Outsourcing is common, but is it right for every business? While it can increase organizations' productivity and budget, it may also lead to unintended legal or financial consequences. They should consider their professional needs and weigh the pros and cons of outsourcing before deciding. Why do companies outsource?
What Is Outsourcing?
Outsourcing does what its name suggests — businesses source services or goods from external parties. It means they hire or contract them to perform tasks, provide assistance or produce goods. For example, a digital marketing organization could find a third party to manage its advertisement campaigns.
It’s essential to understand what outsourcing is because there are legal considerations surrounding it. No specific laws in the United States regulate outsourcing transactions, but there are still limitations.
Various privacy laws protect consumer data, meaning a company must comply even when outsourcing to other countries. For example, both parties must keep health and financial information secure during transfers, processing and storage.
Why Do Companies Outsource?
The multitude of benefits explains why people outsource. As of 2019, around 33% of small businesses outsourced their operations. It’s relatively popular because it lets them focus on pressing matters while outside sources handle routine tasks.
Many also outsource because of their workloads. Contracting out is more manageable whether they’re just starting or have new, large assignments. A third party can handle the excess work to free up time. Typically, it’s also more cost-effective and efficient. It takes a lot to run a business, so it’s no surprise that some need to delegate tasks.
Pros of Outsourcing
There are many pros and cons of outsourcing, but it mostly has positive impacts. It frees up an organization’s time and is incredibly cost-effective. In addition, it benefits current employees. They can focus on essential duties, which increases their productivity and reduces stress.
Outsourcing benefits a business in multiple ways:
- Saves money: The labor cost for outsourced talent is usually incredibly low. Although this depends entirely on location and the job type, most companies save money.
- Lightens workload: Outsourcing relieves current staff of high workloads and lets them focus on more critical business aspects.
- Increases flexibility: A company can use the time and money they saved outsourcing to take on more duties or diversify their services. Depending on where the third party resides, their hours may also become more flexible.
- Broadens choice: More candidates become available when businesses outsource, which opens up the possibility of more talented and skilled employees.
One of the primary reasons many organizations outsource is to save money. It’s critical for them to decrease costs, especially when they’re focusing on growth. They can contract out manufacturing, accounting or administrative tasks.
Cons of Outsourcing
There are plenty of upsides to outsourcing, but it does present some challenges. Businesses must be careful not to be affected by the third party’s distance or the compliance issues that come with it.
While it may be beneficial, outsourcing still has issues:
- Weakens communication: Finding a time to speak with a third party can be challenging. They’re often located far away or in different time zones than where a company is based. Ineffective communication can lead to oversights.
- Slows turnaround: Increased wait times and communication barriers can slow the turnaround of goods and services.
- Heightens risks: Third parties regularly deal with sensitive or confidential information. They may behave in ways that threaten the data’s integrity. In addition, someone may leak or breach it if it’s not secure.
- Decreases control: A company that can’t monitor their outsourced labor might have quality issues. Poor products and services can result from decreased control.
Companies should always know how to outsource labor properly because legal ramifications will affect them otherwise. For example, poor quality work may lead to consumer complaints or even investigations.
In addition, noncompliance has expensive consequences for them and whoever they outsource to. Improper classification of workers can also jeopardize their relationship with their third party.
When Should You Outsource?
Businesses should outsource after doing research. They must have a risk management program so they know what to expect. Since they’re responsible for their third party, all legal and regulatory consequences will affect them.
It’s in their best interest to assess risk properly. On top of that, it’s critical to have contracts that outline what’s expected of both parties. An organization should only outsource when they’ve adequately assessed the risk involved.
Outsource Responsibly
Outsourcing can be highly beneficial if businesses take the necessary precautions. Properly classify all workers, negotiate airtight contracts and securely monitor data. It can be the right decision after properly weighing the pros and cons of outsourcing.
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I’m the Managing Editor of ReHack.com and have over 5 years of writing experience covering cybersecurity and business tech. I’m also a contributor at Business.com, MakeUseOf, Lifewire, and more.
