Outsourcing: How It Can Cut Costs for Your Company

One of the biggest things companies struggle with as they grow is scaling non-core business functions. Everyone has their own set of skills, and sometimes that doesn’t translate to things like customer service, accounting, or web design.

This is where outsourcing comes in — by leaving these non-core functions to experts, you can focus on what your company does best, and save money in the process.

Outsourcing has become increasingly popular as technology has made it easier than ever to work with people in different countries. Finding a solution no matter what size your business is — or what size you want it to be — is possible in just a few clicks!

So how can it help your company? Below, we’ll take a look at:

• What the outsourcing process looks like
• The benefits of outsourcing for companies big and small
• How it can cut costs
• How to choose which business functions to outsource
• Selecting an outsourcing provider
• Challenges you may face along the way

Ready? Let’s dive in!

What is outsourcing?

Outsourcing is the process of delegating a company’s business processes to an external service provider. It usually involves hiring a third party to take on all or part of a company’s non-core operational activities, like human resources, customer service, or payroll processing.

The main goal of outsourcing is to save money by taking advantage of economies of scale, by contracting a company that serves many clients and can thus streamline their processes.

It’s important to note that outsourcing is different from offshoring. Offshoring is when a company moves its operations to another country, usually to take advantage of lower labor costs. Outsourcing, on the other hand, can happen even if all the parties involved are in the same country.

Business process outsourcing (BPO)

While it does not encompass all of the ways outsourcing can look, BPO is the term most used today for companies looking to scale. It’s also sometimes called “information technology outsourcing” (ITO) or “ knowledge process outsourcing” (KPO).

In a BPO relationship, the client company contracts with a service provider to take on all or part of its non-core business processes. These can be anything from customer service and technical support to data entry and bookkeeping.

The service provider then manages these processes on the client’s behalf, leveraging their experts to complete the functions quickly, and oftentimes more effectively.

Shared services center

Another term you may hear is shared services center (SSC). This is a type of BPO where the service provider sets up a dedicated team to handle all of the client’s specific business processes. The SSC then manages these processes on an ongoing basis, usually from the provider’s facilities.

The main advantage of using an SSC is that it can help companies standardize their operations and improve quality control. It can also lead to cost savings since the provider can spread the fixed costs of running the center across all of its clients.

What are the key benefits of outsourcing?

It’s that last point, cost, that is so important here. Every business wants to lower spending on overhead or shave a few dollars off of functions that they don’t consider part of their core competencies.

The benefits of outsourcing can be divided into two categories: financial and operational. First, let’s briefly take a look at some of the operational benefits before digging a little deeper into the financial details.

Operational benefits of outsourcing

Outsourcing can free up your company’s resources so you can focus on your core competencies. It also allows you to tap into a pool of skilled labor that would otherwise be unavailable and gives you more flexibility to scale your business up or down as needed.

In addition, outsourcing providers usually have state-of-the-art facilities and equipment that would be too expensive for most companies to maintain on their own. They also tend to have robust processes and procedures in place that can help improve the quality and consistency of the services they provide.

Last but not least, outsourcing can help you mitigate risk. When you outsource a business function, you transfer some of the associated risks — like regulatory compliance or data security — to the service provider. This can give you peace of mind and allow you to focus on more important things.

How outsourcing can cut costs

Now it’s time to get into the details — cost cutting.

The most obvious way that outsourcing can help you save money is by reducing your labor costs. This is because, in general, wages are lower in countries where outsourcing providers are based.

However, there are plenty of other financial benefits as well, some of which you might not have expected.

No training investment

Suddenly, by investing in BPO or other outsourcing services, you have completely removed the need to train employees on non-core functions. It might seem like that will only save you the costs of paying those employees while they are getting up to speed, but it also:

• Eliminates the opportunity cost of having those employees unavailable to work on other tasks
• Reduces the risk that they will make mistakes during training and cause expensive problems down the line
• Lowers your chance of turnover. If an employee is unhappy with their training, they are more likely to leave; not a problem with business process outsourcing!

Even things like certification and education credits that you might have once needed to include in a benefits package are no longer needed, leading to even more cost savings.

Reduced benefits

Speaking of benefits, you don’t need to cover those either for the BPO experts. For businesses that want to attract the best candidates, benefits packages often have to be competitive.

This can be a big cost, especially for small businesses. When you outsource, you don’t need to worry about this because it is all taken care of by the provider.

There’s also no paid time-off you have to worry about. Say you used to have just one HR manager; by using a BPO solution, there’s no time when the work isn’t being done.

Smaller office space

One of the things that get overlooked the most when considering whether to use outsourcing or not is the potential to downsize office space or use it for something else to benefit the company.

Departments like human resources, customer service, or even accounting might not need to be based in-house at all if they are being outsourced.

This can lead to some serious cost savings on things like:

• Rent or mortgage payments
• Utilities
• Furniture and equipment
• Cleaning and maintenance services

Not to mention, it can also help your company’s carbon footprint!

Lower turnover

When companies are focusing on getting the best candidates for their core business functions, they don’t want to lose them! New studies are suggesting that turnover could increase as much as 20% moving forward (from an already high rate), meaning keeping your talented team members is going to be harder than ever.

Luckily, by outsourcing some of your non-core functions, you can focus more resources on those essential employees to make sure they are sticking around for the long haul.

Increase efficiency

Here’s the big one.

Outsourcing can help improve your company’s efficiency in several ways:

• You’re able to focus on your core business functions. The main goal of outsourcing is to help you focus on what you’re good at. When you outsource non-core functions, you can put all of your energy into making sure your company excels in its area(s) of expertise.
• You have access to experts. When you work with an outsourcing provider, you’re working with people who have a lot of experience in that particular field. This can help improve your processes and, as a result, make your company more efficient overall.
• You’re able to scale quickly. If you need to scale up or down quickly, outsourcing is going to be your best bet. It’s much easier (and less expensive) to add or remove team members when they’re not in-house.

By increasing productivity and efficiency, there’s no telling how much money a company can save. Sold yet? Let’s talk about how you can decide which functions are best suited for outsourcing.

How to choose which business functions to outsource

The first step in deciding whether to outsource is to take a good, hard look at your company and what it does best. Your core competencies are the things that make you unique and give you an advantage over your competitors — these are the things you should be focusing on.

Outsourcing non-core functions can help you save money while freeing up time and resources; it’s not always easy to know what counts as a non-core function. Here are some examples.

• Customer service: If you’re not in the business of customer service, chances are good that you’re not doing it as well as a company that specializes in it. There’s no shame in admitting that — and outsourcing this function can save you a lot of money and headaches.
• Accounting: This is another function that many businesses choose to outsource. It’s important to have accurate financial records, but unless you’re in the business of accounting, it’s not likely that you have the in-house expertise to do it well.
• Web design: Your website is one of your most important marketing tools, so it needs to look good and function well. Unless you have a team of web designers on staff, outsourcing this function is usually a good idea.

Once you’ve identified which functions are non-core, the questions you should ask about whether or not it is worth outsourcing are:

• Is it a function that takes up a lot of time and resources?
• Is it a function that is essential to your business, but you’re not good at it?
• Is it a function that you don’t have the in-house expertise to do well?

If you answered yes to any of these questions, outsourcing might be a good option for you!

How to choose an outsourcing provider

Now that you know what business functions to outsource, it’s time to find a provider. This can be a daunting task, but luckily there are a few things you can keep in mind to make the process easier.

First, consider what kind of relationship you want with your provider. Do you want a long-term partner who will get to know your business inside and out? Or do you need a more transactional relationship where you just hand off the work and forget about it?

The answer to this question will help you narrow down your options. If you’re looking for a long-term partner, you’ll want to find a provider that has similar values to your company and is invested in your success. If you just need someone to do the work and don’t care about the relationship, the price will be your main concern.

Second, take a look at the providers’ portfolios and case studies. This will give you an idea of their experience and whether they’re a good fit for your business.

Third, ask for referrals from companies in your industry that have outsourced similar functions. They’ll be able to give you insights into the process and what to expect.

Finally, once you’ve narrowed down your options, request proposals from each of the providers. This will help you compare their services and pricing side-by-side so you can make the best decision for your company.

Challenges you may face

While the advent of more complex outsourcing solutions has made it easier for a business to find what they need, there are also some challenges to consider.

One challenge is managing expectations. It’s important to remember that your outsourced team is just that — a team. They’re not going to be able to read your mind, so you need to be clear about what you want and how you want it done. This includes setting deadlines and giving feedback along the way.

Another challenge is cultural differences. If you’re outsourcing to a team in a different country, there may be language barriers or different ways of doing things. It’s important to be aware of these differences and take them into account when communicating with your team.

Finally, you need to be prepared for the possibility that things may not go as planned. There may be hiccups along the way or times when the work isn’t up to your standards. The key is to stay calm and work with your team to find a solution.

Outsourcing can be a great way for companies to save money and focus on their core business functions. By keeping the challenges in mind and taking the time to find the right provider, you can set your company up for success.