An Easy Guide To Understanding Outsourcing

The business world is ever-changing and becoming increasingly complex. Businesses must constantly adapt and innovate to stay ahead of the competition. One way that companies can remain agile and responsive to change is by outsourcing certain functions. However, a few fundamental principles go into outsourcing to do it effectively.

What is Outsourcing?

Outsourcing is contracting with another company or individual to perform a specific task or service. The term “outsourcing” often has a negative connotation, as it can be associated with job loss and sending work overseas. However, outsourcing can also improve efficiency and free up resources so that businesses can focus on their core competencies.

The desire to outsource often arises when a company struggles to keep up with demand or when they want to cut costs. In some cases, businesses may outsource entire departments, such as customer service or accounting. Companies may also only outsource specific tasks, such as website design or social media marketing.

Types of Outsourcing

You have probably heard about business strategies based on “core competencies.” This business theory states that companies should focus on their best activities and outsource the rest. There are various types of outsourcing business models based on this principle. These models include:

1. Functional Outsourcing

This type of outsourcing occurs when businesses contract with other companies to perform specific tasks or functions. The most common examples of functional outsourcing are human resources, accounting, and customer service. Businesses may also outsource more technical tasks, such as website design or social media marketing.

2. Project-Based Outsourcing

Project-based outsourcing is similar to functional outsourcing, but it is typically used for one-time projects rather than ongoing tasks. A company may outsource the development of a new product or launch a new marketing campaign. Once the project is completed, the relationship between the two companies ends.

3. Staff Augmentation

Staff augmentation is a type of outsourcing that involves hiring additional staff from an external company to supplement the existing workforce. This is often done when a company needs additional skills or resources for a short-term project. For example, a company may hire an outside firm to provide IT support during a system upgrade.

4. Managed Services

Managed services outsourcing occurs when a company contracts with another company to manage an entire function or department. The most common examples of managed services outsourcing are IT, payroll, and benefits administration. With this type of outsourcing, the service provider is responsible for all aspects of the outsourced function, including hiring and training staff, managing day-to-day operations, and setting goals.

How to Outsource Effectively

Now that you understand the basics of outsourcing, it’s time to learn how to do it effectively. Here are a few tips:

Define the Scope of Work to be Outsourced

The first step is to identify which functions can be outsourced. This will vary from business to business, but some common examples include customer service, accounting, and IT support. Most companies will have a mix of both core and non-core functions. Core functions are essential to the business and cannot be outsourced, such as product development or marketing. Non-core parts can be outsourced without compromising the quality or integrity of the product or service.

Once you have identified the functions that can be outsourced, you need to define the specific tasks and responsibilities that will be included in the scope of work for the outsourced provider. This is important so that there are clear expectations from the outset and that both parties are on the same page.

Find the Right Provider

The next step is to find a provider who can deliver the services you need. There are a few different ways to go about this. You can use an online platform like Upwork or Fiverr or work with a staffing agency specializing in outsourcing. Working with a custom solution provider may be necessary if you have specific requirements.

Once you have found a few potential providers, it is important to vet them carefully. You can screen bids using metrics such as price, experience, and reviews. However, the most critical metric is usually fit. The following metrics will help you to assess whether a provider is a good fit for your business:

· Personality and culture fit: It is vital to work with a provider who shares your values and who you get along with. This will make it easier to communicate and collaborate.

· Skills and experience: The provider should have the skills and expertise necessary to deliver your services.

· Capacity: The provider should have the capacity to handle the workload you are outsourcing.

Negotiate the Terms of the Agreement

Once you have selected a provider, the next step is to negotiate the terms of the agreement. This includes price, the scope of work, timeline, and deliverables. It is vital to have a clear and concise agreement to avoid misunderstandings down the road. The agreement should also include a provision for what happens if the relationship is not working out. This could include a clause that allows either party to terminate the contract with 30 days’ notice.

Manage the Relationship Effectively

Once you have selected a provider, it is essential to manage the relationship effectively. This includes setting clear expectations, communicating regularly, and providing feedback. It is also necessary to document everything to have a clear record of what has been agreed upon. The most important thing is maintaining a good working relationship with the outsourced provider. This will make it easier to resolve any issues and ensure that the agreement benefits both parties.

Address Legal and Accounting Considerations

There are a few legal and accounting considerations to consider when outsourcing. First, you will need to ensure that the agreement between you and the outsourced provider is legally binding. This includes things like intellectual property rights and confidentiality agreements. You will also need to consider structuring the relationship for tax purposes. If you are considering outsourcing, it is essential to consult with a lawyer to make sure you know the legal and accounting implications. A lawyer can help you draft a legally binding agreement and advise you on the best way to structure the relationship for tax purposes.

Outsourcing can be a great way for businesses to stay agile and responsive to change. However, it is vital to understand the basics of outsourcing to be done effectively. By following the steps outlined above, you can be sure to find a provider who is a good fit for your business and manage the relationship effectively.

About the Author

Martin Brown is a senior ad tech writer.  He is also a freelance IT recruitment consultant for various companies helping them find the best person that would fit the vision and ethics of the company.