Outsourcing has always played a crucial role for operating successful businesses. When a company is in its initial stages, the main focus of an entrepreneur should be on its core operating activities as they are the ones that make or break the business. Providing the best-in-class products and services is the most important factor for the growth of the company. But, along with these activities, a company has to perform numerous supporting activities for smooth functioning of the business. It is not considered viable for the company to perform all these activities on their own. This is where the concept of outsourcing comes into picture. In this article, we will provide you with the concept of outsourcing along with the advantages and the disadvantages of outsourcing for small businesses.
What is Outsourcing?
It is the process of hiring a third party, either locally or internationally, for performing specific activities which are not a part of the core competencies of an organization like payroll processing, tax filing, creative work, content writing, social media marketing etc. The hired third party would possess an expertise to perform such activities and will do it in the best possible manner. It is a common practice adopted by organizations as it helps them save a lot of time, effort and money. Moreover, organizations can focus on their primary revenue generating activities and improve their growth rate in a very hassle free manner. There are a lot more ways in which you can enjoy the benefits of outsourcing as discussed below.
Benefits of Outsourcing for Small Businesses
Big businesses generally possess the required resources to hire and train personnel for non-core activities. Their scale of operations is so large that they absorb these personnel with ease. They even set up separate departments for majority of these activities. Before taking the decision for outsourcing, they analyze in detail whether outsourcing brings them some economic benefits or not. Majorly, it is the small and medium sized enterprises that redeem the economic benefits of outsourcing. The benefits are as follows:
Cut Cost and Save Big- It is one of the primary benefits of outsourcing for small businesses. It converts your fixed costs into variable costs as you don’t have to maintain any infrastructure for the outsourced activity. Small businesses are generally in a cash crunch, so you can save money by outsourcing, pump that money in the primary activities and escalate your growth rate. This enhances the investors’ confidence too.
Obtain Skilled Expertise- Companies providing outsourcing services specialize in doing those activities. They possess the required workforce and knowledge to deliver the work in the most efficient and effective manner. As the main focus of an enterprise is to provide the best quality of goods and services, it makes more sense to get your work done through experts of those fields.
Focus on Core Activities- By outsourcing the secondary activities to third parties, entrepreneurs can focus on the core revenue generating activities of their company. Even the managers doesn’t feel overburdened this way and they are able to work in an effective manner to attain greater client satisfaction
Flexibility of Staffing- Since you don’t have to build an infrastructure for getting the work done, you can easily scale up or down the operations whenever required. Especially when you are operating seasonal business or there is an economic downturn, this feature might end up being quite profitable. You can avail the services just as much you require!
Convenience in Starting New Projects- If a company wants to start a new project immediately, it would require the appropriate human resource and infrastructure for the secondary activities. In such a scenario, outsourcing can provide them with a ready workforce to start the project right away. Handling all these activities on their own would cost them heavily and would require substantial time.
Equal Opportunities to Small Firms – Small firms are not able enjoy the same privileges as enjoyed by the large firms. Large firms are able to set up in-house support services which small firms can’t afford. Outsourcing aids in an apple to apple comparison by providing the same expertise to the smaller firms so that they can match the performance of the big players.
Reduces Risk of Performing Activities- Every activity has a certain kind of risk attached to it. As we are living in a dynamic environment, business conditions are tend to change overtime. The changes are generally observed in technology, regulatory guidelines, market competition, business cycles etc. By outsourcing a work, you also transfer the risk involved in performing that activity.
Disadvantages of Outsourcing for Small Businesses
As there is no rose without thorns, outsourcing has some potential pitfalls as well. Factors that a company should keep in mind before outsourcing are-
Loss of Confidentiality- The biggest disadvantage of outsourcing is the threat of losing sensitive information. Managers should keep a check on the security measures to avoid this kind of an issue. They might have to face legal consequences if they have signed a non-disclosure agreement with their client.
Losing Management Controls- Managers would not be able to control the activities that they have outsourced. This might create a hindrance in the smooth functioning of the company.
Quality Issues- If the outsourcing company doesn’t possess the required knowledge and expertise to perform a task, the quality of the final work would not be up to the mark. You would be answerable to the client for any mistakes committed by the outsourcing company.
Hidden Cost- Though outsourcing leads to a cost reduction. There can be a lot of hidden cost and legal problems if the terms and conditions are not understood thoroughly. The agreement should be read carefully before outsourcing.
The economic benefits of outsourcing overweight its disadvantages. Just keep in mind, before selecting the outsourcing company, conduct a thorough due diligence of its capabilities and the quality of work it delivers. Majority of the pitfalls can be avoided by choosing the right outsourcing company, aligning the goals of the organization, paying attention to the terms and conditions of the contract and making a timeline of the activities.