7 Types of Outsourcing: That Will Make Your Business Successful
Small businesses can expand in two ways: by hiring in-house staff or by outsourcing. If you choose to hire in-house, you'll require capital, loans, or initial financing to build your team and potentially expand to new places.
However, many small-business owners lack the funding or significant capital needed to expand. As a result, they often turn to outsourcing, especially during the initial phases of growing and scaling their business.
It's a smart decision as it grants entrepreneurs access to talent and expertise they might not otherwise afford. Additionally, numerous outsourced services are remote, eliminating the necessity to purchase or rent new physical locations.
But what can (and should) a small business outsource?
Here are a few outsourcing options available to small businesses, each with its own advantages and disadvantages. This information will help you make a more informed decision regarding your business.
What is Outsourcing?
Outsourcing means assigning or hiring another company or service provider to handle specific business functions. Companies choose to outsource when they lack the expertise, skills, technology, resources, or time to perform certain tasks on their own.
What are the Different Types of Outsourcing?
1. Process-specific outsourcing
Process-specific outsourcing, also called business process outsourcing (BPO), involves assigning particular business tasks to a service provider. For instance, you might outsource tasks like sales, claims processing, or customer service. This approach helps cut costs, improve efficiency, and allocate resources to other parts of the business.
Benefits: If a small business is growing fast and finding it challenging to manage customer emails and calls, it can choose to outsource its customer service to a BPO company. This helps the small-business owner save time and money that would otherwise be spent on recruiting, hiring, and training an in-house customer service team.
Deloitte's 2022 Outsourcing Survey indicates that 52% of executives choose to outsource various business functions, with 57% outsourcing human resources and 45% outsourcing sales.
Potential drawbacks: You'll give up some control over operations and quality assurance—such as the risk of skilled sales people negatively impacting your reputation when dealing with customers. Additionally, there's the possibility of security concerns, like a data breach by a finance or legal service provider that could expose your company's confidential information.
If you choose this option, create standard operating procedures (SOPs) to ensure the outsourced company can start quickly and maintain consistent standards.
2. Professional outsourcing
Professional outsourcing occurs when a business hires an expert or specialist to manage a specific task or project. This often happens in companies lacking the necessary expertise or skills to handle the task internally. For example, if a company doesn't have its own accountant or legal team, it can outsource these responsibilities to an external accounting or legal firm.
In the Deloitte outsourcing report mentioned above, it shows executives outsource the following to pro services:
- Legal (64% outsource)
- Tax (61% outsource)
- Finance (51% outsource)
- Product development (45% outsource)
- IT (76% outsource)
This is a great option if your business needs insights from an expert in a technical field.
Adam Goulston, owner of Science Marketer, a marketing agency, explains, 'As a science marketer, I lack the personal expertise to delve deeply into diverse and complex subjects like cell biology, chemistry, and medicine.' He further adds, 'For my projects requiring scientific insight, I collaborate with researchers and practitioners worldwide who possess advanced degrees or practical experience.
Benefits: The benefits of professional outsourcing include:
- Access to specialized skills and expertise (no need to train staff)
- Cost savings (no salaries or benefits to pay)
- Increased efficiency (experts can hit the ground running)
- Scalability (you can scale up or down depending on your needs)
- Flexibility (you can switch providers if needed)
Potential drawbacks: You may not have control over quality assurance as you depend on the service provider to achieve the expected outcomes. Additionally, there could be language and cultural barriers if you outsource to a foreign country.
3. Logistics outsourcing
Logistics outsourcing involves hiring an outside provider to oversee and organize the transportation, storage, and distribution of goods. This approach is commonly adopted by businesses lacking the resources or know-how to manage these operations internally.
Consider a scenario where a business seeks assistance with tasks like order fulfillment, inventory management, or freight forwarding. To address this, they might outsource their logistics operations. This allows the business to concentrate on its primary strengths while ensuring timely and proper delivery of their products.
Through logistics outsourcing, you gain access to the expertise and technologies provided by third-party logistics (3PL) companies. For instance, numerous 3PLs provide advanced tracking systems, enabling you to monitor shipments and allowing customers to track their orders from purchase through to delivery.
Benefits: The benefits of logistics outsourcing include:
- Reduced costs (no need to invest in equipment or warehouse space)
- Improved efficiency (no more dealing with order fulfillment)
- Access to insights in the supply chain (the 3PL’s knowledge and data can help you plan around disruptions and delays)
Potential drawbacks: Choosing a low-quality 3PL provider can damage your reputation with customers. Additionally, costs can escalate if you require an excessive number of services.
4. Operational outsourcing
Operational outsourcing entails assigning specific operations within your company to an external entity. For instance, if you own a local laundromat and wish to introduce a new service like dry cleaning or home delivery, you can outsource that particular operation to a service provider.
Operational outsourcing examples include tasks such as payroll management, marketing, product development, and supply chain management.
Benefits: Operational outsourcing is beneficial for small businesses aiming to reduce the workload on their internal staff or venture into new services.
Potential drawbacks: If the service provider you've outsourced to doesn't meet your expectations or raises rates over time, it can start eating into your profit margins.
Gulshan Hajara Banu, a biotechnologist, is the founder of Pest Keen, a pest-control company. She delegates various services such as pest inspection and prevention, rodent control, and wildlife control to professionals through outsourcing.
To provide top-notch service quality, I hire a team of certified professional exterminators trained in the latest techniques," says Banu. "Every service is supported by a satisfaction guarantee, ensuring I consistently deliver the best possible experience to my clients.
5. Manufacturing outsourcing
Manufacturing outsourcing is when a business hires an external manufacturer to produce its products instead of producing them internally. This practice is prevalent in the retail and e-commerce sectors, where companies often outsource manufacturing to factories located in countries like China, India, or other regions offering more cost-effective labor and materials.
Benefits: Outsourcing manufacturing can assist small-business owners in increasing production without the need to hire additional staff, buy more equipment, or rent larger spaces to meet the rise in demand.
Potential drawbacks: When outsourcing to factories overseas, there might be language barriers and quality concerns. Additionally, there's a chance of supply chain delays due to political issues in the manufacturer's country.
6. Project outsourcing
Project outsourcing happens when a business brings in a service provider to finish a particular project. For instance, a marketing agency might enlist a web development firm to create a new website for a client. Similarly, a contractor might hire a fencing company to construct fences for a community they're developing.
Benefits: Project outsourcing is beneficial for companies seeking speed and quality. It allows you to bring in a professional who can start right away and complete the work with minimal guidance.
Potential drawbacks: Since you're collaborating with someone new whom you haven't hired before, there's uncertainty about whether they'll meet your expectations. To address this, it's advisable to maintain a database of service providers you've worked with previously, whom you can reach out to for future projects.
Multi-sourcing refers to a company engaging with more than one service provider for a project. For example, a video game studio might outsource various processes—such as game design, game development, audio production, animation, and level design—to different companies or contractors.
Benefits: This approach enables the studio to enlist multiple experts, accelerating production and ensuring quality. It's more effective than assigning all these tasks to a single contractor with limited resources and expertise, which could potentially slow down production or compromise quality.
Multi-sourcing is advantageous for streamlined companies aiming to stay small. For instance, Ivy Tutors Network, a service company providing personalized education and mentorship, has a management team of four. It regularly utilizes multi-sourcing on a monthly basis, which includes:
- Creative/graphic design
- Web development
- Search engine optimization (SEO) work
- Proposal writing
It hires numerous local and international agencies and freelancers who are specialists in their respective fields.
I believe in developing our internal workforce, but even employee development involves outsourcing," says Lisa Peransky, founder of Ivy Tutors Network. "When I promote a teacher to a managerial role, there's a lot for them to learn, and sometimes we might not have the most up-to-date expertise in-house to provide that training.
Instead of allocating resources to enhance the onboarding and training process, she chooses to outsource this task to a service that specializes in it.
We've brought marketing agencies to train aspiring marketers, social media experts to train our internal staff, and operations experts to assist us in implementing Zapier. Outsourcing enables us to remain efficient while accessing the expertise and knowledge of a much larger company.
Potential drawbacks: There's a chance that the project might lag if one or two companies encounter bottlenecks, hindering others from meeting their deadlines. For instance, if the character 3D modeler falls behind, it can cause a delay for the animator in creating character animations, ultimately leading to a postponement in the game's release date.
Whatever type of outsourcing you choose for your business, ensure the provider's credibility by reviewing their feedback and references. Ultimately, it's your reputation at stake if any issues arise.
Frequently Asked Questions (FAQs)
What are the 3 phases of the outsourcing process?
3 Phases of the Outsourcing Process involves:
1- Planning and Analysis:
Identify needs and goals for outsourcing.
Evaluate internal capabilities and resource availability.
Conduct a cost-benefit analysis.
Choose the type of outsourcing (e.g., IT, manufacturing).
2- Vendor Selection and Contract Negotiation:
Define project scope and expectations clearly.
Research and shortlist potential vendors.
Evaluate vendor capabilities, experience, and references.
Negotiate contract terms, pricing, and service levels.
3- Implementation and Management:
Establish clear communication channels and processes.
Onboard the vendor and transfer knowledge.
Monitor performance, assess quality, and provide feedback.
Manage risks and address challenges.
Which is the most common type of outsourcing in IT?
Most Common IT Outsourcing:
Project-based outsourcing: Hiring vendors for specific projects like software development or system implementation.
Managed services outsourcing: Contracting vendors for ongoing IT infrastructure and service management.
Business process outsourcing (BPO): Outsourcing non-core IT functions like customer support or data processing.
What are the 4 factors to consider before outsourcing?
Cost-effectiveness: Compare outsourcing costs to in-house costs considering long-term implications.
Data security and privacy: Ensure adequate data security measures in place with the vendor.
Vendor capabilities and experience: Evaluate the vendor's track record, expertise, and references.
Communication and collaboration: Assess the ease of communication and collaboration with the vendor.
What are the 4 stages of outsourcing?
Initial evaluation: Deciding if outsourcing is suitable for your needs.
Vendor selection and contract negotiation: Choosing the right vendor and establishing terms.
Transition and implementation: Setting up the outsourcing relationship and transferring knowledge.
Ongoing management and monitoring: Overseeing performance, evaluating results, and making adjustments.
How many types of outsourcing are there?
Nearshore: Outsourcing to a neighboring country with similar time zones and cultural understanding.
Offshore: Outsourcing to a distant country with potentially lower labor costs.
Onshore: Outsourcing within your own country.
Mult sourcing: Utilizing multiple vendors for different tasks or regions.