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What is business outsourcing and what are the advantages and disadvantages?

Discover everything you need to know about outsourcing for small businesses below.

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What is outsourcing?

Outsourcing is a business practice in which services or job functions are hired out to a third party on a contract or ongoing basis.

There are two ways to bring in the skills your business needs: hire more staff, or outsource (e.g. to agencies, contractors, freelancers or other suppliers).

Depending on your circumstances, there can be various pros and cons to outsourcing. Some of the advantages are:

  • The service can be up and running very quickly

  • It may be cheaper or more efficient to do so

  • You can easily increase or reduce capacity as required

  • You can terminate the service more easily if it’s no longer needed

  • You don’t need in-house office space

  • You may get a more expert service

However there may be drawbacks to outsourcing too, such as:

  • Outsourcing is not necessarily cheaper (it could go either way)

  • The provider may not know your business as well as an employee would

  • You may not get the same continuity of service

  • Communication can be more difficult

Ultimately the decision ‘in-house or outsource?’ needs to be made on a case-by-case basis.

Here are some more things to consider when you face this choice.

Which parts of a business can be outsourced?

The most common types of work that businesses outsource are:

  • Accounting functions such as bookkeeping and payroll

  • IT services like database management and data storage

  • Recruitment

  • Marketing such as SEO and content writing

  • Design and creative work

  • Website management, design and development

  • Customer services

  • Manufacturing and assemblage of products

  • Distribution

Sometimes you may outsource a function altogether so that it is entirely managed by your provider.

In other cases you may have one in-house specialist (or a few) who takes charge of that function while outsourcing some of their workload.

For example, you may have an in-house accountant or finance director but outsource some of your accounting work.

The advantages of outsourcing

Depending on your circumstances, it can make sense to outsource.

Hiring and employing a full or part-time employee is costly and comes with lots of overheads, and it can also take several months or even longer.

There are similar drawbacks to training up your existing staff (even where this is possible).

By contrast, outsourcing means you can have a new function up and running very quickly – often within the week.

This is ideal for small businesses and start-ups where you don’t yet have the capacity to take on lots of staff.

Outsourcing is also flexible, in that it’s usually easy to increase or decrease capacity at short notice.

Again this is particularly useful for fast-growing businesses, or businesses with fluctuating demand.

You can also benefit from economies of scale.

For example, as a small business you may only be able to afford a junior staff member, whereas for a similar cost you could get an outsourced service delivered by a more experienced provider.

Outsourcing is also very useful when you are exploring new areas of business or growing into new markets.

You can test the waters using an outsourced service, and if you are successful you can look at bringing the function in-house.

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The disadvantages of outsourcing

When does outsourcing stop being the best option? The answer may be, when you can do it better in-house – or when you have a strategic reason for doing so.

Another reason may be mounting costs – if you have a large volume of work in that function, outsourcing may eventually become less cost-effective than having your own full-time employee(s).

There may be other issues to consider with outsourced services.

Your providers are not your employees, so may not have the desired level of commitment to your business.

This can be the case particularly if you are a small client of a large firm (for this reason, you may prefer to choose smaller firms where you are a more important client).

Communication can be a challenge if the outsourced provider is not on-site, and so the quality of the work may suffer.

It can also be harder to respond if a serious error is made, as you are in the position of a complaining client rather than a boss.

Outsourcing may also mean less continuity of service.

The personnel at your provider may change over time, or work may be carried out by a variety of different people over whom you have no direct control. This can impact on quality.

Finally, if a function is central to your business then it may be in your long-term interests eventually to bring it in-house.

There are benefits to having closer control over key functions, and you can learn a lot about your own business by seeing the workings of it up close.

How to choose whether to hire or outsource

Many factors will influence your decision whether to outsource or hire in-house staff.

As a small business, you may initially prefer to outsource most functions and then see which ones should be brought in-house as your business grows.

One way to do this to consider how important each function is in terms of both

  • Your strategy, and

  • Your operations

If a function is of high strategic importance, it means that it helps to give you your competitive edge.

For example, for a business making innovative greetings cards, then the design and artworking of such cards would be core to its strategy.

If a function is of high operational importance, it means that it helps your organisation to run smoothly and would cause a disruption if interrupted.

So for the aforementioned greetings card business, the printing and distribution of the cards would be of high operational importance, but not strategic (because it’s vital work, but not a unique selling point).

The rule of thumb is to keep a function in-house if it has both high strategic and operational importance.

So the greetings card maker would ideally have its designers in-house.

However, if it is of high operational importance but low strategic importance, the function could easily be outsourced.

So the card-maker might choose to outsource their printing and distribution.

Look at each of the areas of your business and try to measure their operational and strategic importance.

This will help you decide which to outsource and which to keep in-house.

If you found this article useful, you might also find our article on staff appraisals informative, too.

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About the author
Nick Green is a financial journalist writing for Unbiased.co.uk, the site that has helped over 10 million people find financial, business and legal advice. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.