The Importance of Business Outsourcing in Business Management

In today’s environment, companies operate in a constantly changing landscape, which necessitates staying updated on technology, customer demands, competitive advances, and more. Furthermore, companies can now coordinate geographically dispersed employees with mobile resources and outsource a significant portion of their technical and communication resources. Flexibility becomes the key to the future.From this perspective, outsourcing allows a company to operate with fewer resources and take on more functions. By externalizing certain activities or services, companies free up personnel who can then focus on much more productive activities, thereby channeling all efforts into their core business activities.

What is Outsourcing?

Outsourcing is the process by which a company identifies an activity or process that could increase productivity and optimization, involving third parties who are subcontracted to execute that activity. In other words, outsourcing involves delegating certain functions or activities to a specialized company or team to reduce costs, increase production efficiency, access better technologies, and focus on core business activities.

Objectives of Outsourcing

The objectives of a service outsourcing strategy through the hiring of providers to carry out internal company activities are as follows:

• Reduce and control operational expenses.
• Focus company resources on activities that generate greater value.
• Adaptation to changes.
• Greater flexibility for activity development.
• Avoid investing in high-cost equipment that requires frequent reinvestment due to constant updates.
• Access specialized providers with advanced technology tools and techniques that the company does not possess.

Purpose of Outsourcing

An old popular saying goes, “Cobbler, stick to your last,” and outsourcing is exactly about that: seeking business talent in each process or activity of your business to collaborate and advance together in achieving your business goals.

Specifically, outsourcing is a hiring technique aimed at delegating tasks to external experts to achieve the best possible results. The purpose is for the company’s structure to concentrate all its energy on its core business, while subcontracted companies focus on their specialty, optimizing workflows, reducing execution times, incurring fewer costs, and achieving set objectives much faster.

Characteristics of Outsourcing

This form of interaction between companies is characterized by the following:

• It allows cost reduction, as the cost of an outsourcing contract is lower than directly hiring employees.
• It reduces risks; if you lack trained personnel in certain areas, outsourcing allows you to access them and reduce the possibility of errors in processes, with associated delays and risks.
• It covers diverse areas; outsourcing can be used in technical, administrative, human resources, production, control, and training areas.
• It aligns with digitalization and remote work; workflows between the hiring and subcontracted companies can be organized and connected online, even if they are thousands of kilometers apart.
• It provides flexibility, versatility, and solutions at local, national, or international levels, adapting to companies of different sectors and sizes.
• It offers high levels of specialization; one of the significant factors driving outsourcing is the search for highly specialized talent that cannot be directly hired but can be subcontracted for specific activities and processes.

Advantages and Disadvantages of Outsourcing

Thanks to outsourcing, many companies have been able to externalize certain specialized activities, processes, or services to reduce costs, increase efficiency, and focus on their core business. However, like any business practice, outsourcing has both benefits and drawbacks for the contracting company.

Advantages:

The main benefits of outsourcing are summarized as follows:

• Cost reduction: One of the main reasons companies opt for outsourcing is to reduce costs. By outsourcing certain activities or processes, companies can save on personnel expenses, office space, equipment, and technology.
• Increased efficiency: Outsourcing can also help increase a company’s efficiency. By outsourcing non-essential activities or processes, companies can focus on their core business and become more competitive and efficient in their production capacity.
• Access to specialized skills: Companies can access specialized skills and knowledge they would not otherwise have. This can be especially useful for small or medium-sized enterprises that cannot afford a large internal team.
• Greater flexibility: Outsourcing can provide companies with flexibility in reducing fixed costs. This way, companies can adjust resources according to their needs and not worry about additional staff during high-demand periods.
• Technological currency: It allows leveraging technological advancements without directly investing in equipment.
• Quick response: To changes in workflows, processes, or technology.
• Improvement of company services.

Disadvantages:

The drawbacks of outsourcing can be summarized as follows:

• Loss of control: By outsourcing activities or processes to third parties, companies can lose some control over these functions. This can lead to quality and efficiency problems if the provider does not meet expectations.
• Communication problems: Outsourcing can also lead to communication problems between the company and the provider. If expectations and communication procedures are not clearly established, misunderstandings and production delays may occur.
• Data security risks: Companies also risk having their confidential or sensitive data misused. It is important to ensure that the provider has adequate security measures for the information or data provided to them.
• Dependency on the provider: Outsourcing can also lead to excessive dependency on the provider. If the company does not have a contingency plan in case the provider is unavailable, serious problems may arise in production or service delivery processes.
• Responsibility for inefficiency: The company assumes responsibility for any delays or quality issues in the goods or services produced by the subcontracted company.
• Reliance on third parties for innovation implementation: The company may lose direct contact with new technologies and methods available to improve processes.
• Lack of planning: Inadequate determination of outsourcing activities or processes can result in cost reductions that are not as positive as expected by the company.

To avoid potential problems, the outsourcing process must be carefully planned and controlled by the contracting company, as it is their reputation and image at stake.

Why Hire Outsourcing Services

Some reasons for a company to hire outsourcing services are:

• Externalizing to expand and access new market areas, locating production or service delivery closer to end users.
• Lower operational and labor costs for the company.
• Companies outsource certain non-core business services and activities to specialized companies, optimizing their time to focus on new projects, activities, or business processes.
• Liberating internal resources for leveraging the company’s core business.
• By delegating responsibilities to another company, companies can rid themselves of difficult-to-manage functions while still reaping their benefits.

In summary, outsourcing specialized companies to handle certain activities enhances competitiveness by allowing companies to dedicate time and resources to their core activity, while using specialized resources to handle “secondary” tasks—understood as those tasks that are not part of the company’s core business.

Types of Outsourcing

There are different types of outsourcing based on the purpose of hiring, responsibility, work location, and geographical location.

a) According to the service objective:

• Tactical: Tactical outsourcing refers to subcontracting complementary tasks to the company’s core business to reduce costs. In general terms, it is simply outsourcing to perform a specific task that is not essential for the company; thus, the organization does not have to allocate its resources and energy to a secondary task. Its main purpose is cost reduction.
• Strategic: Strategic outsourcing is used to delegate strategic functions to a company specialized in a particular activity or process, aiming to improve service quality and effectiveness without losing visibility or control. This involves fostering a very close and stable relationship with a third party. These are strategic alliances designed to enhance company work processes, quality, or production capacity.

b) According to the scope of responsibility:

• Reduce and control operational expenses.
• Focus company resources on activities that generate greater value.
• Adaptation to changes.
• Greater flexibility for activity development.
• Avoid investing in high-cost equipment that requires frequent reinvestment due to constant updates.
• Have access to specialized providers with high technology tools and techniques that the company does not have.

Purpose of Outsourcing

An old popular saying goes “Cobbler, stick to your last,” and outsourcing is exactly about that: seeking business talent in each process or activity of your business to collaborate and advance together in achieving your business objectives.

Specifically, outsourcing is a hiring technique aimed at delegating tasks to external experts to achieve the best possible results. The aim is for the company’s structure to concentrate all its energy on its core business, while subcontracted companies focus on their specialty; thus optimizing workflows, reducing execution times, incurring fewer costs, and achieving set objectives much faster.

Characteristics of Outsourcing

This form of interaction between companies is characterized by the following:

• It allows cost reduction, as the cost of an outsourcing contract is lower than directly hiring employees.
• It reduces risks; if you lack trained personnel in certain areas, outsourcing allows you to access them and reduce the possibility of errors in processes, with associated delays and risks.
• It covers diverse areas; outsourcing can be used in technical, administrative, human resources, production, control, training, etc.
• It aligns with digitalization and remote work; workflows between the hiring and subcontracted companies can be organized and connected online, even if they are thousands of kilometers apart.
• Outsourcing allows flexibility and versatility and can provide solutions at local, national, or international levels, as well as adapt to companies of different sectors and sizes.
• High level of specialization; one of the significant factors driving outsourcing is the search for highly specialized talent that cannot be directly hired but can be subcontracted for specific activities and processes.

Advantages and Disadvantages of Outsourcing

Thanks to outsourcing, many companies have been able to externalize certain specialized activities, processes, or services to reduce costs, increase efficiency, and focus on the core business of their business. However, like any business practice, outsourcing has benefits and disadvantages for the contracting company.

Advantages:

• Cost reduction: One of the main reasons why companies opt for outsourcing is to reduce costs. By outsourcing certain activities or processes, companies can save on personnel expenses, office space, equipment, and technology.
• It allows increasing efficiency: outsourcing can also help increase the efficiency of a company. By outsourcing non-essential activities or processes, companies can focus on their core activity and become more competitive and efficient in their production capacity.
• It allows access to specialized skills: Companies can access specialized skills and knowledge that they would not otherwise have. This can be especially useful for small or medium-sized companies that cannot afford a large internal team.
• Greater flexibility: outsourcing can also provide flexibility to companies in reducing their fixed costs. In this way, companies can adjust resources according to their needs and not have to worry about additional staff during high-demand periods.
• Technological currency: Allows leveraging technological advances without the need to directly invest in equipment.
• Quick response: To changes in workflows, processes, or technology.
• Improvement of company services

Disadvantages:

• Loss of control: By outsourcing activities or processes to third parties, companies can lose some control over these functions. This can lead to quality and efficiency problems if the provider does not meet expectations.
• Communication problems: Outsourcing can also lead to communication problems between the company and the provider. If expectations and communication procedures are not clearly established, misunderstandings and production delays may occur.
• Data security risks: Companies also risk having their confidential or sensitive data misused. It is important to ensure that the provider has adequate security measures for the information or data provided to them.
• Dependency on the provider: Outsourcing can also lead to excessive dependency on the provider. If the company does not have a contingency plan in case the provider is unavailable, serious problems may arise in production or service delivery processes.
• Responsibility for inefficiency: The company assumes responsibility for any delays or quality issues in the goods or services produced by the subcontracted company.
• Reliance on third parties for innovation implementation: The company may lose direct contact with new technologies and methods available to improve processes.
• Lack of planning: Inadequate determination of outsourcing activities or processes can result in cost reductions that are not as positive as expected by the company.

To avoid potential problems that may arise, the outsourcing process must be carefully planned and controlled by the contracting company, as it is their organization that exposes its prestige and image.

Why Hire Outsourcing Services

Some reasons for a company to hire outsourcing services are:

• Outsourcing with the aim of expanding and accessing new market areas, placing the point of production or service delivery closer to end users.
• Lower operational and labor costs for the company.
• Companies outsource certain non-core business services and activities to specialized companies, optimizing their time to focus on new projects, activities, or business processes.
• Freeing up internal resources to be able to use them to leverage the company’s core business.
• By delegating responsibilities to another company, companies can forget about functions that are difficult to manage and control while still reaping their benefits.

In summary, we can say that outsourcing specialized companies to handle certain activities enhances competitiveness by allowing companies to dedicate time and resources to their core activity, while using specialized resources to handle “secondary” tasks—understood as those tasks that are not part of the company’s core business.

Types of Outsourcing

There are different types of outsourcing according to the purpose of hiring, responsibility, work location, and geographical location.

a) According to the service objective:

• Tactical: Tactical outsourcing refers to subcontracting complementary tasks to the company’s core business to reduce costs. In general terms, it is simply outsourcing to perform a specific task that is not essential for the company; thus, the organization does not have to allocate its resources and energy to a secondary task. Its main purpose is cost reduction.
• Strategic: Strategic outsourcing is used to delegate strategic functions to a company specialized in a particular activity or process, aiming to improve service quality and effectiveness without losing visibility or control. This involves fostering a very close and stable relationship with a third party. These are strategic alliances designed to enhance company work processes, quality, or production capacity.

b) According to the scope of responsibility:

• Co-Sourcing: In this type of outsourcing, both organizations share responsibilities and the risks involved in the service provision. That is, there is a partnership relationship between the companies, and both parties have responsibility for the work results. The tasks are carried out within the hiring company.
• Out-tasking: As the name suggests, tasks are performed outside the hiring company and under the responsibility of the subcontracted party. In this scenario, the client outsources certain tasks without losing control or ownership of specific functions.

c) According to the physical location where the work is performed:

• In-house or on-site: In-house outsourcing involves outsourced services being performed on the premises of the hiring company, although they are carried out by an external company.
• Off-house or off-site: Outsourcing services are performed within the premises of the subcontracted company providing the service.

d) According to geographical location:

• Offshoring: Offshore Outsourcing refers to the subcontracting of services to a company located abroad, to take charge of an activity, process, or service, usually because it offers lower costs.
• Nearshore: When an activity, process, or service is outsourced to a company located in a neighboring country.
• Onshore: The contracting company and the subcontracted company are located in the same country.

It is very important to consider the appropriate choice of Outsourcing type to contract according to the specific needs of each Company. Therefore, it is advisable to carefully evaluate the available options and consider the pros and cons of each type of Outsourcing before making a decision.

Areas where Outsourcing is applied in Companies.

The areas of a Company where service management can be outsourced are as follows:

1. Financial Area: It is a common practice for large companies to hire experts for analysis and advice in the finance area. The reports from these specialists are relevant as they define the company’s resources, solvency, liquidity, expansion possibilities, and growth.
2. Information Technology: Outsourcing to specialized IT companies is one of the smartest outsourcing decisions because technology advances so quickly that it would be nearly impossible for a company to have its staff adequately trained while performing tasks within the company.
3. Human Resources: Recruitment, hiring, training, and evaluation of personnel are of great importance to companies as they provide the human resources needed to produce. Doing this work in a completely independent and specialized structure ensures better results.
4. Administrative Systems: Administrative tasks encompass various jobs, and each of them can be outsourced. Some of the most outsourced tasks include payroll processing, customer service, payment management, inventory control, collection management, etc.
5. Logistics, Transportation, and Shipping: If your company manufactures physical products, outsourcing this part of the process is a good idea as the infrastructure required entails a significant time investment and capital placement in activities that involve risks external to the company, such as transportation and distribution.
6. Market Research and Marketing: Understanding the market, its own and potential niches, customer types, segmentations, and the likelihood of a product’s success is fundamental for business decision-making. For this reason, it is common for companies to subcontract experts for this sensitive task; just like in the technology field, marketing is so dynamic that you need specially trained personnel who are aware of the latest trends and updates in the industry.
7. Internal Control: Not all companies have experts in organizing and implementing an internal control system, or in implementing Corrective Measures resulting from audits they are subject to (in the case of public entities), so this activity is another of the services that companies often outsource.
8. Other activities: processes or services.

Conclusions:

• Currently, Outsourcing plays a very important role in the strategic plans of Companies, as a valid tool in planning the growth of a company and essential for facing changes in the market for goods production or service provision.
• The practice of Outsourcing has contributed to changing the concept of client – supplier relationship, transforming it into intense, growing cooperation, and of a strategic alliance profile; that is, Outsourcing emerges as a solution for Companies that allows them to delegate vital and non-vital activities, processes, or services in order to improve their productivity, increase profitability, and gain experience in technological and management areas where they lack the required expertise.
• The ultimate goal of adopting an outsourcing strategy for activities, processes, or services is to position the Company well strategically in a competitive market and in a globalized environment. Outsourcing seeks to reduce costs, achieve rapid adaptation to market changes, and improve the competitiveness and productivity of the Company through the hiring of third-party services only when needed.

More Information.

If you would like more information on the topic discussed in this article, we invite you to contact us through the various means detailed on our website www.ura.pe; at Urbizagástegui & Asociados, we have a multidisciplinary staff of auditors and specialists to provide the professional assistance your Company requires.