Table of Contents
What Is Outsourcing?
It’s a common business strategy to hire a third-party resource outside a business organization, which is also known as contracting out. Outsourcing can take many different forms, ranging from large-scale partnerships between international corporations such as Apple/IBM to smaller business relationships that involve simple tasks such as printing fliers or outsourcing administrative duties.
Advantages of Outsourcing
It Functions As A Cost-saving Measure
Outsourcing allows businesses to save operating, overhead, personnel, etc., because many of the external resources used for outsourcing such as 3rd party organizations have a comparative price advantage due to their specialization in key services/production of certain goods.
It Increases Efficiency & Productivity
A business can take advantage of this expertise to offer a level of efficiency that it would not have been able to attain if the activity was carried out in-house. This helps boost overall productivity and ensures that consumers are able to enjoy better products and services.
It Allows A Business To Free Up Internal Resources
By shifting certain responsibilities to another business that can carry out these activities more cheaply and effectively, you can free up a significant amount of internal resources. It can be manpower, increased finances, or the freedom to focus on parts of the production process in which you possess some form of comparative advantage.
Mitigate Risks
Some businesses also use the important partnerships built through outsourcing to spread out the business risk and reduce overall exposure to a certain degree of unpredictability within the business.
It Improves Flexibility Within the Business
Outsourcing to a 3rd party vendor allows you to take advantage of their expertise to upscale or adjust your business operations accordingly. It also allows a business to capitalize on its resources for services that are only required periodically.
Risks Of Outsourcing
Reduced Confidentiality & Information Control
Outsourcing opens a business up to the risk of revealing potentially sensitive customer information through data leaks or even important intellectual property such as company secrets.
Loss of Management Control
Increased outsourcing comes a reduced control over the production process which can lead to a variety of issues including poor quality control, increased costs, reduced productivity & other mismanagement.
It Leads To Higher Costs
The 3rd party vendors are driven primarily by the need to make a profit and therefore may include hidden costs or unnecessarily long contractual agreements in a bid to increase their revenue, which would translate to higher costs.
Increased Logistical & Communication Complexity
Adding a 3rd party vendor comes with a whole host of new logistics & communication challenges. The complexity leads to more potential failure points within the business structure.
Internal Friction Between Works
It’s important to carefully outline your rationale for outsourcing to your full-time staff, so I avoid them receiving the impression that they’re being replaced or that they are being perceived as incompetent.
Types of Outsourcing
Types of Outsourcing Strategies
Onshore Outsourcing: it’s a business practice that involves hiring the services of a 3rd party contractor who is within your country. This type of outsourcing is also known as locao/domestic outsourcing.
Offshore Outsourcing: it involves contracting out various tasks to 3rd party vendors a significant distance away from your country. It is more popular among large-scale businesses that are aggressively seeking out comparative advantages in terms of cost, quality, or other benefits by recruiting the services of international companies.
Nearshore Outsourcing: it can be considered the middle point between onshore & offshore outsourcing, which means relatively nearby. It allows a business to combine the various benefits of other types of outsourcing to achieve a more favorable model.
Different Types of Outsourcing Services
Engineering Process Outsourcing (EPO): It involves contracting out specific engineering functions to an outside party. It’s more prevalent among industries associated with manufacturing, such as electronics & auto companies.
Product Development & Design: R&D is the driving force behind the success of numerous companies in various areas of commerce. It’s a cost-intensive process that requires a high degree of specialization and expertise.
CAD & Drafting: CAD is simply the use of software tech to increase the productivity & quality of a design by optimizing the process. It requires a certain degree of specialization that may not be available to most companies, and it’s not worth keeping as permanent staff when their services may only be required.
Simulation & Analysis: it’s another area within the field of engineering that has seen significant use in terms of outsourcing. The field of simulation & analysis is still relatively young and high-entry.
Reverse Engineering: R&D has become increasingly important in ensuring the continued survival of a business. Reverse engineering involves the stepwise deconstruction of the finished product to obtain further info about its design and function. The process of reverse engineering can be considered a subset of computer-aided design and drafting and also makes use of simulation technology.
Technical Documentation: It’s a practice within the field of engineering which means an extensive description of the design, functionality, and performance of a product for various purposes.
Information Technology Outsourcing (ITO): IT can be defined as the use of various forms of tech for the storage, distribution, and reception of different forms of info. Therefore, ITO can be considered the use of external services to provide IT-based solutions & infrastructure in order to support or optimize various aspects of the business process.
Knowledge Process Outsourcing (KPO): KPO is a business practice that involves contracting out specific high-level information-focused tasks within the business process to external resources that have the required degree of skill, expertise, and specialization in that particular field to gain a particular comparative advantage over competitors.