How Does Outsourcing Work: A Detailed Guide to How It Works

There’s simply not enough time or resources to handle everything in-house. You need expert help, but hiring a full-time team for every function? Even the pressure of trying to manage it all sometimes leads to burnout and delays.

You might find yourself spreading your team too thin or compromising on quality to keep things moving. The challenge grows as your business scales, and the stakes get higher. Every decision, every delay can have a big impact, and you can’t afford to get stuck in the weeds when you need to be focusing on growth and strategy.

This is where outsourcing comes in. Instead of trying to do everything yourself or hiring in-house for every task, you can outsource to external experts who specialize in the areas you need help with. You get the expertise you need, exactly when you need it, so you can stay focused on what matters most—growing your business.

But how does outsourcing work? Below, we illustrate the meaning and types of outsourcing. You’ll also learn how to outsource profitably.

What is Outsourcing?

Outsourcing involves hiring an expert to handle a specific job for you without bringing them on as a full-time employee. It's about passing on specific tasks or projects to an external party specializing in that area.

For example, you run a tech startup and need a new mobile app developed. Instead of hiring a full-time app developer (which could be costly and time-consuming), you can outsource the task to a skilled agency or freelancer who does this every day.

It’s like calling a plumber when your pipes burst instead of trying to fix them yourself. You’re bringing in someone with the know-how and tools to get the job done efficiently without having to invest in learning how to do it yourself.

Types of Outsourcing

Local vs. Offshore Outsourcing

Local outsourcing means hiring an external party within your country. It’s like getting help from a nearby team or individual who understands your market and works in the same time zone as you.

The advantages? Communication is seamless, there are fewer cultural differences, and you can easily arrange face-to-face meetings. For instance, if you’re based in the US, you could hire a local marketing agency to handle your social media campaigns. You’ll likely pay more compared to offshore options, but the benefits of proximity and cultural familiarity might be worth it.

Now, offshore outsourcing involves a situation where the external party you hire resides in another country, often with significantly lower labor costs. This is where you’d usually hear about US or European companies outsourcing development work to teams in India, the Philippines, or Eastern Europe. Why? Because you can get highly skilled professionals for a fraction of the cost of hiring locally.

Let’s say you’re a European startup needing a mobile app. Instead of paying $100,000+ for a local development team, you could outsource the same work to a highly qualified team in India for less than half that. Yes, you might need to manage some time zone differences and adapt to different communication styles, but if you have a tight budget, this could be a game-changing solution.

Functional outsourcing examples

You can break outsourcing down into specific functions within your business. These areas don’t need to be managed in-house, allowing you to focus your team’s energy on core activities:

• IT outsourcing: You can outsource the entire function. It could be software development, IT support, or cloud management  
• HR outsourcing:  Outsourcing HR functions to a third-party provider can be a smart move, especially in the early stages of scaling
• Marketing outsourcing:  Outsourcing tasks like content creation, social media management, SEO, or paid advertising can help your brand
• Customer support outsourcing: As your customer base grows, so will the need for support

Project-based vs. dedicated outsourcing

There’s also a difference between project-based outsourcing and dedicated outsourcing. With project-based outsourcing, you bring in an external team to handle a one-off project, like redesigning your website or launching a new product campaign. Once the project is complete, so is the partnership.

On the other hand, dedicated outsourcing is more ongoing. You might hire a dedicated external team that continuously works with your company on an ongoing basis, handling things like IT support or customer service. It’s a longer-term relationship where the outsourced team becomes an integral part of your operations, even if they aren’t technically in-house.

For instance, you’ll likely choose project-based outsourcing if you need a website overhaul. However, dedicated outsourcing may be the smarter option if you need continuous server management. It gives you consistent support without the need for a permanent in-house team.

How to Outsource: Step-by-Step Guide

Step 1: Identify the right tasks to outsource

The first step in successful outsourcing is figuring out what to outsource. As a founder or CEO, you need to focus on the core activities that directly contribute to your business's growth. But not everything requires your attention or in-house expertise.

Start by asking yourself, "What tasks are essential to our core mission, and what could be done more efficiently by someone else?" For instance, product development or customer experience might be critical to your business, but bookkeeping, IT support, or content creation may not be. These non-core tasks are excellent candidates for outsourcing because they can be handled just as effectively by external experts without impacting the quality of your core offering.

Step 2: Selecting a service provider

Now that you’ve identified which tasks to outsource, it’s time to find the right partner. This step is crucial because the quality of your outsourced work depends entirely on the provider you choose. Start by thoroughly vetting potential providers.

Look at their portfolios or past work, read client reviews, and ask for references. You want to ensure that their experience aligns with your needs. Let’s say you’re outsourcing your app development. You wouldn’t just pick the first agency you come across.

Instead, you’d want to assess multiple developers or agencies, reviewing their portfolios to see if they’ve built similar apps before. Check whether they’ve worked with startups or scale-ups like yours, and ask their previous clients about their experience.  

Also, consider factors like time zone differences, language barriers, and their ability to scale with you. It’s not just about finding the cheapest option—it’s about finding the right match for your business’s needs.

Step 3: Contracting and setting expectations

Once you’ve selected your provider, the next step is establishing a clear contract and setting expectations from the outset. This is where many outsourcing arrangements fail—when expectations aren’t clearly defined, both sides can become frustrated.

You'll want to create an explicit service-level agreement (SLA) that outlines the deliverables, timelines, and key performance indicators (KPIs). This agreement ensures that everyone is on the same page about what will be delivered and when. It’s also vital to define quality benchmarks. If you’re outsourcing customer service, for example, you might specify that 95% of customer inquiries need to be resolved within 24 hours.

Be sure also to address payment terms, intellectual property rights, and confidentiality clauses. A strong contract protects both parties and provides a clear framework for the project.

Step 4: Ongoing management

Outsourcing isn’t a "set it and forget it" process. Even after you’ve contracted an external partner, ongoing management is essential to ensure the project stays on track. Regular communication is key here. Establish a system for check-ins—whether that’s weekly meetings or progress reports at certain milestones.

Feedback loops are crucial, too. Make sure your outsourced team knows how they’re performing against your expectations. Provide constructive feedback early on so they can course-correct if necessary. Likewise, be open to their suggestions, as external partners may have valuable insights from working with other businesses.

Open communication helps keep projects on track and strengthens the relationship with your outsourcing partner, increasing the chances of long-term collaboration. After all, the more they understand your business, the more value they can bring.

Cut The Stress Involved in Outsourcing

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Simply fill out this smart brief, and within 72 hours, we’ll connect you with the perfect software partner you can trust to deliver excellent results.

FAQs

What is outsourcing and how does it work?

Outsourcing is the practice of hiring external parties to handle certain business tasks or functions. It works by partnering with specialists or companies who provide expertise in specific areas, allowing your business to focus on core activities while delegating non-core tasks.

How do you make money from outsourcing?

You save money through outsourcing by reducing operational costs, avoiding full-time salaries, and gaining access to expert services at a lower cost. Additionally, outsourcing helps improve efficiency, allowing your business to focus on revenue-generating activities.

What are the steps of the outsourcing process?

The outsourcing process typically involves:

1. Identifying tasks to outsource
2. Selecting a service provider
3. Establishing clear contracts and expectations
4. Managing and monitoring the outsourced work.

What is the main point of outsourcing?

The main point of outsourcing is to improve efficiency, reduce costs, and access specialized skills, enabling businesses to focus on their core competencies while external experts handle non-core tasks.