With the growing uncertainty of the economy and the market conditions, the topic of outsourcing is becoming hot again. Why should SMBs use outsourced services, and where is the drawback? We collected and are sharing with you the pros and cons of outsourcing for SMBs in five points.

In the challenging business environment that the recent and ongoing pandemic has brought, SMBs are under growing pressure to optimize their operations. Outsourcing can be a tool that helps small businesses survive but the outsourcing process needs to be thoroughly planned to reap the benefits and to avoid the shortcomings of using external expertise.

Although outsourcing in its core means using the services of skilled contractors instead of keeping business functions such as IT, payroll, or even manufacturing in-house, outsourcing is more than simply hiring contractors. Outsourcing is a business strategy with its roots in the 90s when companies first recognized its benefits as an integral part of business economics. The primary aim of outsourcing at an SMB is cost reduction, but there are other significant benefits. Let’s take a closer look at the five most important ones.

What are the benefits of outsourcing?

1. Cost Reduction

As we mentioned before, the primary aim of outsourcing is reducing costs, and the savings come in many forms. With outsourced services, there is no need to invest in infrastructure or software, you can pay only for what you need. This results in a highly flexible operation that is lean and agile and enables you to scale your business according to your actual requirements and possibilities.

Outsourcing also significantly reduces labor costs. There is no need to hire new employees and invest time and money in their training – all the while risking losing your investment. This leads us to the second benefit.

2. Access to talent pool

Outsourcing provides instant access to skilled labor as and when you need it. Certain skills may only be needed for a short period of time, for a development project, for example. Or skills may be needed permanently, for example, to maintain IT infrastructure, but it would be too expensive to hire an expert full time. Outsourcing provides access to a much larger talent pool with highly specialized skills. The best thing is that this access is scalable according to your needs and you only pay for what you actually use.

3. Process optimization

Processes are quicker and more efficient with skilled labor, which translates into less hassle, more productivity, and more savings. By focusing more on your core business instead of the operational daily tasks, your efforts are more targeted on activities that produce income, which translates into efficient and effective work – and profitability.

IT is one of the most easily outsourced functions and it is a mature and reliable solution by now. Because of its standard procedures and highly skilled labor needs, it was one of the first ones to be built into business strategies when SMBs started outsourcing. 

4. Access to cutting edge technology

Cutting-edge technology is another tool that can help efficient and effective work that provides an advantage over your competitors. Using outsourced solutions saves the heavy investment in top-notch infrastructure and software and allows your business to pay-as-you-go, always according to your needs.

5. Scalability

The bottom line of most points above is scalability, which is the ultimate component of process optimization and cost-cutting. Outsourcing can guarantee that you only pay for what you use, when you use it, and how much you use regardless of whether it is specialized skilled labor, software, or infrastructure.

It may seem by now that outsourcing is the ultimate answer to every business issue of SMBs, but there may be drawbacks that you either need to accept and live with or learn to shield off.

What are the negative effects of outsourcing

1. Reduced level of control

Probably the issue that can be the most painful for SMBs is losing a certain level of control over the whole of their business operation. Given the size of SMBs, their business operation is likely to be centralized and tightly managed. Outsourcing means letting go of some control and trusting an external provider with the company’s crucial operational functions, such as IT, for example. This may be a hard step to make for certain small businesses, but in most cases, it only means a small change of perspective and internal business culture.

2. Quality issues

With reduced control, the number of quality issues may also increase. It is all the more important to properly vet your future outsourcing service providers and sign a service contract that covers potential quality issues and their corrective action. It can also help to have a thorough SLA in place and integrate the quality management system (QMS) requirements into it.

3. Security issues

Allowing external service providers to access sensitive company data carries risks. Be it intellectual property breaches or mishandling of sensitive customer information, outsourcing is a potential threat for data. But there are various ways in which these risks can be mitigated. For example, you can ask for SOC 2 certification or a security risk audit report from the service provider. Properly defined processes of handling sensitive information and making data protection an integral part of the QMS are prerequisites of outsourcing.

Using external IT systems may also make your business more vulnerable to cyber threats, but a robust security strategy and policies including strictly enforced policies for devices, users, gateways, connections, and applications can mitigate the risks of cyber threats. 

4. Communication issues

Outsourcing means working with external service providers and as such, it has its potential communication difficulties. Depending on where you outsource your business functions, you may face time zones or language barriers. Even if the outsourcing is local, you need to align your business communication needs with the service provider, clearly defining the points of contact and an IT communication plan including the channels, time, and frequency.

5. Challenge of finding the right provider

All the above issues boil down to the challenge of finding the right service provider that can handle your business needs with the necessary security and quality standards. For this reason, outsourcing must be thoroughly planned by examining all aspects of working with an external service provider. Shortlist and thoroughly vet your potential outsourcing partners discussing every concern before you decide to hire.

The 5 most common types of outsourcing and their benefits

There are several types of outsourcing, but the most common ones are the following five:

IT outsourcing

As we mentioned earlier, IT outsourcing has the longest history and it is for a good reason. IT requires very specific knowledge and infrastructure that may get quite expensive to purchase and if not planned properly, gets outdated before it can provide a return on investment (ROI). Even outsourcing this single function can mean significant savings for SMBs.

Professional outsourcing

This type of outsourcing includes functions such as payroll or HR that rely on standard processes which can be applied to any organization. This makes it fairly simple to outsource them.

Project outsourcing

Depending on the project, you can outsource only a certain aspect or the entire project. This is especially useful for one-off developmental jobs like a website redesign or ad campaign and provides you with access to highly skilled professional work.

Manufacturing outsourcing

This type of outsourcing can be extremely beneficial when scaling your business because it provides flexibility and speed that in-house manufacturing cannot cope with. Using overseas suppliers can make manufacturing outsourcing especially cost-effective, but quality issues are always a potential threat.

Business process outsourcing

At a more advanced level, you can outsource certain business processes, such as customer service and administration. However, since such services have an impact on your customers and clients, it is even more important to select your provider with proper care.

Outsourcing strategies with advantages and disadvantages

The different outsourcing strategies are primarily defined by location because there are common possibilities and threats if you outsource locally, offshore, or nearshore. Let’s take a look at each of these.

• Local outsourcing

In this case, you outsource a certain business function to a local service provider, which saves all the headaches about language barriers and time zone issues. You also share a common cultural background which can speed and ease up the first steps. However, this comes at the price of losing some savings that services from cheaper countries can provide.

• Nearshore outsourcing

This type of outsourcing is already outside the country's borders, but still within reach, which means either the same time zone or just a couple of hours away. It can be Latin America for example or Mexico. Nearshore outsourcing can also be a tool to test the waters for a potential expansion abroad.

• Offshore outsourcing

Offshore outsourcing is the most cost-effective since it takes advantage of significantly lower labor costs in distant countries. It can provide access to a talent pool and skills that may be too expensive at home. However, this type of outsourcing also carries the most potential issues with language, communication, culture, and quality. In certain cases, the time zone difference can also slow down work to a point when it no longer makes sense to use the service.

The importance of outsourcing done right

The above pros and cons provide a more detailed picture of up to what level can outsourcing be the answer to cost-cutting and optimizing your business processes. It has a significant impact on the company culture as well that you need to evaluate besides the potential gains.

Your team may interpret outsourcing as a tool to lower the pressure on them, but also as a threat to their jobs. The loyalty and trust of your employees are the fuel of their productivity so the impact on the company culture needs to be considered before you decide to outsource.

If done right, outsourcing can greatly enhance the ability of SMBs to adapt to a changing economy and market environment and provide flexibility in scaling and growth. The most important groundwork to successful outsourcing can be summed up in three points:

1. Assessment of profitability

There are simple means to calculate whether or not outsourcing a business function is profitable. For example, poor IT can cost $6,876 per employee per year so it is quite easy to see at which point it makes sense to outsource your IT management to professional service providers.

2. Clear business strategy

If you have evaluated all the pros and cons of outsourcing and decide to go for it, build a strategy. Outsourcing heavily impacts your organization, and your processes need to be clearly defined to integrate the outsourced services into them. Quality management systems, data protection tools, and processes are just a few due diligence you need to get ready before you start to consider outsourcing.

3. Careful selection of trustworthy partners

If you made all the underlying calculations and defined your business strategy, the most important step is to find the service provider that can meet all the requirements. This may take some time, and you might want to consider different outsourcing strategies. At the end of the day, this is the single most important step in successful outsourcing. A slightly more expensive service provider or outsourcing locally rather than offshore may cost more, but it may also eliminate certain risks of an offshore company and culture.

Closing thoughts

Outsourcing is not the secret sauce for everyone, but it can be highly beneficial in strengthening the competitiveness of SMBs. The key to successful outsourcing is careful planning which includes a thorough assessment of costs, processes, and potential providers.  IT is the most widely outsourced area of business because it provides instant access to better skills and always up-to-date technology without significant upfront investments.

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