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How Much Do Companies Save By Outsourcing?

How Much Do Companies Save By Outsourcing?

Key Takeaways

  • Outsourcing involves partnering with an outside company to perform business processes, services, & functions.
  • Outsourcing before beginning in-house development saves the most money. 
  • You shouldn’t outsource your strengths and core competencies. 
  • There are six core outsourcing types:
  • IT
  • Project
  • Manufacturing
  • Operational
  • Process
  • Professional
  • The greatest benefit of outsourcing is cost reduction. 

It’s no secret that cutting costs is the number one benefit and reason companies choose to outsource some of their business processes and functions. Outsourcing means that in-house development's labor, logistical, and operating costs are replaced with predictable contract and service agreement fees.

How much a company can save on outsourcing depends mainly on the scale and nature of the outsourced business service or function. However, the benefits of outsourcing are numerous, and businesses have been taking advantage of it for hundreds of years. 

What Is Outsourcing?

Outsourcing is the business practice of partnering with an outside company to accomplish specific business practices, processes, or services. Outsourcing could involve partnering with another company to provide your customers with online tech support or a private security firm to provide security at your physical locations. 

Offshoring is a form of global outsourcing where companies contract service providers in developing countries, such as India or the Philippines. Many companies utilize offshoring to save time on customer support and data entry tasks. Outsourcing services such as these is a low-cost option that allows in-house employees to focus on core business functions. 

In all of its various types, outsourcing allows businesses to quickly and cost-effectively accomplish tasks without needing to develop and perform them in-house. Whether your company is a startup, small business, or large corporation, outsourcing provides numerous benefits with few negative consequences. 

When Should a Business Consider Outsourcing?

It’s not ideal for a company to need outsourcing after attempting to create or establish in-house teams for specific products or services. This stage of the outsourcing decision-making process has some of the most significant negative consequences for your company’s bottom line and your employees.

This is primarily due to reallocating your existing workforce or discontinuing their employment. The latter tremendously affects their lives and the morale inside your company culture. Once you have started in-house development, you have also committed financial resources. Choosing to cease that development results in wasted capital.

Therefore, the most appropriate time to outsource is before in-house development. Outsourcing from the beginning yields the most significant benefits. 

We note this because we want to stress the importance of diligently strategizing and weighing the pros and cons of outsourcing versus in-house development. Reaping the full benefits of outsourcing is best accomplished without wasted capital or resource investment. 

What Kind of Work Is Usually Outsourced?

Since outsourcing is best done before in-house development, the next question is what you should outsource. Answering this question requires an honest assessment of your company’s core competencies and strengths and your most significant weaknesses and vulnerabilities. 

Your core competencies and strengths will center around the foundation of what you exist to create. The answer to these two questions yields your purpose and mission as a company. Throughout this assessment, you will discover what your greatest strengths are, and it is these business processes and functions that you should most likely retain.

The next, and perhaps the hardest step to take, is to determine where your company struggles, why, and what vulnerabilities these weaknesses create for your future success and growth. The answers found here are areas where outsourcing may best serve your company. 

For example, if your core competency and strength lie in product design and innovation, you should retain those business processes in-house. However, if manufacturing is a weak point in the totality of your business processes, manufacturing your designs should be outsourced. 

Offloading your weaknesses gives you more space to focus on your fundamental strengths. This focus will yield innovation and a higher output of quality. 

What Are the Different Types of Outsourcing?

There are six core outsourcing types, each serving a unique purpose for your business. Below, we’ll cover each of them in detail.

Information Technology (IT)

Information technology services outsourcing saves companies a tremendous amount of money. These services include everything from the computer hardware you use at your desk to coding and software development. 

Many companies find that developing, implementing, and maintaining the various systems that comprise IT is very costly to their annual budgets. Starting from the ground up with in-house development is ever more expensive.

Hiring IT experts trained in web development, cyber security, app development, network building and security, and software engineering is one of the most significant ongoing expenses. These individuals are highly trained and expect to be highly compensated for their unique skill sets. 

Instead of developing IT in-house, outsourcing to a partner who can provide all your IT services ensures you get the maximum output at a much lower cost. 

Project Outsourcing

Project development outsourcing involves partnering with companies and firms specializing in developing and managing large-scale projects. Due to the highly technical nature of project development and management, outsourcing provides you with a partner who is experienced and logistically equipped to see the project through to completion. 

Manufacturing Outsourcing

We like to call this type of outsourcing the grandfather of them all. Even before a word was defined, entrepreneurs and businesses have outsourced some or all of their manufacturing. From textile and automotive to tech and food companies, industries across the spectrum outsource their manufacturing to control costs and increase delivered product quality.

Operational Outsourcing

Operational outsourcing involves partnering with outside companies to provide specific business functions for your company. 

For instance, new startup companies that experience rapid success are forced to recruit and hire additional labor force resources quickly. An increase in the labor force requires an increase in operational services such as human resources. Instead of developing in-house, the startup could outsource this operational service. 

Business Process Outsourcing

Operating business results from several different business processes working together and culminating into one giant machine. Some processes are not directly related to the business's primary objective. 

For instance, Apple develops computers, tablets, smartwatches, and phones. However, their headquarters needs protection from intruders. To protect the property, they need security. 

Office security is not directly related to their core competencies but is a necessary element of their total business process picture. Instead of hiring security guards, they can outsource that need to a private security firm. 

Professional Outsourcing

Lastly, operating any business requires the assistance of certain unique and professional services. Attorneys, for instance, must ensure you comply with relevant local, state, or federal laws and regulations. Accountants are another professional service no business can survive without. 

Hiring these professionals can be costly. Therefore, the more cost-effective solution is to outsource those services contractually. By outsourcing, you are sharing the cost of their professional services with other companies. 

What Are Some Real-World Cost Savings?

The most significant benefit of outsourcing is its cost reduction. How much you can save by outsourcing depends on when and what you outsource. 

For instance, outsourcing can save 70% - 90% in labor costs alone. 

Choosing to outsource before beginning in-house development ensures the most significant cost savings. However, even if you are not afforded that luxury, the long-term savings cannot be ignored. 

Outsourcing also eliminates the need to recruit your labor force. These savings can add up to an average cost of $4,100 per employee. 

In terms of IT, the average small company spends nearly 7% of its revenue on information technology services. Outsourcing IT services is only a fraction of the cost. 

Bringing It All Together

It’s difficult to say how much your company will save by outsourcing because it depends on what and when you outsource, the size of your company, your geographic location, the type of product or service you create, and the partner you choose. However, we know for sure that it will save your business money and a lot of it.

As hard work has been, outsourcing has been a part of the overall business process. Although choosing to outsource is a significant decision that may seem negative, nothing could be further from the truth. 

Here’s How We Can Help

Awesome CX is a trusted outsourcing partner for customer service, amplifying the customer experience. We offer our partner companies a team-only dedicated approach to providing customer service. This ensures that we can become an extension of your company and not just some outside force. 

Our pricing is simple, straightforward, and doesn’t come with any fine print hidden fees. We offer contracts and service agreements on a month-to-month basis so that you can have the peace of mind and confidence to choose us as your outsourcing partner. 

Give us a call and connect with us today to discover more. 

 

Sources:

Outsourcing Definition | Investopedia 

What Is Outsourcing? How Outsourcing Works - 2022 | MasterClass 

What is a Business Process? Definition, Examples, and Advantages | Processology 

How outsourcing can cut labor costs by up to 70% | Outsource Accelerator 

Four Reasons Your Startup Should Consider Outsourcing | Entrepreneur 

How Much Should a Company Spend on IT? | Techvera