Benefits of Outsourcing
Many business owners don't thoroughly understand the benefits of outsourcing. It's true that outsourcing can save money, but that's not the only (or even the most important) reason to do it.
Wise outsourcing can provide a number of long-term benefits:
Control capital costs. Cost-cutting may not be the only reason to outsource, but it's certainly a major factor. Outsourcing converts fixed costs into variable costs, releases capital for investment elsewhere in your business, and allows you to avoid large expenditures in the early stages of your business. Outsourcing can also make your firm more attractive to investors, since you're able to pump more capital directly into revenue-producing activities.
Increase efficiency. Companies that do everything themselves have much higher research, development, marketing, and distribution expenses, all of which must be passed on to customers. An outside provider's cost structure and economy of scale can give your firm an important competitive advantage. In many cases, outsourcing allows access to expert talent. Outsource service firms can offer innovative approaches, the latest technology, and creative, cutting-edge solutions that otherwise aren’t available. Outsourcing also increases flexibility in that resources no longer used in one area can be redirected to the company's core operations
Reduce labor costs. Hiring and training staff for short-term or peripheral projects can be very expensive, and temporary employees don't always live up to your expectations. Outsourcing lets you focus your human resources where you need them most.
Start new projects quickly. A good outsourcing firm has the resources to start a project right away. Handling the same project in-house might involve taking weeks or months to hire the right people, train them, and provide the support they need. And if a project requires major capital investments (such as building a series of distribution centres), the startup process can be even more difficult.
Focus on core business. Every business has limited resources, and every manager has limited time and attention. Outsourcing can help your business to shift its focus from peripheral activities toward work that serves the customer, and it can help managers set their priorities more clearly. For many businesses, the primary motivation to outsource is that it frees owners, managers, and employees to spend their time on income generating activities.
Level the playing field. Most small firms simply can't afford to match the in-house support services that larger companies maintain. Outsourcing can help small firms act "big" by giving them access to the same economies of scale, efficiency, and expertise that large companies enjoy.
Reduce risk. Every business investment carries a certain amount of risk. Markets, competition, government regulations, financial conditions, and technologies all change very quickly. Outsourcing providers assume and manage this risk for you, and they generally are much better at deciding how to avoid risk in their areas of expertise.
Improve the bottom line by decreasing expenses. A skilled contractor or firm can generally perform work less expensively than a full-time employee can, and the costs of hiring, training, and maintaining employees are eliminated, as are taxes and benefits.
It's Okay to Let Go: Key Business Functions You Can Outsource
Outsourcing -- hiring outside firms to perform work normally handled internally -- is a good thing for small and even not-so-small companies. Some businesses don't have the man-power to tackle all the work that needs to be done. Outsourcing can also save money, giving work to companies that are cost-efficient.
The key is to outsource functions that are not integral to your core service. This will allow you to focus on what you do best.
Consider the following functions:
Scheduling, travel arrangements, data entry, typing and other administrative tasks can usually be handled by a virtual assistant or administrative service. While these tasks are crucial to the proper functioning of any business, they are not usually core business activities.
Paying employees is tricky; it can take a lot of time to master the process. Outsource this task to a company that knows the payroll process inside and out so you don't have to spend time on taxes and health benefits. Outsourcing payroll processing alone can save considerable hours, headaches and dollars.
Accounting and financial duties
Accounting firms or individuals can help with many financial services including bookkeeping, invoicing and accounts payable and receivable, as well as financial reporting, analysis and planning. Many financial contractors will bundle these tasks for even greater savings. And many accounting firms will also handle payroll processing as well.
Outsourcing human resources is particularly useful for small businesses. An experienced HR outsourcing company can manage a whole range of human resources functions that you might otherwise outsource to multiple providers - these functions include everything from payroll processing and benefit plan management and administration to recruiting, employee relations and more. By staying current with employee legislation you know your employees will be managed in a fair and compliant manner. With one provider to take responsibility for a range of HR functions, you'll not only spend less time on administration and legal fees, but less time managing vendor relationships as well.
Much like taxes and payroll, negotiating medical plans on an annual basis takes away from focusing on core business issues. Using a benefits specialist to manage employee benefits can also be wise, since they must stay up to date on the latest products that will work for your business.
The skills needed to make an awesome new product are much different than the ones needed to distribute it widely. With the rise of e-commerce, international trade, and third-party suppliers, the process of getting your products to customers can be a logistical nightmare. Let the experts to do it.
Have a new idea for a product or service, but don't know whether it will sell? Hire companies to do in-depth research for you. Specialists can conduct polling, focus groups, and online data evaluation to determine whether or not your business idea will work. Having an objective third-party do the research will make the results more credible.
Every entrepreneurial venture comes with some risk. Outside consultants can tell you how to avoid risk in their areas and what challenges you might run into. For small businesses just starting off, it is helpful to have outside advisers who are experienced in your industry.
Effective marketing determines how both brand and company reputation are perceived in the marketplace. A marketing firm or consultant can often provide an outside perspective that an internal marketing staff cannot. Professional freelance writers can develop higher-quality, polished content that will improve marketing efforts. Website design, brand development, press releases and online marketing duties such as social media, blogging and search engine optimization are good candidates for outsourcing as well. Independent contractors specialize in increasing brand recognition through social media platforms and word-of-mouth. With a new level of exposure, you will be energized to keep focusing on your core business.
It can be extremely expensive to handle IT operations in-house. The average business has limited ability and knowledge to manage all of its IT needs. Unless you’re an IT company, IT is a maintenance and repair function, not a core business activity. The potential advantages of outsourcing IT tasks are enormous.
Top 10 Tips for Finding an Outsourcing Partner
Finding an outsourcing partner requires detailed research and discussion. It's critical that you are compatible with your partner, and that you work with organizations or individuals who will drive success for your company. Below are ten indicators that are critical when working with outsourcing partners.
1. Results Driven – Is the company committed to helping you reduce costs and at the same time increase customer satisfaction, one that can set a goal that is achievable within a specific time frame?
2. Partnership Oriented – Does the company that shares your common goals and values, of which performance is a key point among staff, the community and the managing company?
3. Innovative – Can the company execute on its own across the board, and can it provide a great deal of benefits to you and your business with modernized technology and more?
4. Flexibility –Does the company offer customized and tailored services, always keeping in mind the needs of you and your customers, first and foremost?
5. Modifiable Management – Can the company swiftly manage changes when necessary for achieving your performance improvement goals without negative impact. In addition, can it prepare staff members for a change without flaw and deliver change in a positive, productive and professional manner.
6. Benchmarking – Can the company comparison data to ensure that your customers are receiving the highest quality of service, and does it offer measurable success to customers' and employees' satisfaction thus creating more growth and profit potential for everyone involved?
7. Resourceful – Can the company attain depth, with an extensive experience in the long-term market and is it able to offer resources specifically fitting your goals and vision?
8. Employee Development – Can your outsourcing partner provide comprehensive and ongoing training, as well as overall professional development for all employees, at all levels of the corporate ladder in relation to your outsourced campaign?
9. Continuous Improvement on Quality – Can your partner always take things to the next level and raise the bar higher for every goal that is achieved? Can they also encompass the willingness and ability to meet both short and long term goals?
10. Proven Record – Above all, does your outsourcing partner have a successful, professional proven track record? They should be able to provide you with references and testimonials if you feel they are required. If a company, particularly one overseas, cannot provide references, then simply stay clear of them.
Coach's Corner: Best Practices for Effective Outsourcing Contracts
Due to the strategic nature of the outsourcing initiative, it’s critical that you select the right outsourcing vendor and set up the partnership in such a way that both parties benefit from the relationship. Structuring the contract with the outsourcing vendor is a critical process in establishing the outsourcing relationship.
In each step of contract negotiations, both parties should make sure that the contract serves the purpose of their short-term and long-term goals. This will ensure that there are sufficient incentives for both parties to guarantee the success of the outsourcing relationship.
A well-defined outsourcing contract helps in:
- Clearly articulating the success criteria to the stakeholders in both the client and the vendor teams.
- Defining some of the high level metrics used to measure the vendor performance.
- Defining the project requirements in terms of people, process, security, technology and business continuity.
- Defining the incentives and penalties based on vendor performance.
- Handling the unpredictable scenarios without causing undue frustration on either side.
- Pursuing structured growth of the partnership.
It’s important to clearly define the requirements for the projects in terms of people, infrastructure, security, business continuity and processes.
- People-related requirements include the skill set of resources, size of the team, duration of ramp up, etc.
- Infrastructure requirements include hardware, software and network details.
- Process-related requirements include resource induction process, status reporting, delivery knowledge transfer, quality process etc.
- Security requirements include physical, personnel and network security.
- Business continuity requirements include planning for physical theft, data theft, virus attacks and natural and man-made disasters.
- The service levels for the outsourcing relationship and the corresponding incentives and bonus clauses should be clearly defined. This will help the vendor to internally measure and manage the outsourcing projects as well.
- The governance of the contract in terms of termination clauses, contract breach and governing clauses should be clearly defined.
To reduce the cost of contract structuring, companies can leverage in-house legal council to draft the contract based on the term sheet. Also, vendor contract templates can be modified to incorporate the term sheet details, and outside legal support can be used only for the final validation of the contract.