The term “outsourcing” is derived from two English words: “out” and “source”. When a business outsources something, it entrusts a third-party company with a workload that was previously handled by its own employees. Let’s explore the pros and cons of this approach, as well as the advantages and risks it entails.
Benefits of outsourcing
Firstly, outsourcing is very convenient. While your business is solving key tasks and focusing on strategy, you delegate all routine tasks to an external service provider. A provider specializing in a particular service can attract the most qualified professionals from the labor market, whereas in your company, the costs of hiring them would hardly be justified.
You can outsource reporting, interaction with regulatory authorities, maintenance of computer and office equipment, retail customer support, and even personnel recruitment and training. Specialized outsourcing gives you access to best practices and modern tools, as it possesses the necessary templates, methodology, high-performance IT systems, and highly qualified personnel.
With outsourcing, you get the optimal number of employees for a particular function of your company according to a standard comparable to the best enterprises in your industry, as well as access to the most advanced and usually expensive technologies and IT solutions.
Unlike the costs of paying salaries to full-time employees, these costs are not permanent and can be flexibly scaled in accordance with the workload. Moreover, it is much easier to replace a service provider in case of a violation of the SLA (Service Level Agreement) than to replace your own employees.
Paradoxical but true: in most cases, transferring a function to outsourcing provides greater transparency and efficiency than in-house solutions. This is due to the fact that service providers provide operational reports that are not only qualitatively different but also directly, item by item, linked to the costs you incur.
Disadvantages of outsourcing
The biggest risk when switching to outsourcing is choosing an unqualified supplier. In this case, there are risks of the provider failing to fulfill its obligations regarding the quality, volume, and cost of the services provided, and in critical cases, data leaks and other issues. It should be noted that no such cases have been recorded among the top 10 outsourcing providers in Russia. Thus, choosing a well-known and highly rated provider insures you against such excesses.
The most common problem when switching to outsourcing is resistance from the customer’s personnel. Your own employees will have to change processes and approaches to work, and this is not always easy, even if all the innovations are only for the better. In this regard, if you have decided to switch to outsourcing, you will have to do painstaking preparations to explain to your personnel your motives, the economic rationale for such a decision, and motivate them to cooperate with an external company.
Only the support of management and close constant contact with the service provider during the transition to a new model will make it relatively easy and allow you to go through it painlessly.
Outsourcing formats
One or several supporting functions can be outsourced. The volume of services provided, IT services, and tools that the provider shares with the customer are regulated by the contract.
A particular function can be transferred in full or in part. For example, a company is not ready to transfer all personnel records for some reason, but is happy to give up the recruitment, onboarding, and training of personnel, as the most problematic part. In the case of accounting, it is possible to leave the function of the chief accountant to yourself, and to give away transactional operations. At the same time, the service provider can work in its own system or in the customer’s system, if this is specified in the contract.
Sales are typically not outsourced as they are essential to a business’s survival, but most other functions can be easily handed off to an external company.
Most commonly outsourced services
The most commonly used functions include financial and tax accounting, budgeting and financial planning, human resources and document management, as well as legal and IT support.
Specialized service providers operate in other areas as well, such as cloud data storage, security and access control systems, employee meal programs, and lastly, cleaning services. In nearly all of these fields, using third-party services enhances quality while reducing costs.
Outsourcing, outstaffing, freelance. What’s the difference?
Outsourcing is a business service characterized by the responsibilities of one company towards another, involving a contract to outline the terms of work, guarantees, liabilities, and potential penalties – which makes it a typically expensive practice that comes with risks.
Outstaffing involves hiring employees from another company to work for you on a temporary basis, typically for a specific project; the guarantee and responsibility take on a totally different form, with a greater burden on the host company. In this case, your management is responsible for their performance efficiency, and employees contribute solely their personal experience rather than innovative solutions or software.
Freelancing involves independent experts and freelance workers, often registered as individual entrepreneurs or self-employed individuals, whose services can be utilized by a company to complete minor one-time tasks. Freelancing can occasionally provide a high-quality solution at a minimum cost, yet it more often comes with delays in deadlines, a lack of commitment and no guarantees of achieving results, even when popular international and Russian freelance platforms are involved.
Outsourcing is on the rise
With major top tier companies having mostly covered their efficiency needs through outsourcing or established their own internal shared service centers (SSCs), we are now observing a trend toward medium-sized businesses entering this market to optimize and take their business processes to a new level. Outsourcing serves as a viable solution for business growth as it requires less investment while addressing issues right on the spot.
Obviously, outsourcing is gaining increasing popularity among Russian companies due to the need for cost reduction, improved efficiency, and greater access to advanced technologies and best practices.
By Svetlana Bormatova, General Director, Greenatom Simple Solutions, part of Rosatom State Corporation