Outsourcing Definition and 6 Main Types

Date 7/23/2019

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What is Outsourcing?

The term outsourcing originally comes from the merger of two words: out (external) and source. Outsourcing means delegating the company’s tasks and processes to third-party executors on subcontracting terms. It should be also mentioned there is an option of collaborating when outsourcing company performs its potential on a prepaid agreement. Delegating a part of tasks or specific department performance as well as hire remote employees to cover narrow range functions is selective outsourcing. This is an agreement where the working process is carried out by people from third-party companies, who are usually experts in this kind of work. Outsourcing is often used to optimize a company’s expenses and save the budget. By delegating strategically important processes to outsourcers (a business partner who takes remotely “alien” functions of a company customer on itself) the company makes a mutually beneficial exchange.

According to the United States Outsourcing Institute – it’s a developing optimization type of any size businesses and enterprises. The greatest growth has been observed in the field of finance and accounting, but today, any size businesses obtain significant benefits from outsourcing. Statistics compiled by the American Management Association in 1997 showed by that time 20% of the 600 surveyed companies had outsourced at least part of the remote financial, accounting, bookkeeping, dispatching and IT operations, and 80% – a part of administrative functions like customer service, personal assistance and call center services.

Effective business development

Outsourcing also answers the question – to buy or to do by yourself everything you need for efficient business? At the same time there are only 3 decisive criteria:

The cost of producing products or services
Product or services quality
Business strategy

Based on our experience in providing outsourcing services for companies all over the USA and Canada, we can highlight one more important criteria to select the most appropriate company to work with: confidence in the receiving of high-quality services.

The main criterion for delegating of any business process or business function to outsourcing is a competitive environment. A monopolist is rarely customer-oriented and takes care only about ensuring a competitive price for its services. So the goals of outsourcing are: reduce the company’s costs on salaries, office rent, equipment, and taxes; increase business efficiency; free up a number of resources for the development of new areas or concentration on existing ones. Read more about our proprietary human resources management model.

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History of Outsourcing

The concept of outsourcing the same as its history is quite young. This term was widely adopted only in the late ’70s of the last century.

It is generally accepted that modern outsourcing has started from UK USA law companies, who began to provide consulting services to their partners in the early 20th century.

The history of outsourcing is closely connected with the confrontation in the 1930s by two giants in the automobile industry: Henry Ford and Alfred Sloan. When General Motors was almost on the verge of collapse thanks to outsourcing Alfred found a solution to get out of a difficult situation. Thus, they have proven to the whole world that delegating of background business processes is one of the most effective options for the development of any enterprise.

But real popularity outsourcing has received due to the development of the IT industry and particularly due to the Internet. A lot of companies required professional services related to the IT including development and engineering, technical support, telecommunication platforms, CRM systems, and web development – creating their own Internet pages for promotion of their products. One remote IT specialist and even whole outsourced IT department either has been proving that it is the most optimal way of conducting business.

The new millennium was marked by the rapid development of outsourcing in the world. More and more companies have decided to evaluate all the benefits of such management for their business. As a result, some brands delegated almost all auxiliary processes (up to 90% of the total number of functions) to subcontractors. Thanks to this they can fully concentrate on their core business leading to a positive financial effect.

Outsourcing predictions for 2019

**Global outsourcing industry revenue from 2010 to 2018, by service type** (in billion U.S. dollars) *(source: Statista.com)*

This chart shows how outsourcing has grown since 2000. Despite the drawdown in 2016, in 2019 it’s very promising for those who take the right place in it.

Virgin America performs aircraft repair and maintenance, baggage delivery, ticket booking, providing passengers with food and other functions not buy regular staff. They outsource staff from third-party contractors. “We will outsource everything that is not directly related to communication with customers,” said David Kush, the airline’s general director.

Alphabet has been the best employer 7 times for the last 10 years according to Fortune magazine’s rating, has almost the same number of regular and hired in third-party trusted outsourcing company workers.

Around 70.000 outsourced employees test Google‘s self-driving cars, sign up documents, improve the company’s products, analyze data, conduct marketing activities.

The predictions for the future of outsourcing

According to research from 2005 to 2015, the number of employees hired through the contractor has increased from 0.6% to 2% of the total US workforce. The number of outsourced workers often reaches 20–50% of the total staff in big companies. The quantity of outsourced staff in Bank of America, Verizon Communications, Procter & Gamble, and FedEx comes to thousands. In the oil, gas and pharmaceutical sector outsourced staff can sometimes exceed the number of constants at a ratio of 2 to 1, says Arun Srinivasan of SAP Fieldglass. So, delegating functions to outsource is becoming a global trend for almost all industries.

So, below are our predictions for the future of outsourcing:

Small businesses, startups and companies of the SOHO format (“small office/home office”) will be proactive to take advantage of outsourcing due to increasing operational efficiency and saving time.

The larger number of critically high-level business functions will be outsourced in the next decade. Outsourcing of low-level functions will be stabilized.

Outsourcing of IT development and technical support direction will increase in demand because of rapidly growing cloud computing services.

Will outsourcing disappear in the upcoming years? Definitely not. Outsourcing services providers can confidently take their way. As they provide access to specialized skills and not just save time and resources, but also allow them to focus on solving key business issues.

Types of Outsourcing

Business process outsourcing

The “business process outsourcing” describes a complex of secondary technological processes with constantly changing composition. Typically, this complex includes finance and accounting, labor, supply, payroll accounting and accounting, internal audit, tax calculation, customer service centers and a number of industry-specific processes. Learn more

IT outsourcing

Currently, IT – outsourcing implies the passing of any IT processes execution to external companies. IT processes include the design, development, implementation, maintenance, and development of the company’s IT infrastructure. IT outsourcing became widespread due to the development of information technology in the late 20th century. Most businesses both small and large accept to entrust the IT support to specialized companies. It saves time and money. Take note: IT outsourcing is the most used type of outsourcing in the world due to the rapid pace of development and ever-growing market demand and high rates of computer technology development. Learn more

Production and housekeeping outsourcing

are one of the most common types of outsourcing when all concerns related to administrative and lumper jobs like real estate operations, cleaning, cooking, company’s transport fleet management, goods inventory, and other service work fall on the outsourcing company’s shoulders.

Accounting outsourcing

is one of the options for ensuring enterprise accounting. Types of cooperation are very different: ranging from the formation of “zero reporting” to regular cooperation on a daily basis. An accounting outsourcing company can fully perform all functions of an enterprise’s accounting including the bank payments execution and issuing primary documents to counterparties. However, this does not exclude the opportunity of building a fairly flexible business process using external companies and own employees to achieve maximum efficiency. Learn more

Marketing outsourcing

can be used when it’s more profitable for the company to receive services from a third-party specialized in solving marketing issues. The choice of marketing development direction for outsourcing is unique for every company. It depends on the specifics of the company, presence in the company staff a sufficient number of its own marketers and their level of qualification. Learn more

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What types of outsourcing are popular nowadays in the USA?

The first successful company that used this model became American Airlines. The company abandoned the internal state of the operators and delegated all call center functions to a small company specializing in telephony. The example of American Airlines was immediately followed by many small, medium and large businesses. Outsourcing has become popular. Quarterly and annual reports showed a profit growth of 25-40%.

Sure thing, instead of costs for office equipment, salaries, deductions and investments in the company’s staff development you are able to pay once for the contract and get services of the highest level. Besides there is an opportunity to return money back if you are not satisfied with received services. The advantages of outsourcing were instantly accepted by seasonal businesses due to reducing costs and increasing profit.

United States Outsourcing Institute published information that 89% of US enterprises have delegated part of business processes to external providers. IT, call centers, dispatching and accounting are leading services.

Comparing with European data, Eurostat says that 87% of enterprises use outsourcing in Germany, France – 88%, Liechtenstein – 94%. The average of outsourcing in Europe is 83%.

Motivation and reasons to outsource your positions

From an economic point of view to cooperation with an outsourcer allows the company to significantly reduce costs. Because the company does not have to contain additional structure and increase the staff. Transaction costs may also be reduced. Some constant costs can be transformed into temporary depending on the company’s needs in the exact period of time.

From the point of view of strategic task implementation, outsourcing makes it possible to concentrate resources on the main production, as well as to improve operational control. In addition, the process of involving new technological or management operations is facilitated.

From a technological point of view, outsourcing provides access to high technologies. If the staff does not consist of necessary specialists, they can be easily attracted through an outsourcing program. The quality of providing services increases significantly since a third-party company undertakes to control the quality of the work provided under the contract.

Generally, outsourcing is a lucrative deal for many companies that do not have enough resources for total control of all production stages and processes. World statistics confirm this. To confirm this we have already mentioned that American Management Association has conducted a survey of 600 companies and it turned out that 20% of them had already outsourced some financial operations, and 80% administrative functions.

Outsourcing benefits for small and medium businesses

A business owner who chooses to delegate certain business processes to contractors should consider that external management usually brings benefits. Understanding of the advantages allows you more accurately to assess the picture.

Getting results from business processes without managing them. The performance of important functions is delegated to contractors. Therefore, the necessary corporate result is achieved by external efforts.

The attraction of competent specialists. Outsourcers are professionals in their area. They can find the best solution for highly specialized tasks.

Savings on labor. As certain business processes are passed to a partner, the company eliminates the need to maintain its own employees for their management.

Saving money resources. Staff reducing leads to the total wage bill decreasing. This ensures a cost reduction in various funds and tax payments.

Effectiveness growth of the main activity. To get rid of non-core functions means to be able to concentrate on the main direction and increase its results.

Lack of expenses for personnel costs. An outsourcer independently selects who will perform the functions entrusted to him. Therefore, the client can be confident that business processes are handled by professionals while receiving detailed reports as well as having constant access to monitoring the entire process.

Exclusion of disputes and disagreements with the staff. If a specialist is not satisfied with something, he can make claims only to his employer. The client pays the agency for the services and is not engaged in staff management.

Elimination of problems with public services. Regular staff checks do not affect the company: employees are formalized in another organization.

Contract form of relationship. The partnership between the outsourcer and the customer is executed by the contract. It sets out all the duties and responsibilities of the parties, as well as the important nuances of cooperation.

The universality of service. Any non-core and sometimes core functions can be delegated for external control.

Part of Front Desk Helpers in the outsourcing services

Our company began its history providing call center services in the US market, particularly in the New Jersey and New York area. Since the company was founded in 2015, the number of our staff has grown 4 times and the range of services in which we provide employees already exceeds 7 industries in the market of Hospitality, Homecare, Dispatching, IT services, and others.

Small and medium-sized businesses are attracted by the opportunity to instantly reduce staff costs and even pay up to 65%, while the processes that are outsourced to our company are automated and show an increase in employee productivity. We identified the optimal growth factors:

– professional technical equipment

– the selective process of the employees for each project

– our proprietary employee management system allows us to provide outsourcing services to an increasing number of companies every year.

We invite you to learn more about our capabilities and use the cost calculator for remote employees to evaluate the benefits of working with us!

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Front Desk Helpers Co, 2019. Change your business mind!

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