What is outsourcing and what are the advantages?

In the past decades, the topic of globalisation has shaped the economy like no other. In the meantime, it has become normal for small, medium-sized and large companies to operate internationally and to benefit from the many advantages. In the course of this, the term outsourcing is repeatedly brought up: A company outsources an area or process to an external service provider, often located abroad.

In this article we will answer the question of what outsourcing is and what advantages it can offer your company. It is essential to have good advice on how to outsource the service/product to a reliable provider.

What is the definition of outsourcing?

Every company has numerous steps, processes and areas in its value chain to ultimately offer a service or product. It is not always necessary to provide all these steps oneself. This is exactly what outsourcing means, where a company hands over a certain sub-area, a process step or even an entire department to an external service provider.

Essentially, it is a matter of outsourcing a previously internal service and thus obtaining it from a third-party provider. Although many people think of outsourcing abroad when they think of this topic, this is not initially defined by the term itself. After all, if a company outsources a sub-area to an external service provider in Germany, it is also outsourcing.

Why is outsourcing so important?

There are essentially three reasons that make this strategy so attractive. First, the external service providers are usually located in countries where labour costs are much lower than in the DACH region, for example. This is usually Eastern Europe or Asia, where there is a cheaper and well-trained workforce. You can then pass the cost savings from this on to the company so that it can remain competitive in the future.

On the other hand, these external providers are also far more specialised in a particular service. It is not uncommon for them to supply numerous customers with a comparable service and can therefore scale much better and benefit from learning effects. Globalisation has increased the price pressure on many companies, and a specialised provider can help to work more cost-effectively. Areas that are very labour-intensive tend to benefit the most.

But the lack of internal resources is also increasingly leading to the decision to outsource a service. Especially in times of a shortage of skilled workers, it can be difficult for companies to build up sufficient internal capacity. If, on the other hand, a reliable external service provider takes over important tasks within a very short time, then the company can concentrate fully on its core business. This additionally increases the momentum to generally accelerate and realise the company’s earning power within the shortest possible time.

What forms of outsourcing are there?

There are numerous different forms of outsourcing, which can further define or subdivide the term. This allows for a more precise categorisation of this very extensive topic. These include, for example:

Offshore outsourcing (offshoring): This term specifies to which location the service provision is migrating, in this case namely necessarily abroad. A further subdivision between nearshoring (e.g. Eastern Europe) and farshoring (e.g. Asia) is not unusual.
Outtasking: This involves outsourcing individual tasks or small steps instead of an entire organisational area or department. This helps to keep the scope (e.g. initial costs) rather small at first and to test the service provision and quality.
Out-servicing: In out-servicing, internal customer service is outsourced. Classic examples of this form of outsourcing are call centres or maintenance centres, which can be located either at home or abroad.
Transitional outsourcing: If there is a technology or organisational change, it may be that a certain area is partially completely out of action. To bridge this period, an external service provider takes over all tasks during the transition.
Complete outsourcing: This term refers to the outsourcing of entire departments or areas. Due to the increasing complexity of information technology, many companies today outsource their entire IT department to an external service provider.

What are the advantages of outsourcing?

There are numerous advantages that make the use of an outsourcing strategy attractive. Particularly in view of the ever-increasing volatile economic situation, a company can thus benefit considerably from cost, time and flexibility advantages.

The most important advantages of outsourcing include

Cost minimisation: External service providers specialise in a subarea and often benefit from cheaper labour costs abroad. This enables them to offer a comparable or even better service at significantly lower costs.
Quality improvement: However, many companies not only gain great advantages in terms of costs, but also in terms of quality. Through the experience and learning effects from which an external specialist benefits, you also usually get better quality results.
Risk minimisation: In times of economic fluctuations, it is always a risk to build up your own resources within the company. If there is an upheaval in the economy, the services of an external service provider can often be scaled up or down much more easily.
Speed: It takes a lot of time and money to build up your own internal resources in sufficient capacity. However, if the activities or departments are outsourced, they are available far more quickly and in higher capacity.
What are the consequences of outsourcing for employees?

Of course, it always depends on the situation in the respective company. If there is no internal department or insufficient resources to take on all the tasks, the impact on employees is often minor. This is because the external service provider often only serves to provide additional capacities that are otherwise not available in the company.

If, on the other hand, the company wants to outsource an internal department for cost reasons, for example, this can have a major impact on the employees in the company. In this case, it can be a decisive advantage to rely on a professional interim manager for the outsourcing project, who can contribute a lot of experience in such situations. This person is able to quickly recognise and resolve internal company tensions so that the employees are prepared for the new situation.

When does outsourcing make sense?

At the beginning of every decision, a profitability calculation should be made. This must include all total costs, not only the running costs of the external service provider, but also the internal costs of implementing the project. Often there are far-reaching organisational or structural effects on the company, all of which must be evaluated beforehand from a monetary point of view.

When outsourcing core competencies or key technologies, however, it is important to proceed very carefully. This is because the company can quickly move into a dependency situation or create a future competitor. In addition, there are always data protection or intellectual property challenges that need to be resolved beforehand. Once these issues have all been resolved, outsourcing can make a lot of sense because it is cheaper, faster and more reliable.

Which business areas can be outsourced?

In business, you will always find certain areas in the company that can be outsourced better than others. Some typical examples of outsourcing are the following:

• Customer care or call centre
• IT support and IT security
• Development of software, apps or websites
• Accounting and preparation of annual financial statements
• Marketing, logistics or catering

What mistakes are often made in outsourcing?

Many companies make the mistake of outsourcing the wrong area right at the beginning. Here, one must not orientate oneself on the examples of other companies, but must conscientiously carry out the profitability calculation for oneself.

The second mistake is often made when choosing an external service provider, because the range of services on the market is already so large that it is easy to lose track of them all.

However, it is not only essential to define exactly which area is to be outsourced to which provider, but also to define the exact scope of services with the provider and to contractually stipulate them. There must be no misunderstandings or ambiguities, otherwise both sides will have the wrong idea about the cooperation. Therefore, one should not underestimate the entire communication effort and the very important communication rhythm, both during the project and during operation.

Another popular mistake is often made here: the effort required for the outsourcing project is underestimated. It is not uncommon for this to be a full-time job that often cannot be reconciled with day-to-day business. In addition, managers in the company often lack the experience to manage and accompany an outsourcing project extensively. A professional interim management, on the other hand, knows all the challenges of the important aspects and the critical path in order to be able to carry out the project quickly and cost-efficiently.

Is outsourcing still in vogue in 2023?

Especially in view of difficulties in global supply chains, current geopolitical challenges and uncertainties, the question arises: Is it better to start the new year by outsourcing certain projects or to rely on internal expertise? The internal solution gives the impression of better control. But in the context of increased complexity, is insourcing really the best strategy to stay competitive?

Especially in these times, we can explain when, where and why outsourcing is the right answer to avoid additional challenges that may otherwise arise with insourcing.

Outsourcing in 2022: What are the results?

Here are 3 statistics that speak for themselves:

45% of companies plan to expand outsourcing since the start of the COVID19 pandemic due to a lack of internal skills (source NTT)

Since the onset of the COVID19 pandemic, many companies around the world have seen a growing need to improve and optimise their workplace and attract talent and new skills.

A study showed that 48% of companies knew they needed to modernise their work environment because of the pandemic, while 45% of global companies said they were looking to outsource more work for the same reason.

The study also suggests that much of the effort previously spent on outsourcing will be redirected to finding more skilled workers with technical skills.

For 70% of companies, cost reduction is the main reason for outsourcing (source Deloitte)

Outsourcing statistics show that the main reason companies decide to outsource is simply to reduce costs. In fact, outsourcing helps to reduce the company’s overall costs by significantly minimising the costs normally associated with hiring internal staff. These include the cost of hiring staff, various employee benefits and health insurance, depending on the employer and location.

62% of companies worldwide are looking to renegotiate their outsourcing terms and contracts (Source BCG)

Companies are still struggling with budget issues caused by the COVID-19 pandemic, while the market continues to grow and develop exponentially. A study has found that up to 62% of companies plan to renegotiate their outsourcing agreements and contracts. The report shows that 59% of companies want to renegotiate the terms of outsourcing contracts, 56% of companies want to change the pricing structure and 48% of companies want to reinvent the current delivery model. Supply chain management is required here.

The obligations of today’s company

Today’s companies must meet certain criteria in order to position themselves against the competition and thus make money, develop and evolve. Four commitments form the pillars of a business that will endure in the post-Covid era:

• Delivering a true customer experience — by creating the best outcomes for its customers;
• Rationalising costs — intelligently resisting increasing pressure to improve margins and maintain competitiveness.
• Regulatory and legal compliance — staying compliant in an ever-changing legislative landscape.
• Equip — deploy all available technological and operational capabilities to drive diversification and competitive advantage.

Internalisation in 2023?

Internal resources often have to divide their attention between multiple, sometimes conflicting projects. All this means that this strategy can fall victim to many constraints:

• Lack of the latest technology;
• Existing system constraints;
• Poor allocation of internal resources;
• A constantly deteriorating user experience;
• Inadequate analysis and understanding of customer needs;
• Constantly changing regulations.

It is impossible to win tomorrow’s customers with yesterday’s technology and strategies. It is more prudent to tackle these challenges with the right partner.

Successful outsourcing with 3i Business Solutions AG

Outsourcing is a topic that is becoming increasingly important in the DACH region due to globalisation and rising cost pressure. By outsourcing to a reliable external service provider, costs can be efficiently saved, risks minimised and the quality of the service even increased. But there are many challenges and obstacles to overcome in an outsourcing project.

3i Business Solutions is a long-standing expert in the field of outsourcing and can provide professional interim managers to help you successfully implement all requirements and framework conditions. We draw on our extensive experience in Eastern Europe and Asia, which have proven to be attractive outsourcing locations.

Contact us now and let us advise you on the topic of outsourcing.