What are the Ways of Outsourcing Cost Savings?

As a business, what are the things you prioritize most? Profitability, reduced expenses on operational costs? What do you think is the best way to achieve this? Outsourcing cost savings is what you need to be looking for. Even though there is an economic crisis going on, outsourcing their customer support operations is indispensable to some organizations.

In fact, research revealed that around 54% of organizations still outsource some of their most important organizational operations. Statistics have revealed that 92% of G2000 companies use IT outsourcing services of some form to achieve their cost savings goal.

Outsourcing is one of the most effective strategies to see the goal of cost reductions of your organization, especially if you are a business that doesn’t have the expertise to carry out certain operations that is critical for your organization’s success.

For example, smaller companies may not have the expertise or resources or infrastructure they need to carry out a crucial operation of their business. Outsourcing it to an expert third party services provider is a valuable solution for them as they not only get desired results but also achieve their goal of cost saving.

Definition of Outsourcing and its Evolution

Definition of Outsourcing

Outsourcing is a practice where businesses hire an expert third party vendor who can perform certain operations or tasks for your organization on your behalf. Outsourcing certain operations is a great option as it allows you the time to focus on other operations that is core to your business and productivity of your organization.

Outsourcing offers different benefits depending on the size of the organization. For small businesses, it can help them reduce costs as well as remain competitive. Large companies can gain the advantage of reducing costs and obtaining access to focussed expertise.

Of course, you must be careful before choosing your third-party outsourcing services partner. If you choose right, you can drastically save on your outsourcing costs, but if you choose the wrong partner you may end up sacrificing quality of work and you don’t want that.

Evolution of Outsourcing

The concept of outsourcing first emerged in the 1950’s, but it wasn’t until 1980, did people realise about the benefits it came with. In a brief period of time, since the 1980’s, outsourcing evolved dramatically. To help understand its step-by-step evolution over the years, we have divided it into 3 stages.

1. 1980-1990

During this period, more prominence was placed on traditional outsourcing where businesses handed over the responsibility of carrying out certain operations to a third-party provider, in an effort to reduce costs. The aim was to source products or service from third party suppliers if it turned out to be cost-effective and in turn maximising profits.

2. 1990-2000

The concept of strategic outsourcing emerged in this period. A strategic outsourcing was one where businesses began to outsource core activities or operations that had a significant impact on the business performance and its ability to compete with their competitors. The aim of strategic outsourcing was no more just cost optimisation but to get access to external expertise that had the ability to complement the present and the future of the business.

3. 2000- present

The present is all about the leveraging modern technology to transform your business operations, which is why a transformational outsourcing approach was adopted starting from the early 2000’s. This method provided companies with the flexibility to gain access to innovation and advanced operational benefits from a third-party provider with the expertise, knowledge, and resources capable of transforming your business process, people, operations, and systems.

What are the types of outsourcing?

Depending on the needs of businesses there are several types of outsourcing. While some businesses may only look for benefits associated with cost reduction, others may seek access, expertise, innovation, and the ability to carry out certain parts of their business operations in a far effective manner that can help accelerate business performance.

Here’s a detailed guide about the types of outsourcing services that can help you decide which approach is the right one for your business.

1. Process specific outsourcing (BPO)

Also known as business process outsourcing, the focus here is to delegate a specific task or several tasks like customer services, outsource sales or claims processing etc., to an expert third party service provider with the expertise to carry out the processes effectively and efficiently, freeing up resources in the client organization.

“According to Deloitte’s 2022 Outsourcing Survey, 52% of organizations outsource business functions, like human resources (57% outsource) and sales (45% outsource).”

2. Professional Outsourcing

As the name suggests, this is a type of outsourcing businesses opt for if they want to delegate a particular project or certain operations whose execution or implementation requires certain specific skills or knowledge. Leveraging the expertise and experience of a third-party outsourcing services provider is the right option in such cases if the organization does not have the right in-house staff with the required knowledge to carry out the task successfully and with confidence.

3. Logistics outsourcing

In logistics outsourcing a business can outsource several tasks or requirements to a third-party provider including some or most of its operations, need for warehouse facilities, transportation, and distribution of goods etc. Businesses outsource their logistics operations when they don’t have the resources, manpower to handle the magnanimity of it.

For example, you need to take care of inventory management, and that obviously requires skilled manpower, space, and other resources to be carried out right. In the absence of these resources or manpower its best to outsource it to a third-party logistics services provider who has the capability to take care of it.

4. IT Outsourcing

Although it is easy to think that this is an outsourcing technique exclusive to the IT industry, it is quite the opposite. It’s just the outsourcing of any IT outsourcing issues and services that a business may not already have or for which it lacks the staff.

For example, tasks like developing, coding, and server maintenance come under this category or outsourcing.

5. Manufacturing Outsourcing

This is one of the most common types of outsourcing businesses adapt for obvious reasons. Establishing a manufacturing unit or having the resources to manufacture products in-house isn’t possible for most businesses. And even in situations where it is achievable, businesses don’t prefer taking the responsibility of it as it involves various risks where one wrong move can cost them thousands of dollars.

For example, you have a beverage that needs to be manufactured. The end-to-end manufacturing process of a beverage involves tasks like – Can/bottle making, stickering, filling of the content, sealing, stacking etc. Carrying out these require high end equipment, infrastructure and labour and is a tedious, risky process to execute, especially if you don’t have the expertise.

By outsourcing their manufacturing needs not only do they avoid the risks but can get the desired results without the overhead costs involved.

6. Multi-sourcing

Multi sourcing is a process where the client organization outsources multiple operational requirements to different outsourcing services providers. For example, a gaming company requires audio programming, game development, game design, video effects etc. In order to not hamper the quality of the operations, they delegate every operation to a different service provider. This not only helps in excellent quality results but is time and cost-efficient as well.

Why businesses opt for outsourcing?

Outsourcing is useful for businesses to accelerate through the many stages of business. It helps organizations maintain a steady growth and productivity. Some of the main reasons why businesses, small scale or large scale should opt for outsourcing are-

1. Expand and grow rapidly

A growing company constantly has the need to increase their manpower to accommodate their operations and keep up the productivity. But hiring and retaining employees can incur a lot of unnecessary overhead costs for companies that are still trying to make their mark in the industry. By outsourcing some of their operations they save on infrastructure and costs that they would have to otherwise bear by hiring extra employees. Additionally, this allows them to expand their business faster as they don’t have the extra responsibility that is hovering over them.

2. Flexibility

Your business may not always need excessive manpower. Once your seasonal demands end, the extra hands may not be required, but once you’ve made the hires you certainly can’t let them go as and when you like as you have made a financial commitment to them. But when you outsource your seasonal demands, you avoid the hiring of employees altogether.

3. Access to top talent

The best candidates go to the ones that pay them well. Top companies usually benefit from this as they get access to all the top tier candidates as they have the resources to pay what the candidates expect. And suppose the smaller companies do have immense talent, there is always a fear of them being poached by the big guns. This costs the smaller companies as they lose out on the best picks of candidates. But an outsourcing services company can give you access to the best talent as that’s where they excel in, having a list of potential top talent whether passive or active candidates.

4. Increased brand royalty

As an organization, you may not always be able to stay on top of customer service. Especially, if you are not a service industry, it would probably be the last thing on your mind. But whether you are a service industry or not, having the right customer service is integral to ensure success of your business. While you may not have the right in-house staff to take care of this aspect of your business, you can always outsource it to a third-party provider who can excel at this. Prompt customer service can translate to increased brand loyalty as customer get the confidence to trust you and keep coming back to your brand.

5. Compliance adherence

This one of the most important and critical aspects of ensuring a company’s success and sustainability. Even large companies must comply with rules and regulations issued by the state and federal governments in order to be in business. Non-compliance is the biggest mistake a company can do. Your in-house staff may not have the knowledge and expertise to carry out the compliance procedures, which is why it helps to outsource your compliance challenges to a third-party compliances’ services provider, who understands the importance of it and carries out the necessary steps required for your company to stay compliant with the changing laws and regulations.

Key areas of Outsourcing Cost Savings

The main objective of businesses in general is to optimise their operations, increase cost saving and maximise productivity. Outsourcing some of the operations can help a great deal in achieving this feat. Some of the key areas where outsourcing can help your company in saving costs are-

1. Customer service

Customer service is an extremely important part of every business. But often this is where most companies fall short. Your response to customers whether it’s through, email, chat support or calls plays a significant role in maintaining a company’s success. Outsourcing customer service can help set benchmarks for quality assurance, staff training, implementation, and integration of technology, optimizing your costs.

2. Logistics

Another key area where you can save costs unimaginable if you outsource, is in the logistics industry. Optimising distribution networks not only fulfils the function of carrying out timely orders but also increase capacity without having to add infrastructure.

3. Managing inventory and demands

Inventory management can get complicated as your business expands. Effectively managing your vendors and streamlining the processes can help ensure substantial savings.

4. Multichannel systems

This is one of the most crucial areas and have a significant impact on operational efficiency and productivity. It allows you a great deal of time that allows you to effectively monitor and manage your KPI’s and act efficiently.

Overcoming challenges in Outsourcing

While outsourcing maybe a great option, there are several challenges associated with it. Some of the major challenges are-

1. Finding a genuine and trustworthy vendor

First order of priority must be to find a trustworthy vendor or outsourcing firm. To do this you may follow certain steps-

• Check the outsourcing firm’s track record like the number of projects or clients they have handled
• Reputation of the firm
• How technologically inclined is the firm
• How reliable are their practices
• Client testimonials and reviews

Find the answer to these questions before you choose the one.

2. Commitment to security and privacy

This is extremely important. Your data is everything. And you need to make sure you are appointing the right people to handle it.

• Create a contract with an NDA (Non-Disclosure Agreements) and service level agreement
• Check the company’s security protocol and data protection system

3. Cultural barriers

Language and cultural barriers get in the way of work if both parties aren’t on the same level of agreement about the way of work whether its innovation, attention to detail etc. It’s essential to be on the same page before you get into a mutual agreement with this third-party organization.

• Have open lines of communication
• Communicate clearly with the staff about your requirements
• Pick a language that you both can understand and converse to a comfortable level

4. Picking the right outsourcing model

You must have a certain strategy for outsourcing in mind before you set out as it can have a significant impact on your project results.

• Specify the nature, objectives, requirements, budget, timeframe etc
• Decide on an arrangement, for example if you are looking to having development teams in-house or a fixed priced contract etc.

5. Hidden charges

This is one of the most common problems most companies face while outsourcing- hidden charges and costs revealed by the outsourcing firm for the services they offer, much later in the process, after agreeing upon a fixed amount. To avoid this-

• Speak with the vendor and make a solid proof agreement
• Describe your requirements beforehand so that the vendor can estimate the actual charges and let you know about it

6. Misaligned goals and expectations

Sometimes, you and your vendor may not be on the same page regarding the goals and expectations from the project. You need to make sure that doesn’t happen. To avoid this-

• Communicate openly with your vendor about the desired project outcomes
• The time frame in which certain phases of the project must be completed
• The quality of the project outcome.

7. Inexperience

While it may be a good outsourcing firm, but if they are fairly new to the industry, have less experience, there are factors you need to consider before outsourcing your requirements.

• Identify the chances for mishaps and how to avoid them
• If the team has handled similar frame of work previously
• If the vendor has enough resources to carry out the tasks effectively
• How responsible is the firm about owning to mistakes made regarding the project if any.

Conclusion

Although outsourcing offers many benefits to organizations, you need to be careful when you choose your outsourcing partner.

Alp Consulting has been one of the leading HR (Human Resource) companies in India for over 2 decades and has a reputation for their commitment to clients. If you are looking for a reliable outsourcing services firm that help in your cost Savings, take us up as your outsourcing partner and we’ll help you achieve it.

Our knowledge, experience, and proven track record of our commitment to our clients is unmatched. Get in touch with us today and we will offer you the right outsourcing model for your business needs.