Outsourcing

1. What is outsourcing?

Outsourcing is when a business hires an external company or individual to handle specific tasks or operations, instead of doing them in-house. Outsourcing may save you money, help you be more flexible and manage growth effectively. It also allows your business to access  specialist expertise and technologies.

However, you will need to consider whether the benefits of outsourcing outweigh the costs. The process will have to be properly managed and monitored as anything a supplier does on behalf of your business will reflect directly on your reputation with staff, customers and other stakeholders.

2. Benefits of outsourcing

The benefits of outsourcing can be substantial and can help you build competitive advantage. 

• Gain expertise - access professional skills and specialist knowledge that you might not have in-house, such as marketing or accounting

• Improve efficiency - use experienced providers to get your business functions up and running quicker, more smoothly, and to a higher standard

• Save costs - minimise overheads by removing the need to hire full-time staff or buy specialist equipment

• Consider flexibility and scalability - turn fixed costs into variable costs to free up capital

• Focus on strengths - concentrate on strategic priorities and your core business activities rather than being distracted by tasks an external provider could do better due to economies of scale or highly trained staff

• Reduce risk - seek expert support for key business functions like legal and compliance, payroll, HR, or IT, to help reduce operational risks.

3. Activities you can outsource

Examples of processes that some businesses outsource include: 

• IT functions - you can outsource most IT functions, from network management to project work and data management, or use software platforms without having to invest in expensive consultants or systems

• Business processes and HR - outsourcing activities including recruitment and legal services gives you access to specialist skills, either on a retainer or pay-as-you-go basis 

• Finance - depending on your business you could outsource most of your accounting function, including, payroll, bookkeeping and tax management

• Sales and marketing - many organisations use a consultant or an agency to handle marketing, and smaller businesses, or those in specialised markets, can also outsource sales to specialist agencies

• Health and safety - there are consultants who specialise in health and safety compliance to help you cost-effectively meet all your obligations, and stay up to date with legal changes

• Facilities - many businesses also outsource daily tasks such as cleaning, catering and facilities management

• After-sales -  it may be possible to outsource fulfillment and after-sales services, including deliveries, installation or customer service.

4. Consider your options

Before outsourcing any business function, take the time to plan what you need, set the terms and find the right service provider. Assess your staffing needs and weigh up the risks of outsourcing against those of keeping the processes in-house and hiring staff or training your own team.

Consider the following:

• What are your core strengths and what are secondary? 

• Which processes are you thinking of outsourcing and why? 

• If the task is key to business success, would you be better to keep it in-house to ensure future competitiveness?

• What are the costs of doing it in-house? Include hidden costs such as office space and staff and labour costs.

• What are the costs of not outsourcing? Will your business suffer because it cannot afford to invest in the expertise or the facilities that an outsourcing partner might provide?

• Check the return on investment (ROI) - ask potential service providers for help, as many offer an ROI calculator.

• Would it be helpful to use a consultant to help you find a service provider?

• Are you prepared to spend the time and energy required to manage the outsourcing relationship?

• Are your expectations realistic? 

5. Potential pitfalls and contingency plans

Many businesses are wary of outsourcing and concerned about handing over key functions to an external organisation. It’s important to choose very carefully who you work with and how you manage the outsourcing relationship.

Potential pitfalls can include:

• service delivery falling below expectations

• confidentiality or data breaches

• rigid contracts

• provider going out of business

• insufficient in-house resources to oversee the outsources processes and relationship.

When planning to outsource, you also need to plan for problems:

• have backup providers

• consider how to bring processes back in-house if needed

• ensure contracts specify when changes can be made to avoid compensation claims against you. 

6. Choose an outsourcing partner

Outsourcing is about creating a successful long-term partnership, not just choosing a supplier. Take time to look in detail at potential providers.

• Find potential providers. Speak to other businesses in your network for recommendations for potential providers for the services you need, search online or use supplier directories. Also check industry bodies for accredited members, such as ICAS to find chartered accountants.

• Provide a brief. Create a detailed brief outlining your requirements, budget, and success factors and ask potential partners to come back with a proposal and costs. This will help you assess whether they understand what you need and can help you compare providers.

• Track record. Make sure the provider has a track record of service commitment and long term clients. Also look for industry recognition and awards. 

• Relationship management. Consider how your relationship will be managed and try to meet your relationship manager. If outsourcing abroad, consider time zones, language, culture, and exchange rates. 

• Customer references. Look at their existing clients and assess customer satisfaction levels through references and testimonials. 

• On-site visit. Visit each potential service provider if possible and look at their working environment, staff retention, IT systems, cybersecurity, management processes, and quality procedures. If not possible, meet virtually and discuss their ways of working.

• Financial stability. Check that your potential provider is financially stable. If a limited company, verify accounts, and consider a credit check. If subcontracting is planned, apply the same checks to subcontractors.

7. Freelance marketplaces

Freelance marketplaces are online platforms that connect freelance professionals with businesses who are looking for specific services for a particular project. For example if you are looking for a designer to design your logo or image editing.

Examples of freelance marketplaces include Fiverr and Upwork.

These can be useful if you are looking to outsource a small-scale, defined project to a freelancer, as they can give you:

• fast access to a large pool of talented professionals like designers, tech professionals and admin assistants

• cost effective short-term support without the need for a long-term contractual commitment.

However, you must do your due diligence and consider that:

• skills and reliability will vary, so you must review past work and customer ratings and avoid committing to too much work upfront

• you will need to keep security and data front of mind - avoid sharing sensitive business information, and use all the protection you can including contracts and NDAs where needed

• you will need time and money to manage the relationship and the outcomes of the work, there could be hidden costs or inefficiencies if you are not satisfied with the outcome.

8. Service level agreements

A service level agreement (SLA) sets out what services the supplier is to provide and to what standards, as well as your obligations to enable them to provide the service. 

The service level agreement forms part of the contract between you and your outsourcing partner. 

SLAs are complex documents that should be well defined and you must be involved in drawing up the SLA together with the supplier. . It may be worthwhile getting advice from a service management consultant or a commercial lawyer. You must be involved in drawing up the SLA together with the supplier.

Typical SLAs include:

• the services provided

• the standards of service

• the delivery timetable

• responsibilities of supplier and customer

• provisions for legal and regulatory compliance

• mechanisms for monitoring and reporting of services

• payment terms

• how disputes will be resolved

• confidentiality and non-disclosure provisions

• termination conditions.

If providers or customers don’t meet agreed levels of service, SLAs can provide for compensation, for example, often in rebates on service charges. Identify the critical components of the deal, apply the strictest penalties to these, and build periodic performance reviews into the SLA.

You should aim to build flexibility into the SLA, so that it can be adapted as your business needs change or new technologies evolve. 

The relationship might end prematurely or may simply have run its course. Ensure your service level agreement includes a clear exit strategy that:

• details how the outsourced functions should be brought back in-house

• clarifies who owns which assets

• specifies when compensation is due, and how much.

9. Managing relationships and performance

Effective relationship management

When outsourcing, remember that although the supplier manages the process, you still need to manage the relationship and communicate and meet regularly. You should appoint a senior member of staff to manage the partnership.

Keep your staff informed about the new agreement - especially if their roles are affected - and follow relevant employment laws. This is particularly important if staff are being transferred to the outsourcing provider under the arrangement.

Long-term relationships often deliver the best results. Switching suppliers can be disruptive, so plan for continuity and build a strong relationship.

Regular reviews

It is important to regularly measure and review the impact of the outsourcing arrangement on your business and the return on investment, for example with better customer service, fewer errors or faster delivery. Ensure you involve key staff when gathering feedback and data.

You may need to renegotiate the contract before the end of the term. A flexible contract benefits both parties, allowing the supplier to innovate and you to react to changing circumstances.