The concept of outsourcing has been around longer than that particular term has been used to describe it. Companies have chosen to have someone outside the organization handle a specific business function for many years. Technology has made the process more practical, especially for companies that want to outsource certain functions overseas. It keeps becoming even easier to outsource certain functions. The question is no longer how to outsource, but whether outsourcing is the right approach for your company.
Deciding Whether It's Right
Deciding whether to outsource is a subjective process. It's different for every company. The most commonly outsourced tasks are those that are time-consuming and can be done more cheaply by another company. Manufacturing is a commonly outsourced business function. When you can take advantage of the differences in the cost of manufacturing overseas, it often makes financial sense to do so. Even with manufacturing, there can be reasons to keep the work in-house. If, for instance, your manufacturing process helps you stay ahead of the competition, you don't want to outsource the work to another company that can easily take your competitive edge and tell your competition all about it.
If you're considering outsourcing, you need to look not only at the financial costs of doing the work yourself or letting someone else handle it, but also whether the task in question is part of your competitive advantage or if it's central to your ability to create profits. Outsourcing is a question you need to revisit, as well. Circumstances change and what made sense to outsource a few years ago may be better handled in house now. If, for instance, you began outsourcing because you needed a specialized skill set but didn't have enough work to keep a full-time employee busy, you may grow to the point where you can bring someone on staff in the future. You should consider any outsourcing arrangement to be short-term and revisit it often to make sure that it's still the best choice for your company.
Determining the Cost of Outsourcing
The actual costs of outsourcing are heavily dependent on just what you need done. Outsourcing bookkeeping work for a small business would be calculated on an hourly basis, while having another company handle all of your manufacturing would result in a rate based on the number of items you need produced. No matter what work you need completed, however, you need to calculate the difference between handling the work in-house and outsourcing it. Only if you will save money by outsourcing should you even begin to consider it as an option.
There are costs to outsourcing that are easy to miss, so make sure you take everything into account. Working with someone who is outside of your office may require you to spend more time on project management to make sure everything happens as you need it to. Outsourcing internationally can also require you to spend more on communications, as well as risk changes in pricing due to currency fluctuations. You also run the risk that what you get will not be exactly what you need. Manufacturing processes in countries like China may be sub par or even subject to contamination. Even moving over to an outsourced solution can require you to invest money upfront.
But there are just as many hidden costs for keeping a task in-house that you need to take into account. A trained specialist may handle a project in a fraction of the time that it takes an administrative assistant to handle something she's less familiar with. Outsourcing also allows a company to effectively eliminate the work that is central to your specialties as an organization, letting you push the greatest share of your resources towards what lets you stand out in the marketplace.
The Bottom Line
There are pros and cons on both sides of the balance sheet, but if you do the math, you'll see if outsourcing really works for your company. It depends a lot on what work you are planning to outsource and where you would be getting the outsourced work from.