In the last few years, outsourcing has become a successful and widespread business strategy, with enterprises only using internal staff for core business functions while asking external actors to complete an array of secondary tasks. The outsourcing industry represents 31% of IT services in the world, and the global outsourcing market generated an average of $92.5 billion in revenue between 2000 and 2019 (Statista).
According to Deloitte, the top reason companies outsource is to reduce costs (59%) and allow their teams to focus on strategic goals (57%). But there are more reasons why outsourcing may be beneficial, such as enhancing the overall quality of work.
There is a lot of strategic and tactical planning involved in any outsourcing engagement, which is why the first step to such a transition should always be to create an overarching outsourcing strategy.
Advantages of outsourcing
Cost Reduction
Entrepreneurs want to keep costs low and profit high, and outsourcing tasks like meeting scheduling, sending follow-up emails, and administration work can save $5 trillion annually, freeing up 69 workdays a year for the average employee.
Productivity
Switching between one tedious task and another is very time and money-consuming, costing on average 40% of a worker's productivity. Outsourcing will help your employees concentrate on smaller to-do lists to increase efficiency. Since 45% of paid activities can be outsourced across all industries (McKinsey), you will be able to focus on compensating employees for their particular expertise and skilled labor.
Skilled expertise
Outsourcing gives access to expertise that may otherwise be out of reach, as you can look for niche experts for each project rather than depend on an in-house team that is good at everything, allowing everyone to focus on the tasks they are most proficient at.
Increased talent pool
Outsourcing will allow you to go further than the local and connect with highly skilled experts without increased costs. Deloitte's 2018 Global Outsourcing Survey highlights that outsourcing offers opportunities to access services that businesses couldn't integrate on their own.
Disadvantages of outsourcing
There is a downside to everything, and the rule makes no exception for outsourcing.
Communication
While communication won't necessarily be an issue for you, it is essential to ask yourself key questions regarding your vendor's location; the way time zones will affect communication, and which tools you'll be using to keep in touch. As always, remember to prepare a communication strategy with your partner before onboarding.
Control
You'll always be the one giving out directions to your vendors; however, you won't be able to have as much control over the task as you would with your in-house team. But since you are supposed to trust the vendor, this doesn't have to be a disadvantage and can allow you to free up resources.
Impact on company culture
Outsourcing does not always affect company culture negatively. But you should keep in mind that positive company culture is one of the biggest productivity drives for employees, which is why you should evaluate the possible impacts of outsourcing carefully.
How to Get Started with Outsourcing
The most important thing when outsourcing is to come up with initial solid planning and goals, setting up long-term strategies so you won't have to plan every project in detail. You will help yourself and your vendors by having a clear vision of your tactical objectives from the get-go and being able to communicate them clearly to your service provider. You can then use them as a management tool through different projects. Below are a few steps to help you plan your outsourcing effectively.
Step 1 – Define clear goals:
A long-term plan will help you reduce costs and communicate effectively with providers.
Step 2 – Pick a management policy:
Be sure to focus on employees' rights and create a management policy that is clear to everyone. Don't think that reducing flexibility will reduce costs.
Step 3 – Define the functions to outsource:
At first, outsource non-core functions that don't depend on know-how transfer, which will be the most likely to encourage short-term cost savings.
Step 4 – Select a provider:
It's always best to pick a customer-driven provider with a lot of existing references for short-term savings, offshore with providers who have good resources and low service rates. For longer projects, you should take your time comparing profiles, taking into account economic stability and IT resources available across the world.
Step 5 – Prepare for the change:
Keep your employees in the know of long-term and short-term goals and decrease the cultural gap between your team and the providers to establish a good and professional climate.
Step 6 – Upgrade your operation:
Provide the outsourced team with network access and whatever communication tools are necessary, ensuring a solid security policy.
Step 7 – Maximize the opportunity:
At the beginning, focus on only outsourcing functions where your provider has a competitive advantage to maximize gains.
Outsourcing as a Start-up
Below are a few reasons why outsourcing may be the best choice for new businesses.
Scaling
One of the most challenging aspects of starting a company is knowing when to scale up, which is an intimidating process, especially since onboarding is one of the biggest human resources expenses for businesses. By outsourcing scaling, you can explore your options without committing long term, allowing you to hit the ground running rather than spending time training new employees that might not fit.
Expenses
Building an accurate budget is the best way to survive the early months of a startup. If you're on your own, the costs can be flexible and difficult to plan and account for. But by using a vendor and paying them a set fee, you can reliably factor that exact amount into your budget, helping you see how much of your budget is inflexible more clearly so you can manage changing costs more predictably.
Focus
No one can be great at every one of a business's many facets – marketing, sales, accounting, IT, and more. It's impractical to have every department fully staffed when you're on a budget. It makes more sense to outsource tasks with companies that are experts, offering a quality of service at low cost in ways a general-purpose employee couldn't compete with.
Outsourcing for Small and Midsize Businesses
Below is a list of concerns that might arise when trying to outsource, and solutions to plan for them.
Selecting the Right Service Provider – As the bedrock of the entire outsourcing process, the selection phase needs to be flawless and well accounted for in order to avoid surprises down the line of the contract. You should strictly identify your organization's requirements and the output you are seeking and select a vendor closely based on these factors, ensuring everyone agrees on the contract's type and tenure. You can select to go for a test run beforehand and monitor key performance indicators throughout your partnership, implementing the 'Balance Score Card' method.
Legal and Contractual Miscommunication – Many outsourcing failures result from companies overlooking legal issues and allowing both parties to retain a vague understanding of the contract, which can cause many roadblocks later on. It's important that everyone conforms to local legislations, executives from both sides taking contract negotiation seriously and making the terms clear to each other before making any decisions.
Cultural Concerns – The fate of your deal can depend on the way cultural tangles unfold, taking into account both corporate and country-specific cultural peculiarities. You should study the impact of your project and method on different cultures before getting into business. By coming up with a multi-cultural sensitization program for both sides, you can reach an efficient cultural synchronization and avoid further issues.
The cost of hiring in-house
According to the CPH, the American National Standard metric, the total of hiring in-house staff should encompass all of the following internal and external costs:
- Talent acquisition system expenses
- Advertising and marketing costs
- Job fair and recruitment event expenses
- Travel costs
- Relocations fees
- Office expenses for the recruiting department
- The recruiting team's salary and benefits. Here you should include the employees that are in charge of posting, screening, interviewing, onboarding, and training.
According to the Society for Human Resource Management (SHRM), the average cost-per-hire (CPH) is $4,129, and the average time needed to fill a specific position is 42 days.
Benefits
Based on the figures provided by the Bureau of Labor Statistics (BLS), the benefit costs can account for up to 30.0 percent of the total employee compensation costs. According to BLS statistics, a software developer with a median hourly rate of $51.73 will, in fact, cost their employer $77.09 per hour. Thus, the median annual wage of $107,590 grows up to $160,342.
An impressive difference, don't you think?
Social security
Social security contributions are compulsory payments that represent a big part of the financial and administrative side of entrepreneurship. Payroll taxes, as these contributions are referred to in the U.S, are typically paid by the employer and employee. Both parties pay 6.2 percent of wages up to the taxable maximum of $142,800.
Equipment and overhead
Except for the hiring expenses, developers' salaries, benefits, and social security contributions, companies will also need to cover indirect costs. These expenses include office rent, office space use (heat, light, and more), office equipment and consumable supplies such as laptop and software, accounting services, payroll services, legal and audit fees, travel and entertainment costs, internet costs, etc.
On average, a company pays for each developer a one-time overhead expense to cover computer setup, software, and furniture cost, of around $3,000.
Annual Cost of an In-House Developer in the US
| Hiring | Salary | Benefits and Social Security | Overhead | Total | |---|---|---|---|---| | $4,125 | $107,590 | $52,752 | $3,000 | $164,767 |
Choosing to outsource software development brings several cost reductions. You will be able to save not only on the developer's salary but also on hiring, benefits, social security contributions, and overhead.
Software Development: which option is more beneficial?
It's important to think carefully about how you want to organize the development process for software and applications; the main question is: should you outsource or work in-house?
Many companies use outsourced software development services to cut costs, save time, and find competent staff. That's because the market of IT outsourcing (estimated to reach $96.7 billion in 2021) provides a huge pool of technical specialists that have both knowledge and experience. This means that the hiring process can take just a few days and provide unlimited hiring opportunities.