Citation:

Why Do Companies Outsource?. Why Do Companies Outsource. 2019.

Abstract:

Outsourcing is a practice to hire a third party to complete work services. Most common ways are hiring outside of country rather than residing country.

Full Text

OUTSOURCING WORK

Have you ever wondered why do businesses outsource, or what does the word “outsource” mean exactly? Well, it’s simpler than what you can imagine. First of all, “outsourcing” is basically what the word itself implies: out sourcing; that is, receiving “sources” from “out” – outside, that is. To make it clearer, it’s a common practice among some companies to hire a third party overseas or adjacent countries to perform services and create goods that were once achieved in-house by the company’s own staff, but because of X or Y reasons they prefer, or need, external help for the time being. Usually, it happens because of shortage of labor or because of cost-related reasons, but whatever the reason, the goal tends to be the same: to produce high-quality goods through skills the company itself usually finds hard to develop, for one reason or another.

Why Do Companies Outsource
Why Do Companies Outsource

 

A Peek at Outsourcing

Ever since Donald Trump came into power, Americans have been calling for him to bring jobs back into the United States, being this one of his presidency’s main components, if not his major promise. However, statistics show that outsourcing is still a major practice among contemporary companies, and there’s no sign that it will stop any time soon. Basically, you could even say that this is why companies outsource: they need extra help not found or as-affordable in their home country.

 

Why Do Businesses Outsource?

Outsourcing in business is a truly complex question. Why do companies outsource, exactly? There’s truly not a single reason, but rather several, and it depends on the company’s context and actual needs. Let us remember that outsourcing is when a company hires external help, but the reasons may, and will, vary. Some of the most common motives, however, are the following ones:

 

  • Reduce and control costs of operation (this usually the main reason).
  • Improve the company’s focus.
  • Liberate inner sources for new purposes.
  • Increase efficiency for some time-consuming functions that the company may lack resources for.
  • Use external resources as much as possible.
  • Sharing risks with a partner firm.

What Is Outsourcing
What Is Outsourcing

Even with all the pros, a major reason for the practice of outsourcing is is to run a successful business model. However, even if a company has enough reasons to run a successful outsourcing program, they must also consider every component to make it work. As many other business-related operations, outsourcing could cost more than what it warrants for, as it has potential risks that the company should be wary of, if not weigh more than the actual advantages, at least according to their specific context.

 

Disadvantages of Outsourcing

Companies that use outsourcing must be aware that, while there are many advantages in acquiring external help for their businesses’ operations, the existing disadvantages – and mind you, they’re not few – can be difficult to manage, if not taken care properly. Companies that rely on an outsourcing business must be cautious of the following, should they want to avoid a hopeless downfall:

 

  • Local staff may feel disposable or threatened and might walk away.
  • Some staff members might become redundant.
  • Depending on the geographical location of the outsourcing business partner, there might be issues regarding the product/service quality, as standards may differ among countries.
  • Communication problems, usually due to language or time zones between outsourcing partners.
  • Policies and procedures will be harder to control.
  • Data security will be under jeopardy.

 

What Companies Outsource?

Outsourcing only became popular until the 90s, when cost saving became a cornerstone in several companies. Outsourced resources, even if required, didn’t necessarily leave a great impact on the business itself, as they were mostly customer service-related jobs that were easily handled over the phone (a practice that still exists, by the way). However, some key industries survived and keep operating until today, mostly because they do offer integral products to big name companies.

 

Some of the most common outsourcing firms offer financial services, pharmaceuticals manufacturing, retail and, of course, IT, technology and software testing, web development services. Some of the biggest examples of companies that outsource these last ones, for example, are ZS, Synoptek, Fidelity IT Solutions, etc. There are more, but this list hopes to highlight only the key players inside the company outsourcing venue.

 

How to Perform a Successful Outsourcing Operation

In the past, cost reduction was the biggest cause behind outsourcing. Nowadays, however, strategy and value-adding activities inside of the company became two of the major drives behind outsourcing practices. If this is the case, though, why do companies outsource to other countries? Basically, companies that outsource don’t hope so much for foreign companies to do the job for them, but rather to have partners to help them grow independently, to put it in some sort of way. Still, and as we highlighted before, this must be done carefully in order to not cause damage to one’s company, or else, it will lose more than otherwise in outsourcing. So basically, for a company outsourcing to be successful, the following are key points to be taken into consideration:

 

  • Clear goals and objectives, both for the company and the outsourcing firm.
  • A strategic vision and planning.
  • A good and careful selection when it comes to vendors.
  • A good management between the firms’ relationships.
  • Well-arranged subcontracts and agreements with the vendors.
  • Good and constant communication with stakeholders.
  • The senior leadership must deliver constant support and be in continuous involvement.
  • Detailed attention to any potential issue among the personnel.
  • All financial justifications must be short-term.

 

Mind you, all of these are important. However, let’s delve further into these two key components: open communication and leadership support.

 

Communication

A good and constant communication, alongside constant executive support, are key players in a successful outsourcing process. This is mostly due to the Service Level Agreement (SLA), as it also involves every individual inside of the company staff, which are, obviously, the blood cells in any industry.

Communication is important because of the outsourcing arrangement outcome. Be it good or bad, you need to be able to manage the change, and this is only possible through a good communication. Be it for assessing stakeholder requirements or simply keeping your production line running smoothly, having open communication channels during this time is vital. Everyone, no matter how big or small their role is, is vital during this process.

 

Leadership Support

Obviously, all strategic objectives must be approved by the company’s top heads. It is the senior management that articulate and define which are the best outsourcing strategies and communicate the goals and benefits to all those involved in the process. Without their approval and support, surely any outsourcing project becomes doomed from the very beginning.

Nowadays, top managers recognize big benefits that outsourcing brings to their industries and don’t shy away even after the ink dries in the contract. As a matter of fact, some examples of companies that use outsourcing are some major brands worldwide. For example, Apple’s relationship with China’s Foxconn is rather well-known, and sportswear giant Nike outsources the production of most of its goods to several overseas manufacturing plants, particularly in Asia. These relationships have lasted for a good while, and the success of this is due to good communication and an excellent executive involvement.

 

How A Good Relationship Management Can Save a Failed Outsourcing

Lack of certainty and attention has led to many outsourcing contracts to be renegotiated or canceled within just three years, so ongoing management relationship has become vital for this process to survive and become an actual, long-lasting partnership. That’s why the senior management must always remain involved during the implementation of the contract, specially on what could be considered the “last days”; that’s where their involvement shines more than ever.

 Aside of a clear procedure, the top leadership of a company must keep the outsourcing relationship alive at all times, be it through meetings, messages… That is, a continuous communication. The outsourcing process must always be placed at the top of these reunions, mostly to ensure it runs smoothly and that every end is met at the end of the day to ensure continuous satisfaction. After all, outsourcing has become an integral part for most successful firms (just remember the after-mentioned companies that outsource), so doing it correctly and following the steps is crucial to surviving and being a successful company. 

Why do firms outsource project work or why do US companies outsource jobs? Simply, to complete work, but at the same time, hopefully save money.

Last updated on 11/15/2019