Outsourcing has transformed the way firms operate. However, the benefits of outsourcing have largely been missed by micros and SMEs. But what exactly is it and how can micros and SMEs benefit from it?
What is outsourcing?
Outsourcing is the contracting of a specific activity, function or process to a third-party service provider. The main market segments in outsourcing are business process outsourcing (BPO), where business-related activities, say in HR, finance and customer service, are outsourced, IT outsourcing (ITO), where IT-related activities are outsourced, and knowledge process outsourcing (KPO), where activities or processes of high value and/or high level of domain knowledge are outsourced, such as data analytics and investment research.
How much is outsourcing worth?
At the end of 2010, XMG Global projected the global outsourcing market to be worth 270bn ($425bn), this was a 13.9% increase on the 237bn ($373bn) 2009 market. In 2008, the corresponding market was worth 212bn ($334bn).
Why do organisations outsource?
Business theory and experience indicate that businesses do best when they focus on those activities that give them a particular advantage over their competitors leaving non-core activities to be performed by other firms. Therefore, British Airways focuses on managing its network of air services, leaving baggage handling to one of its outsourcing partners.
In a survey of members, the Outsourcing Institute found that the top 5 reasons why companies outsource were:
- Reduce and control operating costs
- Improve company focus
- Gain access to world-class capabilities
- Free internal resources for other purposes
- Gain resources not available internally
Thus a firm could control its operating costs by outsourcing its internal IT support function. This could bring in technical knowhow and capabilities while significantly reducing its overall payroll and benefits costs, as employees would be transferred as part of the deal. Similarly, a firm could outsource its payroll & benefits processing allowing the introduction of newer and more cost-effective payroll and benefits processing technology.
Can micros and SMEs benefit from outsourcing?
Outsourcing has traditionally been under-utilised by micro, small and medium-sized enterprises (micros and SMEs), as it involved contracting with the large outsourcers to strike multi-year, multi-million or even multi-billion mega deals.
However, micro outsourcing (also known as micro sourcing) allows these firms to gain process efficiencies and cost savings by outsourcing their work to highly skilled freelance workers or independent businesses (service providers) based locally, nationally or anywhere across the globe.
Some of the key benefits of micro outsourcing for micros and SMEs include:
1. Makes processes more efficient Philippines
As with outsourcing, micro outsourcing allows firms to gain process efficiencies and increased effectiveness, as experienced service providers with specialist skills, knowledge, best practices and up-to-date technology & equipment carry out activities and processes.
2. Delivers cost savings
Micro outsourcing has a positive effect on a businesses’ cash flow by reducing overhead costs and capital expenditures. For example, by micro outsourcing, a business could save on not only salary costs but also pension and other benefit costs. With a reduced headcount, other cost savings would follow such as office space, heating and equipment costs.
Note. Estimates indicate that cost savings of between 50 and 70% are achievable.
3. Ensures the deployment of competitively priced resources
With micro outsourcing, service providers bid for your jobs ensuring that costs truly reflect the service provided. Essentially, it is like eBay but in reverse with prices going down rather than up! Thus, firms are able to deploy competitively priced resources, sourced locally, nationally or globally, after considering not just price but also the expertise and experience of the service provider.