Last Updated on September 4, 2024
In 2022, 59% of companies reported that outsourcing helped them reduce costs by more than 30%. This strategical approach, known as outsourcing, involves hiring external parties, such as consultants, virtual assistants, and virtual assistant services, to perform tasks that might otherwise be handled in-house. Companies such as Google, Apple, and others, which outsource their IT support, accounting, and customer service, don’t just save money but gain access to specialized expertise, which helps drive growth and innovation. Moreover, it’s understandable that the global outsourcing market was valued at $261.9 billion in 2022 and is predicted to surge by 9.4% from 2023 to 2030. However, when companies outsource work, they impact their employees positively and negatively.
The key to understanding these differences is to study the company’s workforce and how outsourcing generally works. So, let’s explore why outsourcing is so popular.
Why Do Companies Outsource?
There are many individual reasons why a company will choose to outsource. But the common reasons to outsource tasks or production are:
- To grow faster
- Retain flexibility
- Gain from the skills of top talent
- Maintain the company’s focus
- Boost brand loyalty
- To fulfill compliance requirements.
Growth
Outsourcing has been a catalyst for growth for many companies by providing access to specialized skills that are not available in-house. For example, when Slack was in its early stages, it outsourced its mobile app development to a Canadian firm called Metalab. This decision allowed Slack to tap into Metalab’s app design and development expertise, accelerating its product launch and gaining a competitive advantage in the market.
Retain Flexibility
Outsourcing allows businesses to scale operations up or down based on demand. This is particularly beneficial in industries with fluctuating needs. A notable example is pharmaceutical companies outsourcing clinical trials to specialized research organizations. This approach provides flexibility in managing research and development costs and helps navigate complex regulatory requirements across different countries, ensuring compliance without overburdening internal teams.
Cost Savings
One of the most cited reasons for outsourcing is cost savings, but it’s also about maintaining and enhancing brand loyalty. For example, Zappos, an online shoe retailer known for its exceptional customer service, outsourced its call center operations to a partner specializing in customer support. This allowed Zappos to focus on its core business while ensuring high-quality service and maintaining customer satisfaction and brand loyalty. The cost savings from outsourcing customer support were reinvested in marketing and other strategic initiatives.
Maintain the company’s focus.
Outsourcing allows companies to concentrate on their core competencies while delegating peripheral tasks to experts. A prime example is Google, which outsources its data center management to external providers. This enables Google to focus on innovation and development of its products and services, such as search algorithms and advertising technologies, without being bogged down by the operational details of data center maintenance.
Boost brand loyalty
Outsourcing can enhance brand loyalty by ensuring consistent and high-quality customer experiences. For instance, American Express outsources its customer service to experienced third-party providers specializing in delivering exceptional support. By partnering with experts in customer interactions, American Express ensures that its customers receive personalized and efficient service, reinforcing trust and loyalty in the brand.
To fulfill compliance requirement
Navigating complex regulatory landscapes can be daunting, especially for companies operating in multiple jurisdictions. Outsourcing can be an effective solution for compliance management. Take the example of financial institutions like JPMorgan Chase, which outsource their compliance and risk management functions to firms specializing in these areas. This approach helps the bank comply with ever-changing regulations in different countries, such as anti-money laundering laws and data protection regulations, thereby reducing legal risks and potential penalties.
Why Outsourcing Impacts Companies in Several Ways
Why outsourcing? Well, outsourcing is big business. It has been estimated that the global outsourcing market will increase from $150 billion in 2013 to $400 billion by 2020, making it an increasingly attractive option for companies looking to cut costs and increase profits.
However, beyond the benefits to companies looking to cut costs and increase profits, outsourcing can benefit companies in other ways than cost savings and profit increases.
For example, many companies have found that outsourcing has increased productivity and employee satisfaction by focusing on core competencies rather than non-core processes or tasks (such as office cleaning).
Why Outsourcing Impacts Employee Competence Widely
One of the most widely discussed impacts of outsourcing is its effect on employee competence. Outsourcing can harm employee competence, especially when companies outsource their most technical and specialized jobs, such as software development or graphic design.
In such cases, it can be difficult for employees to find other opportunities in the same field after being laid off or having their positions outsourced. However, outsourcing can positively affect employee competence by giving companies more time to train new employees and teaching them what they know about the company’s products or services.
Additionally, outsourcing often involves a shift from hourly workers (who do not necessarily need specific skills) to salaried employees, who have more responsibilities and are expected to keep up with current trends in their field.
Moreover, hourly workers in non-technical roles might experience job insecurity or changes in their job descriptions as companies outsource routine tasks like data entry or customer service. In contrast, salaried employees, particularly in technical roles, may benefit from outsourcing by focusing more on core, strategic activities rather than mundane tasks. This shift can lead to higher job satisfaction and productivity.
However, outsourcing also challenges company culture and employee engagement, as a divided workforce may arise between in-house and outsourced teams. Additionally, it can affect career development opportunities, with some employees potentially losing access to outsourced skill-building projects. This dichotomy highlights the need for thoughtful integration and communication strategies to ensure a cohesive and motivated workforce.
Employees’ Concern
Another concern for employees is their salary and the value they bring to the company. While most people don’t like to talk about it, money is a big issue for many workers. Employees want to be compensated for their work, and companies must be able to afford fair wages.
Companies should also focus on rewarding their workforce in ways other than salary, making employees feel valued, and receiving more money each year. Rewards could include promotions, bonuses, additional vacation days, or company-sponsored training courses.
Outsourcing: Security of Sensitive Data
One primary concern for companies outsourcing work is the security of sensitive data. Because of this risk, companies must protect both the protection and privacy of sensitive data.
This can be achieved through encryption, the process of encoding data so that only authorized people can understand it. Encrypting your most sensitive information makes it harder for hackers to access it if they get their hands on your files.
Encryption also guards against users with legitimate access to your systems but may not be trusted with all sensitive material. For example, if you hire a contractor or agency to do some work for you, you can give them access only as needed.
Why Outsourcing Liberates, Prioritizes Important Tasks
Outsourcing can provide liberation from many tasks, allowing workers to focus on more important matters. Outsourcing can often free workers time to focus on more critical tasks. This is especially true in a business environment with too many employees and insufficient opportunities for advancement.
If an employee has a skill not widely used within the company (such as a software engineer who knows how to operate an outdated machine), he or she could be better served by taking on different responsibilities elsewhere or switching companies entirely.
This can also apply to mundane tasks like data entry or phone calls: if you don’t need someone on staff doing that work, why have them there?
Outsourcing can provide liberation from tedious tasks so that employees may participate in more exciting projects.
For example, if writing copy for your marketing strategy isn’t your thing, but talking about it is—you’ll want this freedom from your daily routine!
Outsourcing: Workforce Impacts, Pros and Cons
Outsourcing has both positive and negative impacts on a company’s workforce. The effect of outsourcing on a company’s workforce depends on the situation. In some cases, it can have a positive impact by helping increase efficiency and improve customer service while saving money.
Outsourcing can also negatively affect your business if jobs are lost or security is compromised. In other cases, outsourcing may benefit your business: For example, you can outsource work to a source that specializes in providing services cheaper than your company can do internally (e.g., manufacturing or IT).
This frees up internal resources for other projects or initiatives that might otherwise be unprofitable. This could be because of their low volume/high variance nature — such as developing new product lines based on consumer feedback from focus groups − making them more economically likely to succeed!
Why Outsourcing: The Bottom Line
In summary, outsourcing has many positive and negative impacts on a company’s workforce. It can liberate workers from many tasks, allowing them to focus on more important matters.
However, if not carefully managed, it can also impact worker competence and the security of sensitive data. In addition, some employees may feel threatened by outsourcing due to concerns about job security or pay cuts related to offshoring work.
Is outsourcing the right move for your business? Uncover the potential benefits and challenges for your team. Let Aristo Sourcing guide you through the complexities of outsourcing. Book a free consultation to explore how outsourcing can optimize your operations, reduce costs, and enhance your team’s focus.
3 Key Takeaways
The article explores outsourcing and its impact on a company’s workforce. Here are the three key takeaways:
-
Outsourcing offers benefits and drawbacks: Outsourcing can free employees to focus on core tasks, improve efficiency, and access specialized skills. However, it can also lead to job losses, reduced employee competence in certain areas, and security risks for sensitive data.
-
The impact depends on the situation: Outsourcing’s effects on a company’s workforce depend on the situation. Outsourcing some tasks can be positive if it improves efficiency and customer service. However, outsourcing core functions or jobs with sensitive data can be risky.
-
Careful consideration is crucial: Companies should weigh the pros and cons of outsourcing before deciding. They should consider the impact on employee morale, skillsets, and data security.
[i] Business Process Outsourcing Market Size, Share & Trends Analysis Report By Service Type (Customer Services, Finance & Accounting), By End-use (IT & Telecommunication, BFSI), By Region, And Segment Forecasts, 2023 – 2030.