In this post, you will learn more about outsourcing and its different forms. The right approach to outsourcing is also an important topic for companies, which is why we will show you what a possible course of this process could look like. In addition, we will give you an overview of the possible reasons for outsourcing processes and the advantages and disadvantages that such outsourcing can bring.
Outsourcing definition
The definition for the term outsourcing is made up of three English terms: Out side, re sourc e and us ing and describes a corporate strategy in which a company outsources individual tasks, sub-areas or even complete business processes to third-party companies. This means that the services that were previously provided in-house can only be obtained from a service provider who specializes in them. However, only secondary functions, i.e. tasks that the company needs for the performance of its main activity, are outsourced. If possible, you should not outsource core competencies.
The most common form of outsourcing corporate functions is IT outsourcing, in which the company outsources its entire IT infrastructure to an external IT provider and no longer operates it itself. As a rule, the external provider appears as an external partner. The subject matter as well as the duration of the service provision is regulated by a corresponding contract. Often SLAs (Service Level Agreements) are agreed, which control the contractual relationship in detail with regard to reaction times and quality of the service.
But outsourcing can also be found in sectors other than the IT sector. Many small companies no longer maintain their own payroll accounting , but have it carried out by an external company. This lowers the costs for personnel administration. Personnel recruitment is also increasingly being taken over by external service providers. For many companies, building up the expertise in-house is simply too expensive.
What is Outsourcing?
Basically, outsourcing is nothing more than the outsourcing of individual company processes to an external service provider. On behalf of the company, the latter then takes on, for example, payroll accounting, customer service or product manufacturing and is paid by the company for his services. The reasons for such an approach are diverse and mostly serve to save resources and costs , a faster reaction to market changes or an improved quality of the products. The outsourcing is always contractually regulated between the commissioning company and the external service provider.
Which areas of the company can you outsource when outsourcing?
As already mentioned, as an entrepreneur you can outsource very different areas. This works with individual sub-areas as well as with overarching fields of activity such as:
- Accounting outsourcing
- It department
- production
- Customer care & field service
- Marketing area
- Vehicle fleet or logistics area
- Catering
Areas that a company should not give up or outsource under any circumstances are so-called core technologies and key competencies. By outsourcing them, a company would make itself too dependent on external service providers and might no longer be able to make important decisions completely independently.
Why is outsourcing important?
A big advantage of outsourcing is that a company can improve its market position . The outsourcing enables the company to concentrate fully on its core business , which not only results in cost advantages. The company can also react more quickly to changes in the market, identify trends earlier and thus offer consumers appropriate products before the competition.
This is achieved above all through optimized planning in the area of materials management. To ensure this, the company must have appropriate concepts for logistics and production that integrate the external service provider into the value chain. The use of specialized service providers pays off, for example in the area of production, through reduced costs and an optimization of quality.
The most important basis for modern outsourcing is efficient resource planning. This has to start in the company and not only with the commissioning of an external partner. Many companies use so-called Enterprise Resource Planning Tools (ERP), which cover the areas of financial accounting , inventory management and payroll accounting. The ERP software is then, so to speak, the organizational backbone of the company, and the outsourcing is then based on this.
When does outsourcing make sense?
A previously carried out profitability calculation should serve as the basis for every outsourcing decision. This can be used to determine at an early stage whether an outsourcing project would benefit or damage the company. A profitability calculation is a complex process because, in addition to the costs for services, the costs incurred for the completion of a project must also be included.
According to beautyphoon, outsourcing makes sense, for example, if a company is facing restructuring , the aim of which is to concentrate on the core business and to be more flexible. Therefore, all cost-intensive tasks that cannot be carried out efficiently by the company itself are given to the appropriate service company. Outsourcing can also make sense for fast-growing companies. By outsourcing you avoid the often very time-consuming setup of your own internal company processes.
What are the reasons for outsourcing?
As already discussed, outsourcing is an outsourcing in the context of which tasks, processes or structures are transferred to other companies that were previously carried out in-house. There are many reasons for outsourcing:
- Cost savings – due to the high degree of specialization of the service provider
- Quality improvements (for example in production)
- Greater effectiveness – because concentrating on core competencies can strengthen your own company
- Better scalability – especially when it comes to short-term fluctuations in utilization
- A faster ability to respond to changes
In addition, a distinction can be made between internal and external outsourcing. Internal company outsourcing can look like this: The task is transferred to a subsidiary, a new company is founded for the task or the task is carried out by temporary workers.
In the case of outsourcing outside the company, the task is passed on to a third-party company that has nothing to do with its own. This can happen in connection with a regional company or in a country with a lower average wage such as India or China.
