.
* Cost-plus: The contract is written so that the client pays the supplier for its actual costs, plus a predetermined percentage of profit. Such a pricing plan does not allow for flexibility as business objectives or technologies change, and it provides little incentive for a supplier to perform effectively.
* Performance-based pricing: The buyer provides financial incentives that encourage the supplier to perform optimally. Conversely, this type of pricing plan requires suppliers to pay a penalty for unsatisfactory service levels. Performance-based pricing is often used in conjunction with a traditional pricing method, such as time-and-materials or fixed price. This approach can be beneficial when the customers can identify specific investments the vendor could make in order to deliver a higher level of performance. But the key is to ensure that the delivered outcome creates incremental business value for the customer, otherwise they may end up rewarding their vendors for work they should be doing anyway.
* Gain-sharing: Pricing is based on the value delivered by the vendor beyond its typical responsibilities but deriving from its expertise and contribution. For example, an automobile manufacturer may pay a service provider based on the number of cars it produces. With this kind of arrangement, the customer and vendor each have skin in the game. Each has money at risk, and each stands to gain a percentage of profits if the supplier’s performance is optimum and meets the buyer’s objectives.
* Shared risk/reward: Provider and customer jointly fund the development of new products, solutions, and services with the provider sharing in rewards for a defined period of time. This model encourages the provider to come up with ideas to improve the business and spreads the financial risk between both parties. It also mitigates some risks by sharing them with the vendor. But it requires a greater level of governance to do well. IT organizations are increasingly looking for partners who can work with them as they embrace agile development and DevOps approaches.
“Organizations are rapidly transforming to agile enterprises that require rapid development cycles and close coordination between business, engineering, and operations,” says Steve Hall, a partner with sourcing consultancy Information Services Group (ISG). “Global delivery requires a globally distributed agile process to balance the need for speed and current cost pressures.”
Outsourcing and jobs
The term outsourcing is often used interchangeably — and incorrectly — with offshoring, usually by those in a heated debate. But offshoring (or, more accurately, offshore outsourcing) is a subset of outsourcing wherein a company outsources services to a third party in a country other than the one in which the client company is based, typically to take advantage of lower labor costs. This subject continues to be charged politically because unlike domestic outsourcing, in which employees often have the opportunity to keep their jobs and transfer to the outsourcer, offshore outsourcing is more likely to result in layoffs.
Estimates of jobs displaced or jobs created due to offshoring tend to vary widely due to a lack of reliable data, which makes it challenging to assess the net effect on IT jobs. In some cases, global companies set up their own captive offshore IT service centers to reduce costs or access skills that may not result in net job loss but will shift jobs to overseas locations.
Some roles typically offshored include software development, application support and management, maintenance, testing, help desk/technical support, database development or management, and infrastructure support.
In recent years, IT service providers have begun increasing investments in IT delivery centers in the U.S. with North American locations accounting for more than a third of new delivery sites (29 out of a total of 76) established by service providers in 2016, according to a report from Everest Group, an IT and business sourcing consultancy and research firm. Demand for digital transformation–related technologies specifically is driving interest in certain metropolitan areas. Offshore outsourcing providers have also increased their hiring of U.S. IT professionals to gird against potentially increased restrictions on the H-1B visas they use to bring offshore workers to the U.S. to work on client sites.
Some industry experts point out that increased automation and robotic capabilities may actually eliminate more IT jobs than offshore outsourcing.
The challenges of outsourcing
Outsourcing is difficult to implement, and the failure rate of outsourcing relationships remains high. Depending on whom you ask, it can be anywhere from 40 to 70 percent. At the heart of the problem is the inherent conflict of interest in any outsourcing arrangement. The client seeks better service, often at lower costs, than it would get doing the work itself. The vendor, however, wants to make a profit. That tension must be managed closely to ensure a successful outcome for both the client and vendor.
Another cause of outsourcing failure is the rush to outsource in the absence of a good business case. Outsourcing pursued as a “quick fix” cost-cutting maneuver rather than an investment designed to enhance capabilities, expand globally, increase agility and profitability, or bolster competitive advantage is more likely to disappoint.
Generally speaking, risks increase as the boundaries between client and vendor responsibilities blur and the scope of responsibilities expands. Whatever the type of outsourcing, the relationship will succeed only if both the vendor and the client achieve the expected benefits.
Business Areas You Can Outsource
You now understand what outsourcing is and how it works. With all the benefits of outsourcing parts of your business functions, there are no questions like “how does outsourcing work?”. or its relevance. In addition to this explanation of business function outsourcing, here are a few specific areas of business that you can outsource to external service providers.
Outsourcing Sales And Marketing
Aside from social media, creating quality content is also an excellent marketing strategy to bring your business to the market. But again, it takes time and effort to create and produce contents that will make you relevant in your chosen niche.
Fortunately, you can hire a content writer or a content marketer to do this tedious job, making outsourcing article production that much easier.
Social Media Marketing
Social media marketing can be very beneficial in keeping the business relationship with current customers and connecting to new ones.
There can be some tedium involved with regularly posting social media updates, but it can be helpful to do so. If you want a tech-savvy professional to manage your social media platforms, you’ll want to find one who is familiar with Facebook, Instagram, Twitter, Pinterest, and other social media platforms. This will save you time and energy in the long run.
Typing jobs, especially the bulk ones, can be time and effort-consuming. Instead of doing this in-house, typing can be outsourced outside your company, freeing up the time to focus more on the efforts to grow the business.
SEO And PPC
Simply creating content will not bring your business to the top. If you want to be relevant in your field or if you want your brand to appear on the first page of a search engine, you need to be familiar with SEO and PPC marketing strategies.
This is an important job, and it takes time and money to train someone for it. If you're looking for a more cost-effective way to improve your content, you may want to consider finding a professional to do so.
Find Top Freelance Talent For Outsourcing Work
Now that you know why outsourcing is a common practice, you may be inspired to make the switch that most businesses are already making. There are a few things you need to know if you want to outsource certain parts of your business.
To determine whether your business is struggling, you have to look at the areas where you are struggling more frequently. The ones that require a specialized tool or expertise are those that are most complex or require a lot of knowledge.
Given that you do not have complete knowledge of all aspects of your business, what areas do you need to focus on to increase your chances of success? In order to focus on scaling your business, you need to outsource some of your work.
After that, it's just a matter of finding the right people to work for the job. There are many great places to start your search for a job, Legiit is one of them. Every day, businesses can find the qualified freelancers they need on Legiit. With a secure payment platform, a dedicated support team, and a wide variety of service categories, Legiit is the only freelance marketplace you need.
How To Outsource Your Content On Legiit
Now that we have covered all the basics of how to outsource your business needs – let us answer how to outsource your content on Legiit. Don’t worry, as the process of buying and selling on Legiit is as easy as it can get.
Just take care of the few basics, and you would be ready to order content from some of the top-rated content professionals in the SEO industry. For better understanding, let us outline how to outsource your business needs on Legiit in a step-by-step manner
* Visit Legiit.com
* Create an account
* Provide basic details during the registration – Name, email address, etc.
* Once you’re a member, check out the different categories of services mentioned on the top end of the home page – SEO, Video, Business, Graphics & Design, Writing, etc.
* Click on the category you’re looking for, and you’ll see the sellers/services offering services in the selected category.
* You can sort out the services shown to you in terms of pricing (high to low/low to high), popularity, recently uploaded, and top-rated.
* You can even check the services of sellers who’re currently online. (helpful for quick communication/urgent content orders)
* Go through the service description of sellers, check the reviews, and connect with the few you think are a good fit for your project. Ask any questions, clear any doubts, and develop a rapport.
* Place order. The check-out process is simple, straightforward, and self-explanatory.
While outsourcing can be beneficial for an organization that values time over money, some disadvantages can arise when the organization needs to remain in control. Outsourcing a simple task, like manufacturing clothing, will be less risky than outsourcing something more complex, such as rocket fuel or financial modeling. Companies wishing to outsource must adequately weigh the benefits and risks before moving forward.
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