The Benefits and Disadvantages of Outsourcing (With Tips)

Updated February 3, 2023

Many businesses seek to maximize their profits by limiting how much they spend on overhead costs. One way to lower overhead is by outsourcing certain business functions. Companies contract with third-party entities for certain duties, freeing up the company to focus on its core businesses. Learning about this concept and how it can benefit businesses can help you decide if n

In this article, we explain what outsourcing is, its advantages and disadvantages and how to determine if outsourcing would benefit your business.

Key takeaways

Companies hire outside companies to perform specific tasks as a way to reduce operating costs such as salaries, overhead, equipment and technology. This is known as outsourcing.
Outsourcing allows a company to focus on its core aspects by delegating less critical functions to the third-party outside organization.
Insourcing brings new employees into the company rather than farming out tasks to third-party companies.

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What is outsourcing?

Outsourcing is the process of contracting outside businesses to perform specialized work operations. Companies that use outsourcing can employ a third-party company to help perform standard company operations like producing inventory or completing services on the company's behalf. It could be an occasional task, such as preparing taxes once a year, or a routine part of business operations such as preparing and maintaining social media. Some business processes and functions that companies may outsource include:

Accounting
Customer support
Human resources (HR) management
Manufacturing
Content writing
Research
Shipping and logistics
Engineering
Diagnostic services
Administrative tasks
Information technology (IT) operations

Outsourcing benefits

Some of the outsourcing benefits include:

Lower labor costs

You can lower your business's labor costs by outsourcing specific functions to other companies. The third-party organization hires the employees to perform the tasks and is responsible for their pay, benefit packages and training. This allows your company to focus its labor costs on your core staff. Outsourcing can also lower your equipment costs. It can be more cost-effective to hire a outside of your organization rather than buy new equipment, relocate or change processes.

Larger talent pool

When you outsource to specialized companies, you can take advantage of a larger talent pool. These companies have access to candidates in other parts of the country or the world depending on where they are located and how many of their positions are remote. The contracting company will also have its own recruiters to find the best candidates for the tasks or prescreened employees that might have the skills needed for your tasks.

Internal staff development

A large project may require skills that your staff does not currently possess. On-site outsourcing, where you bring in contractors to operate at your own location, can let your employees work beside talented contractors and acquire new skill sets. Outsourcing can also help you focus on training and development for internal employees while outsourced employees handle everyday tasks.

Increased efficiency

Outsourcing allows you to move extraneous functions to more specialized sources. Shifting those functions to companies that specialize in those tasks can lead to greater productivity, efficiency and cost-effectiveness. Your company can increase efficiency by concentrating on hiring, training, facilities and other resources within your core business model. Many times, outsourced employees bring standard processes that they can use to optimize efficiency.

Disadvantages of outsourcing

There are several potential disadvantages of outsourcing including:

Limited control and flexibility

When you outsource tasks to another company, you may be limited by rigid contract agreements. You may have less control over software, procedures and protocols, hiring practices and scheduling. Outsourcing can also limit how much flexibility your business has to maneuver as your company grows or changes arise. Consider browsing for different opportunities with several agencies and negotiating terms that can best fit your business needs.

Decline in employee morale

Outsourcing may affect your company culture, especially employee morale. If your employees don't understand the need for outsourcing, they may feel they are being replaced while employees may become frustrated as workflows become more complicated, especially if the contracted company is in a different time zone. To fight this, you can encourage employees by offering training opportunities in other areas that can help them excel in their role. Open communication about how outsourcing can help them and the company goals can also encourage more positive outlooks on this.

Related: How to Boost Employee Morale

Decreased security

Outsourcing can make data security more complicated. Outsourcing usually involves multiple sites using technology to connect and share information, which can lead to more opportunities for data leaks. Your business will also have less control over hiring and employee protocols, limiting your control over the information those employees have about your company. Consider reviewing data agreements and ensuring any tools you have are compatible with the other company's to minimize any risks.

How to determine if outsourcing is right for your business

Here is how to determine if outsourcing is a good fit for your business:

1. Determine your company's core functions

You can start the decision-making process by outlining what products and services your company specializes in. It's important to first analyze your company's operations to understand which parts of your company need improved efficiency. This can help you decide what business functions could be outsourced to help narrow your focus and lower your overall costs.

2. Calculate department costs

Many companies choose to outsource to save money. To do this, determine how smoothly each department runs, how much income each department generates and the employee turnover rate within each position of a department. Once you determine which departments are not related to your core functions, you can compare your budgets and actual costs. This can provide a guide for determining which departments may be impacting your profits and what can be outsourced.

3. Research companies

Once you determine which departments and functions may benefit from outsourcing, you can research companies that specialize in those tasks to determine how much they charge and what services they offer. You can also get details on their hiring practices, security policies and contract terms, especially regarding what happens if they don't meet quotas. You can also reach out to your network and other companies in your industry for recommendations and reviews.

4. Prioritize your needs

You can use that research to narrow the list to the right companies for your business. For example, if you are looking at outsourcing customer support, you might consider:

What hours you would like the contractor available
How you prefer your customers to reach the support staff
How much volume you expect the company to manage for you
How often you want them to report quotas, quality assurance and other data to your business
What security protocols you expect and if you need financial information encryption to protect your customers' credit card numbers or bank accounts

You can use this analysis to decide how much money you can expect to spend to outsource the business process. If you decide not to outsource, you can also use this information to determine how to streamline the department and focus its functions and employees to be more efficient and productive.

5. Determine how outsourcing may affect your employees

Outsourcing may be a primarily financial decision, but you might consider how it may affect employee morale. You can determine how employees might respond by using surveys and interviews. Many employees feel more comfortable about a transition to outsourcing if their company is transparent about the process and their reasons. You may also want to consider what severance packages or reassignments you will offer employees who may lose their role in outsourcing.