Is Outsourcing a Silver Bullet or is it a Vampire?

Outsourcing is often viewed as a quick solution for cutting costs and boosting a company’s competitive edge, especially during economic downturns. However, like all business strategies, outsourcing has multiple facets. Organizational, financial, and cultural factors all play a role in determining its success and the value it brings to a company.

In this discussion, we’ll explore the true value of outsourcing, its potential benefits, and the drawbacks it may present. We’ll examine whether outsourcing is truly a silver bullet for business challenges or if it’s a double-edged sword that requires careful consideration.

What Is Outsourcing Exactly?

Outsourcing is a commonly used business practice that is a seamless and easy way to take advantage of an increasingly global marketplace. It seems like a no-brainer to send offshore essential business functions such as web development, customer service, marketing, or manufacturing.

Many businesses specialize in providing custom-made solutions for businesses seeking the cost relief of offshoring departments with high overheads, and consulting companies will even help you implement the required changes.

Silver Bullet: Outsourcing Value

Let’s start with the value that outsourcing can bring, followed by a look at what might make it less attractive than can be perceived at first glance. Perhaps once you look under the glittery surface — if you follow the Twilight school of thought — some less-than-ideal traits emerge.

Cost Effectiveness

Where outsourcing shines is in its ability to let qualified people in other geographical locations assume responsibility for specific tasks and roles that otherwise would be costly and unwieldy to maintain onshore.

Deloitte reports that the outsourcing industry at large is predicted to increase to a whopping $6.3 billion. Among the top reasons cited are cost reduction, strategic advantages in innovation, agility, intellectual capital, and adoption of new technologies.

Indeed, as Derek Gallimore, founder of Outsourcing Accelerator, mentions in his Forbes article:

“I think it’s always best to start adapting to tech advancements as soon as possible to prepare for the future. Some of these technologies that we even have on-trend nowadays are foreseen to define the future of business in the coming decades. To name a few of these innovations: artificial intelligence (AI), Internet of Things (IoT), and big data.”

What is interesting about outsourcing is that it has evolved into practice not just out of necessity or cost reduction but rather as an access point into the tantalizing world of new, emerging technologies that allow a company to go from ‘one of the pack’ to a frontrunner.

By taking a large chunk of business operations out of the core organization, there is an excellent point of access to the related field of cloud computing. It makes sense that if you are to remove an entire department, businesses could store all their valuable data in a cloud solution offered by the original outsourcing solution provider. With companies looking for a good deal and getting the most out of their time, this becomes more intriguing by the minute.

What other trends become relevant in this veritable smorgasbord of technological delights?

Web3

The brave new world of NFTs, blockchain, and the metaverse is here. Companies are unsure what to do about these new currency and trade methods and the channels through which they move.

When carrying out an analysis to determine if outsourcing is right for you, it may make sense to review whether Web3 offers value in tandem that surpasses the original proposition of outsourcing alone.

Pangea vendors such as Barrage offer blockchain services that could help you decipher whether it would be worth leveraging those capabilities alongside outsourcing certain business functions.

AI

AI can potentially overhaul the outsourcing jobs created by taking some corporate functions offshore. If automated with increasingly advanced AI technology, there is no telling where the outsourcing landscape will go. Luckily, as pointed out by Outsourcing Accelerator, the human factor still plays a vital role in the success of outsourcing strategy and execution:

“Call centers are the front line of all companies — massive corporations — providing a direct link between businesses and customers. According to research by Forrester, voice calls are still the most used communication channel for service. So, instead of claiming that AI will replace call center jobs, it should be considered a powerful tool that can aid and augment the customer service process within the call center.”

Big Data

Data analytics and data, in general, are two of the biggest buzzwords flying around. Data offers insights, and insights translate into profits. You may benefit from extracting and analyzing valuable data points when outsourcing certain areas of your business.

Volume Aggregation

There are four levers to unlocking outsourcing value, according to a report by McKinsey.

Advantageous prices can be gained by striking volume deals with a provider of outsourcing services. To achieve outsourcing value, customers need to ensure that their requirements closely match the other clients’ in the given volume deal. They must also defer to the decisions of the provider regarding sourcing.

Expertise

The expertise of an outsourcing provider means that they confer outsourcing value by providing best-in-class examples of how to go about outsourcing. They have hands-on experience, which can translate into actionable insights for the company engaging in the outsourcing exercise.

Labor Exchange

While outsourcing value can be gained by exchanging labor from onshore to offshore (and saving funds in the process), there are associated costs of outsourcing to consider in the overall equation. Managing a third party incurs costs too, so this is worth factoring in when deciding to outsource or not.

Management of Demand

Some of the outsourcing value to be achieved comes from internal forces. For example, 40–50% of the savings can be attributed to internal changes. These may include altering specifications to more closely match what is required — streamlining internal aspects “to minimize the total cost of ownership or controlling demand.”

This trusted consulting company also advises that alternatives to outsourcing, like setting up a service center in a low-cost region, could sometimes be the solution.

Vampire: Outsourcing Draws Blood

Outsourcing can lead to a whole host of unforeseen challenges. Perhaps by the simplicity of the premise, it seems so much easier than it is in practice. Implementations of such colossal changes can be riddled with delays, loss of important data, lack of proper knowledge transfer, and more.

In turn, a business can suffer due to the costs associated and, in the long term, due to structural problems introduced by these changes.

According to Deloitte, there are a few key concerns to worry about.

Data Security

Firstly, there is a concern about data security when sensitive information is passed to operations in non-HQ locations.

“In 2018, 78% of organizations reported that their outsourcing engagements were audited within the past 12 months”. Such safeguards may be crucial in maintaining data integrity.

Performance

Performance, too, can suffer. Without solid change management practices, a company may face resistance to outsourcing from within its ranks.

It needs to be appropriately managed through to completion, handled by a strong partner with the right competencies to execute, and a solid contract.

Compliance and Regulatory

Finally, there may be challenges around legal compliance, as regulatory requirements may not keep pace with the rate of technological advances.

Therefore, erring toward the side of caution may be prudent as the benefits can only be realized within the frameworks of legal compliance.

The Verdict

In a report by Gartner, it was predicted that, 40% of finance organizations would consolidate all of their finance and accounting to one outsourcing provider as an ERP solution. This presents a significant change from 2019 when that figure was 24%.

Regardless of the risks involved, outsourcing is here to stay. With benefits tending to outweigh the risks and the associated outsourcing value created by tacking on additional technological innovations - it seems that while outsourcing may not be a silver bullet, it is not a vampire either. Outsourcing value has a positive valence.

If you’d like to learn more about what Pangea vendors can offer to assist you in your outsourcing journey, try our vendor search tool.

FAQs

Q1. What do you mean by value?

Outsourcing value can be taken to mean the economic benefit gained by transferring certain business tasks to geographies where the work can be done cheaply, by a dedicated team. Value can also mean less tangible benefits, such as moving onto new IT architecture, new processes, and innovative technologies.

Taken holistically, the value will be a sum of the positives and negatives gained by utilizing outsourcing — the good should hopefully outweigh the bad, but in some cases where there may be a poorly negotiated vendor contract in place, or perhaps an ill-thought implementation plan, the cumulative value may be in minus figures. This means exercising caution when employing this strategy.

Q2. What are the 4 types of outsourcing?

According to a LinkedIn article, the 4 types of outsourcing are Professional, IT, Manufacturing, and Project. This speaks to the nature of the tasks being sent to a different division. Sometimes outsourcing involves just one of the above, other times, a vendor may be approached to take on more than one of these 4 types of outsourcing.

Q3. How does outsourcing add value?

Outsourcing adds value by cutting costs, creating access points to new, exciting technologies, and relieving staff of the more mundane tasks to allow for better focus. According to Engineering Design: “When business owners and executives are freed from the worry of the outsourced task, they will be able to focus more on “big picture” ideas.”