Why Do Companies Choose to Outsource Work?
“Cultivating important person-to-person relationships with the vendor of outsourced services can improve the efficiency and perhaps the quality of services delivered…” –Harvard Business School.
Businesses have been hiring permanent employees for decades to fill their workforces. Remote contract labor became the norm in recent years, largely due to the COVID-19 scandal and the unsettling events that followed. In 2017, a study by Upwork and Freelancers Union predicted that by 2027, the majority of U.S. workers would be freelancers.
An estimated $90 billion is spent annually on outsourcing, and about 54% of businesses utilize outside support groups to interact with their clients. But why do companies choose to outsource work? Outsourcing is done for many reasons. Most of them are related to growth and revenue.
The business landscape is changing for all because of the growing trend among professionals to abandon their 9 am-5 pm jobs. Small and large businesses of all kinds choose to work with freelancers over recruiting permanent workers. Contract labor is more popular when there are more freelancers available. There are many services and professionals available, from experts to newbies, that can meet every business requirement.
The big question is: “Why?” Why do companies choose to outsource work for each project? In this blog, we’ll look at the benefits businesses experience when they decide to grow and how to successfully work. We will also discuss some important aspects to consider before hiring contract workers.
What is Outsourcing?
Outsourcing is the hiring of third-party companies and individuals to perform certain services or tasks. Offshoring is a form of recruitment that can take place internationally. There are many benefits of outsourcing software development that’s why so many companies opt for this method.
Businesses that outsource their work have an overwhelmingly positive view of this practice. 78% of companies around the world are satisfied with the relationships they have built with their outsourcing partners. Outsourcing work is no longer just a cost-saving measure or a way to relieve pressure.
With the growing gig economy, AI and machine learning on the rise, as well as the 59 million US freelancers, it’s hardly merely reducing costs. Outsourcing is a modern way to deal with changing business dynamics.
Why Do Companies Choose to Outsource Work?
Now that you know the meaning of outsourcing, now the main question arises “why outsource software development”. Beyond its capacity to save costs, outsourcing offers several advantages. You may need to hire someone whose expertise you do not have. You may need additional staff to help with an upcoming event. Let’s look at the benefits of outsourcing.
1. Cost Control or Reduction
Outsourcing is a common cost-cutting strategy for many businesses. They hire providers from other countries to do software development or manufacture, for example. Others use outsourcing to reduce costs, as their needs change seasonally. For certain firms, outsourcing may be a cost-saving tactic, but not in the typical sense.
Imagine you are the CEO of a small business that has built a fantastic SaaS solution. You’ll need a team of professionals to help you grow, including an executive team, finance experts, marketing and sales specialists, and a team dedicated to customer satisfaction. Contractor rates are high but can be a great way to save money, especially when you cannot or do not need to hire full-time staff.
A small business with a revenue of roughly $10 million can spend between $200,000 and $250,000 on the base salary of a CFO. If you include bonuses, benefits, and taxes, as well as overhead and incentives like equity, the annual salary can reach $300,000 to $400,000. If you compare this with a fractional-CFO relationship, which costs an average of $7.500 per month for an ongoing relationship, you’ll save about 75 percent. Calculate your savings with our full-time CFO calculator.
2. Increase Revenue
Outsourcing work can also be done to generate new revenue. If you want to test out strategies but are unsure if they will work, it may be difficult to hire a full-time worker. The talent pool of freelancers is rich and includes marketing and sales professionals.
Specialists are more valuable to me than generalists. You can hire contractors who have spent many years mastering marketing channels such as social media, paid search, SEO, and email marketing. Writers that have the expertise and abilities to produce white papers, lead magnets, and blog entries. Salespeople are more likely than others to have strong connections in a specific industry. You don’t have to train an expert. And you can experiment freely.
3. Improved Internal Focus
You will be able to focus more on your daily tasks and achieve results when you have the best people in place. This is not only true for executives, but also for other members of your team that were at risk for burnout. Consider your marketing manager.
He or she may have to juggle all marketing channels, while also generating new content and answering press inquiries. Under such pressure, no one can perform well. Hiring a part-time employee who is an expert in the areas they are lacking will help reduce stress and allow your employees to focus their energy (and cost savings) on strategies that they feel more confident about.
4. Get Expertise & New Ideas
When you hire someone to work part-time or on a full-time basis, you expose your team members to new ideas and gain their expertise. This can be very helpful for an internal team who has become too emotionally invested to remain objective. Contractors will continue to learn new skills as they continue to work for other organizations.
Contractors can develop long-term relationships and “own” certain functions. These individuals are able to see the big picture (financial and strategic, operational, etc.) and can implement changes for you. Sometimes companies hire contractors to work on a one-off project. You will reap the benefits in both cases, as the contractor’s experience grows.
5. Increased Productivity & Flexibility
You can hire people when you want to, and scale up or down as quickly as you like. You can increase your capacity or save time by adding more resources to your team during periods of rapid growth or for large projects, such as an event or a product launch. Outsourcing can help you manage your cash flow, but it’s not a long-term investment. You have the flexibility to use your money in other parts of your business.
Remember that good contractors are not always easy to come by. You may lose them in the future if you let them go. Be honest with your providers so that they have realistic expectations. If you find someone who you cannot afford to lose then you should consider setting up a monthly retainer.
6. Enhance Customer Experience
Outsourced provider improving the website of a business to enhance customer experience. Contractors can be hired to improve customer service in all areas of your business. If you anticipate a large number of inquiries from customers, you may hire additional staff to ensure a quick response.
You could hire content marketers and website developers to improve your site. They can improve your website’s look, fix any technical issues, clarify your message, and optimize it for conversions. Outsourcing is a great way to help small businesses compete on an equal footing. Outsourcing work to an individual contractor or service can allow you to achieve the economies of size that larger companies can enjoy.
7. Risk Management
Outsourcing work is often done to reduce risk. Outsourcing partners can be a great way to catch mistakes, detect fraud, and improve your business processes.
These controls can help reduce risk, but they cannot eliminate it. Outsourcing gives you access to larger talent pools (often global), and it reduces the administrative and legal burdens of employment. This depends on your capacity to navigate linguistic, cultural, and time zone variations. You will have more options to find suitable help if you are willing to work remotely.
Outsourcing: What Are the Risks?
Now that you are aware why do companies choose to outsource work? Businesses must know the advantages and disadvantages of outsourcing software development. Outsourcing is not without its downsides and risks. Although it is not meant to be discouraging, you should be aware of possible obstacles.
- Outsourcing can cause your employees to feel uneasy in their current position and they may leave for something more stable.
- Outsourcing is a good way to find competent workers. However, the service that you receive may not be up to par, which can hurt your business or your company’s reputation.
- Outsourcing puts your data in danger almost every time. You may find yourself with a contractor that is disgruntled. This could compromise some of the data in your company.
- You may have difficulty with language and time zone barriers if you don’t hire the right person.
How Can Companies Successfully Outsource Work?
Why do companies outsource software development? Well, you are now aware of this question but you must be confused about how to outsource work successfully. So in this section, we will discuss that.
Review Client Feedback on Freelancer Profiles
Companies often use this tactic to find the perfect candidate. This is also where the success lies. Reviews are also added to a freelancer’s online profile so that they can showcase their work and attract clients. Assessing the reviews will give you valuable information as an employer. You can learn about the efficiency, integrity, and performance of a freelancer on projects that they have worked on.
Look at their Portfolios
Professionals showcase their portfolios in their profiles on websites such as Upwork. It’s a record of all their work. Employers can evaluate projects, collaborations, and skills. Before hiring a freelancer, businesses may assess their work. They will only be considered if their experience and talents are satisfactory to the employer.
Pre-Screening of Candidates
You can find talented professionals on other platforms such as Instagram or LinkedIn. The evaluation of CVs becomes important in this situation. It is important to contact these freelancers and ask for samples of their work. You should evaluate a professional in the same manner as you would hire them on a full-time basis. Interview tests and tasks can be equally useful in determining if the candidate’s abilities match project requirements.
Don’t Make Decisions Based on Price
Costs and expenses are important to companies because they impact their financial status. When an independent contractor comes knocking on their door and offers low prices, they are more likely to want to work with him. Freelancers who are well-paid or poorly paid may not be the best or worst choice.
Businesses should actually avoid either. The rates should not be the basis for employees’ decisions. After evaluating if the professional can deliver successful projects with high quality and corresponding rates, they should make a decision.
Write Everything Down
Signing a contract is the first step for both employees and freelancers. This document will maintain business relationships and also concretize the project’s scope, results, and terms and conditions. Changes that are unexpected will be discussed. The agreement can be used as a basis for varying from it throughout the duration of a project. It may be necessary to add fees, do extra work, or assign new tasks, but a written record of the newer changes will benefit everyone.
Example of Large Companies Outsourcing
These organizations have realized a basic truth: By focusing on their core business and outsourcing the non-core activities, they are not only more efficient, but they also save money and grow faster. So let’s look have a look:
1. Google
Google started off as a search engine, but it has now expanded into a huge company that not only provides advertising services but also hardware and software. Its employees are located all over the world. Google has almost become synonymous with the internet and is used as a verb when people talk about searching online.
Google is an exceptional company, even though its creed “Don’t Be Evil” is not part of its code of conduct. Google is a tech company, which is its strength and core business. One of the biggest corporations that outsource is Google, which has been doing so for a long time.
2. Alibaba
When we think of online eCommerce companies, there are several names that come to mind. Alibaba has quickly gained prominence, along with Amazon and eBay. Alibaba is yet another company that outsources, but it is different from Amazon and eBay because Alibaba is based on the mainland of China.
Outsourcing is usually done by companies based on price. Often, this involves lower-cost countries such as India, China, and the Far East. The paradigm changes when the company is located in the region. Alibaba realized that, while it could lower its manufacturing costs and use local resources, the necessary skills to grow in its region were not readily available.
3. WhatsApp
WhatsApp is one of the most popular communication tools. Millions of people use it around the world. It has also recently begun to offer online payment services for its customers. WhatsApp was not always the company it is today.
An outstanding example of a business that has been outsourced from the start is WhatsApp. It had only 30 employees full-time and five part-time in 2012. They knew that they had to cut costs if they were to grow. WhatsApp discovered the answer in Russia, where they could get development staff for a fraction of what they would have had to pay in the US.
4. Basecamp
Basecamp is a well-known tool for project managers and anyone else who wants to stay on track with their tasks. Basecamp began small and, while it is a leader in project management, the company has a limited number of internal resources.
Basecamp understood that doing everything themselves wasn’t the best strategy for their organization. While their tool was used by others for managing projects and work they had internal problems with workflow and customer support. Basecamp outsourced some of the most important functions to allow their internal teams to concentrate.
5. Skype
Skype was the pioneer and leader of online video. Skype’s software clients are available for both smartphones and computers, so almost everyone knows or has used it. Skype, just like WhatsApp, realized product development wasn’t the key to success. Skype had to look for the right talent at the best price to continue developing the software.
Skype, another major outsourcer, chose Estonia (East Europe), as a talent source and hired several developers to work with the product. Skype brought in these developers as partners after they showed success and Skype grew to be a major company. Microsoft purchased Skype for $8.5 billion dollars in 2011.
6. Slack
Slack revolutionized how companies work, and collaboration has changed forever. In certain instances, communication may have been too enhanced via Slack. Employees sitting next to each other often slack instead of talking face-to-face.
Slack, which was launched in 2013, has become the standard for internal communication within high-tech organizations. Slack’s easy-to-use interface and integration features make it a winner. But this success did not happen on its own.
Slack was built by a team of four developers who took the product to market. This group was aware that in order for their product to be successful, it had to look good and work flawlessly.
Conclusion
Third-party IT providers are becoming more popular. Outsourcing offers many benefits to companies, including cost savings and increased productivity. There are still a few things to consider before you consider software development outsourcing. The instructions above will help your business choose the right supplier and conclude a contract that is acceptable.
Outsourcing your IT function allows you to take advantage of the expertise and resources available while allowing staff at the office more time to concentrate on their core business. Now you know why companies choose to outsource work. This will give you an edge over your competition in a market that is becoming increasingly competitive.
