Outsourcing has become a lever for growth and innovation for companies; it is no longer limited to low value-added tasks.
Companies are now looking to outsource strategic and high-value functions, collaborating closely with specialized service providers to benefit from their expertise and skills. This collaborative approach allows for the pooling of risks and investments, while promoting co-innovation and value creation.
Thus, the unprecedented growth of outsourcing relationships raises many questions:
- What motivates managers when they decide to outsource some of their activities?
- What activities should be outsourced?
- What approach should be adopted?
- What are the advantages and risks of outsourcing?
- And other points to be addressed in this article.
Meaning of outsourcing
It is a strategic choice which consists of a companyentrust, for a long-term contract, the performance of a function or service which was previously provided by the company’s internal services, to an external service provider, an expert in his field.It is therefore a trade-off between internal resources and external resources.
Areas of Outsourcing
Subcontracting strategies can cover several areas. Companies can outsource production-related operations such as logistics, maintenance, order taking, accounting, communications, personnel management, IT, or customer relations to onshore (nationally established) or offshore (foreign) service providers.
Why use outsourcing?
The use of outsourcing by entrusting part of its activities to a specialized external service provider, offers the company more than ever the opportunity to gain in agility, efficiency and responsiveness. the need to create more value for the shareholder, in addition to helping it to refocus on its core business, and therefore on its core activities, by transferring parallel operations to other companies specializing in the field.
The main objective, beyond saving time, is to reduce production costs. Indeed, the service provider can provide a service or benefits at a lower cost than that initially assumed by the client company, because specializing in a certain activity allows it to benefit from economies of scale.
Without forgetting that by using outsourcing, the company benefits from the experience and expertise of specialist service providers with sophisticated technological means that they implement to carry out their missions. Especially with the phenomenon of shortening product and technology life cycles that are forcing companies to ask themselves whether certain historically internalized activities should still be kept in-house.
Steps to a successful outsourcing operation
To successfully implement its outsourcing strategy, the company must meet a number of conditions, which can be summarized as follows:
- Define specific needs with clear objectives;
- Carefully choose the functions or operations to be outsourced;
- Establish clear, detailed and exhaustive specifications;
- Ensure that the choice is made on an experienced and recognized service provider in the sector to have a fruitful and quality partnership;
- Include among the clauses of the specifications, an article relating to respect for confidentiality;
- Establish the relationship with the service provider on a basis of mutual trust, by promoting transparency, communication and respect for commitments;
- Establish an evaluation system;
- Implement monitoring and control tools.
The different forms of outsourcing
There are three types of outsourcing: remote outsourcing, domestic outsourcing and cross-border outsourcing, each offering specific advantages depending on the location of the provider, which can be presented as follows:
1- Remote outsourcing
This is a form of outsourcing that involves using the services of a service provider located in a geographically distant area from the client’s location. These are generally developing countries where labor is relatively cheaper. The goal of the client company is to use a service provider located in another country or continent in order to benefit from advantageous rates or circumvent customs duties.
2- Domestic outsourcing
Domestic outsourcing consists of using the services of a service provider geographically located in the same area as the client (same continent, same country, same national territory).
3- Cross-border outsourcing
Unlike the two types of outsourcing mentioned above, cross-border outsourcing involves hiring the services of a service provider based in the client’s neighboring country or in the country bordering the client.
Here, the countries share almost the same culture, history, and sometimes the same language. Services are delivered on time, as the time zone is often the same in neighboring countries.
The benefits of outsourcing
If the outsourcing strategy is well designed and well implemented, and if the providers are well selected, the company will be able to derive several benefits from its choice:
1- create synergy with the service provider
The creation of synergy between a principal and a service provider, particularly in the context of subcontracting, is essential for effective collaboration and positive results. It relies on clear communication, mutual trust, and the precise definition of each party’s roles and responsibilities.
2- Focus on your core business
Companies in a relentless quest for value, performance and optimization because the high pace of exchanges combined with increasingly fierce competition and economic changes force them to be increasingly reactive and specialized, in order to avoid possible needs for restructuring.
Thus, the less strategic functions (nonetheless essential to the functioning of the company) are outsourced and entrusted to external service providers allowing the company on the one hand to access a qualified and specialized workforce and on the other hand so that the internal teams can concentrate on their core business, which ensures the company an increase in the flexibility of human resources.
3- Develop a skill
Outsourcing enriches the companies that use it because they receive the services of providers specialized in their areas of expertise. These providers bring them skills that they would otherwise not have been able to develop due to lack of resources or time.
In addition, outsourcing allows the company to open up to the outside world and potentially discover other solutions (practices, strategies, innovations, technologies) applicable to its business. It is also possible to expand the company’s service offering with the contributions of service providers in order to optimize its competitiveness.
Furthermore, with outsourcing, the company can better consider and prepare for internal structural changes.
4- Gain in quality
The outsourcing operation is logically carried out with experienced specialists who bring with them current market best practices, as well as the latest innovations in the sector.
5- Control your costs
The company hired as a service provider adapts its service based on its client’s expectations and objectives. As a result, the client exchanges fixed costs for variable costs depending on the activity.
At the same time, this type of operation allows it to reduce its payroll, its stocks and its expensive investments in equipment and materials, as well as the current expenses linked to them (maintenance, updating, maintenance or even replacement in the event of obsolescence).
6- Gain operational flexibility
Outsourced activities are entrusted to service providers who operate daily in a competitive market that requires them to constantly seek competitiveness, quality, service optimization and reduction of execution times, which contributes significantly to improving the company’s competitiveness.
Limitations and disadvantages of outsourcing
Although the operation is not lacking in advantages and benefits for the company, outsourcing also has its disadvantages and risks.
Indeed, a company that chooses to use external service providers will have to rely on them to carry out the tasks entrusted to them. It will be responsible to its clients for their errors and failures. Furthermore, it can also cause:
- Loss of privacy;
- Loss of autonomy;
- The drain of skills and expertise;
- Hidden costs;
- Dependence on the provider;
- The difficulty in control your subcontractor if the latter is located in a distant country;
- Difficulties in coordinating operations related to a single project, but which are outsourced to different companies;
- Uncontrolled reversibility in the event of backsourcing (re-internalization), especially with the loss of know-how.
Conclusion
On the other hand, and in any case, the disadvantages of outsourcing can be avoided by carefully selecting the companies with which the client will collaborate.