Outsourcing is the practice of passing individual tasks, subareas, or business processes over to a third-party and thereby receiving the results from outside of your own company. Services that your company was responsible for fulfilling will now be provided by a specialized service provider. These tasks are often a business’s secondary functions: tasks that must be fulfilled in order for a company to focus on its central activity.

What is outsourcing?

Definition: outsourcing

The term “outsourcing” refers to a strategy whereby corporate tasks and structures are given to an external contractor. These can be individual tasks, specific areas, or entire business processes.

With outsourcing, one or more tasks or processes are usually given to an external partner. Under certain circumstances, however, some tasks be performed internally (in-house outsourcing). For example, if you have given a task to a different area of your company, or to a department which specializes in it, this is commonly known as internal outsourcing. In contrast, a task given in its entirety to an outside company is known as external outsourcing. The external company may be based regionally or may be a foreign contractor. The focus is on potential cost savings.

What are the reasons for outsourcing?

In addition to the hoped-for cost savings of outsourcing, there are other reasons for handing over certain tasks:

  • Increased efficiency: Companies can concentrate on their core competencies and work more efficiently.
  • Optimal scalability: Outsourcing increases the availability of labor. As a result, maximum output can be achieved and production guaranteed – even in the event of seasonal or non-operational capacity fluctuations.
  • Quicker response: You are more responsive to change because you can pass these tasks on to specialized third-party companies.
  • Quality improvement: Outsourcing often brings quality improvements. For instance, in manufacturing a good factory or workshop can improve the quality of products.
  • Save costs: External companies have a high degree of specialization with regard to their services. They can work much more cost-efficiently and therefore offer discounted rates.
  • Lack of know-how: New processes and operations in companies are often necessary, but the employees often lack the know-how and implementation skills required. Outsourcing is an alternative to hiring skilled workers for this.

Different forms of outsourcing

There are different distinguished forms of outsourcing:

  • Business process outsourcing: In business process outsourcing, entire company processes are outsourced. An example of this: you can have your employees' payroll created by an external service provider.
  • Knowledge process outsourcing: In this type of outsourcing, complex tasks are outsourced to a third-party company. An example of this can be the preparation of search engine optimized texts for your website. The respective company usually has trained experts with a high degree of specialization.
  • Out-tasking: In this case, only individually-defined tasks are handed over to another company. Often it is because they are time-consuming and administrative processes, such as the archiving of e-mails or data backup. However, the responsibility for this remains with the company, as the whole business area continues to be managed independently.
  • Selective outsourcing: Selective outsourcing mixes business process outsourcing and out-tasking. Distinct sub-areas are outsourced which are more extensive than individual tasks, but nevertheless do not correspond to a complete process.

The subject matter and the duration of the service provided is recorded in a contract. The parties involved often agree on a service level agreement (SLA) to be able to concretely control the contractual relationship in terms of reaction times and service quality.

Outsourcing: examples of outsourcing tasks

Outsourcing strategies are used, for example, in the customer service, accounting, tax consulting, IT, and marketing departments.

Examples of possible outsourcing strategies:

  • Customer service: A company relinquishes the task of customer service to a specialized company. Often call centers take over a certain call capacity for a fixed price.
  • Marketing: A company outsources the support of social media channels to an external service provider (e.g. an agency).
  • Manufacturing of products: For many fashion companies it is too expensive to produce clothes in the US. Therefore, they often opt for production in Asia. After completed production, the clothing is then shipped to the United States.

These are just a few typical examples of outsourcing. In practice, a company today can outsource every step of its operations, whether in manufacturing or the provision of services, to an external contractor. Thanks to the networked world, it no longer matters whether the foreign company is located in the neighboring village or on the other side of the world.

The right approach

Do you think that outsourcing is the best strategy for your business, but you don’t know how best to proceed? Simply put, there is no single right approach to outsourcing a project. Just as companies are different to one another, so too are outsourcing strategies. However, the following best practice method has already proven itself in many situations:

  1. Analyze the current state: Analyze the actual state of a task, a sub-region or a business process. From the analysis, you can determine the best further course of action and estimate the potential of an outsourcing strategy.
  2. Prepare: Organize a kick-off meeting with all of your company's stakeholders to get the most out of your outsourcing project. In the meeting, you can lay the foundation for future joint work. It should highlight and discuss the benefits of the project, the content and timing of the project, and the next steps.
  3. Select a service provider: Compare potential service providers with each other. For the selection and interaction with potential service providers you need a product requirement and a scope statement. In product requirement documents you record all basic requirements as well as the rough project concept. However, in scope statements you note the corresponding solutions and detailed requirements. On this basis, service providers can come up with new solutions or develop existing ones. In addition, you avoid possible misunderstandings.
  4. Stick to your implementation timeline: Once the contract has been concluded, implementation can begin. Important: agree on a concrete timetable for implementation in the contract. As part of the project management, regularly check to see whether contractually agreed milestones are reached.

Mistakes to avoid

Outsourcing is a complex process, which is why there can be mistakes in its implementation. Even comprehensive planning cannot guarantee a smooth process. Here we look at some of the most common mistakes so that you avoid them:

  • Wrong outsourcing partner: Companies can choose between different outsourcing partners depending on the subject: specialized manufacturers, agencies or self-employed. However, a satisfactory result requires a careful selection of the business partner.
  • Arbitrary outsourcing: Arbitrarily outsourcing tasks may save you work, but rarely makes sense. Not only from an economic perspective, it is best to first analyze the different fields and activities of your own company in detail and then make a decision.
  • Inaccurate agreements: Unclear arrangements will often mean you as a business are not satisfied with the results. Therefore, it is important to specify in advance what exactly is being outsourced and how or to what extent the specified criteria will be monitored.
  • Bad contracts: An outsourcing contract should document outsourced tasks and mutual obligations. Unclear questions can lead to misunderstandings.

Outsourcing abroad: what is important?

Do you want to outsource part of your work processes and hire a company or service provider abroad? Be sure to consider these three factors:

  • Time difference: Thanks to digitization, you can collaborate with freelancers from around the world. But in the case of an urgent assignment or spontaneous meeting, the time difference can be a difficulty.
  • Language barriers: Fluent English is one of the most important prerequisites for outsourcing abroad.
  • Working method: Techniques and approaches are not the same in all companies. It is likely that a company on the other side of the world might address a problem differently to the way you are used to.

Outsourcing: advantages and disadvantages

The decision to give certain functions to an outside service provider should never be taken lightly. Once the tasks have been outsourced, reintegrating them back into a company can be anything but easy. You should always first check that the benefits outweigh the disadvantages for your company before opting for outsourcing.

Advantages Disadvantages
Core competencies: The company can focus on its core competencies. Dependence: You make yourself dependent on the respective service provider. If the service provider gets into economic difficulties, for example, this can mean consequential costs for your company.
Cost reduction: The provision of external services is generally more cost-effective than the employment of specialized employees in one's own company. Loss of knowledge: One consequence of outsourcing is the loss of employee know-how.
Time savings: Small businesses and the self-employed need a lot of time to familiarize themselves with new areas of business. Outsourcing saves time and enables investment in other areas. Data protection: Outside service providers may gain an insight into sensitive corporate data.
Improving quality: The use of outsourcing strategies often results in qualitative advantages. These advantages are due to the high degree of specialization of external service providers. Expensive reintegration: If you have outsourced certain tasks, a later reintegration into your company can be very time-consuming. The implementation is expensive, time consuming and requires suitable staff.

You should not outsource the key technologies and competencies of your company to third-party companies as these differentiate you from other companies and competitors.

Outsourcing is gaining importance

Many companies resort to outsourcing strategies in order to purchase services cost-effectively and to be able to focus more on their own competencies. Modern production and logistics concepts are necessary for such measures to achieve the hoped-for success. The just-in-time production strategy is an example of such a concept. Materials are produced or delivered only when they are actually needed. In this way, a company can save on storage costs and only has to pay for the material costs during production.

In the course of globalization, through global logistics concepts and the constant development of the Internet, it is easier than ever for companies to hand over a more or less large part of their process to other companies. Those who use outsourcing properly can speed up workflows and improve their products or services, so it is possible to counter the growing global competition.

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