Where Are The Facts About Outsourcing
Outsourcing is an often-mentioned, but often misunderstood practice. With this blog post, you can get the facts about outsourcing and how it can make your company more competitive.
We'll start with some basics. What is outsourcing? The term refers to an economic model that involves a firm or individual giving certain operations and production tasks to another firm or person who specializes in that function. In other words, instead of only doing what they do best, companies will sometimes outsource functions such as payroll or IT support to another company.
Like most things, there's lots more to it than just economics and business. Outsourcing has been a hot topic for several years now, with various opinions being expressed about whether it's good or bad and what it means for the company. Actually, this is one of the areas where outsourcing usually gets a bad rap. Ask anyone about outsourcing and you'll likely hear more criticism than praise. Many people believe that outsourcing is outsourcing because you don't know what happens to the product or service after it leaves your door; that you're putting your company at risk by sending valuable information off to someone else; or that you've got no control over what happens once your information leaves the hallowed halls of your office building.
Unless you've lived under a rock for the last few years, you're already aware of all this. The thing is, outsourcing can be good for your business. There are plenty of solid reasons to outsource certain tasks, from improved profitability to enabling your company to concentrate on what it does best. The difference between outsourcing and offshoring is that the latter involves sending tasks that require hands-on labor to workers in another country, while outsourcing deals with non-labor functions such as IT support or payroll processing. Essentially, offshoring means sending jobs overseas while outsourcing means sending work elsewhere within the United States (or another country).
Outsourcing has been around for a long time. It's been used by both large corporations and small businesses. As long as there have been efficient means of communication and transportation, companies have been sending work to another company, team of people or individual to get it done more efficiently or profitably.
The same is true today, but the practice has changed considerably in the last decade or so. The advent of office suites like Microsoft Office allowed businesses to do things like word processing and payroll themselves, without sending it out for processing by another company. Then came the Internet and improvements in technologies for communicating with people at long distances. Finally, with advancements in software technology and the availability of services like electronic data interchange (EDI) and bar-coding, companies started to send non-labor tasks out for processing. As a result, more and more companies are outsourcing non-labor functions to other organizations.
There are plenty of reasons why you might want to outsource some aspects of your business or support functions. Your main task is making sure that you decide which parts of your business need to be outsourced or continue being done internally, such as payroll or IT support. You should also consider some factors before deciding which company will do your work. One is making sure the other company in question has sufficient resources for the job at hand. Make sure they have the personnel, computers and other resources to handle the work you're sending them. It's also important to make sure that there isn't a conflict of interest. For example, if you're sending payroll to another company, it would be a conflict for them to also provide employee benefits in the form of health insurance or a profit-sharing plan.
Once you've decided on the company and agree on terms regarding what's being outsourced, you should be able to start offloading work as quickly as possible. Don't delay; this is how companies get caught out by rivals who can take advantage of their speed in processing tasks.
If you're interested in outsourcing, some things to think about include the following:
What tasks should be outsourced? If you're looking to outsource, you first need to decide what works and processes should be handled by your own staff and what can be outsourced. You might want to consider looking at areas of the company that aren't core competencies or where you'd like to see some cost-savings or increased profitability. For example, if you manufacture products and have a factory, it might make sense to send the manufacturing of parts and components that are manufactured in large quantities for high volumes of different product lines to an outside contractor. It could also make sense to outsource inventory management tasks to another company if you have a high volume of different types of inventory that need management, because the costs associated with holding inventory will most likely outweigh the benefits. The point is, you need to know what can be outsourced and why it makes good business sense. You also need to determine which aspects of outsourcing might not make good business sense, such as sending key accounting or customer information work to an outside employee or company you don't know very well.
Outsourcing the right way As we touched on earlier in this article, there are plenty of benefits to outsourcing if it's done correctly. But there are downsides as well. When you outsource certain tasks, you're giving up some control of the work. It's up to the outside contractor to get your work done correctly and in a timely fashion. If the work is completed incorrectly or not as expected, it's your fault and will likely be held against you by the client. If this happens regularly, it could endanger future contracts or relationships with your existing clients, so make sure that you structure your outsourcing agreement with this in mind and don't send information about your company that would put it at risk. You may also have fewer quality control measures in place if there's an outside person or company working on your product than if you do it yourself; for example, if someone else is handling manufacturing and quality control processes.
Beware of Inflation While outsourcing can save you money, there's always a potential for inflation with contractors. If you're having someone else handle tasks for you, especially if it's an outside company, it may be tempting to allow that company to purchase or have others make the equipment and supplies used in their work. But if you do this, be careful about making sure that you're getting a fair deal on the raw materials used in their work. It's also important to make sure they don't mark up your shipping and handling charges so they can pocket extra money. If your contract allows them to set their own prices for raw materials and shipping and handling, the price could go up quickly. But if they're forced to stick to standard pricing, there's a good chance the cost will be reasonable.
You can also save money when you outsource by doing things like working with a vendor who has an existing relationship with your company's customers. This can be particularly useful if the vendor is known for offering inexpensive or low-cost services because they're promoting their ability to work with your company, which makes them look like a good deal and potentially gets you more business. In this case, it may make sense to work with the vendor who already has contracts for that reason alone, but you might have other reasons for wanting to do business with them as well.
Conclusion
If you want to save money when outsourcing, you need to be careful about the choices you make. Outsourcing some functions may save money, but if it's done incorrectly or not as expected, these savings could be lost quickly. On the other hand, if your work involves high volume and low value tasks that no one within the company wants to do or can be done by a contractor on a long-term basis, outsourcing may not make sense at all.
It's also important to keep in mind that outsourcing works best if it complements your own internal staff and not replaces them.