Outsourcing: Strategies to Cut Costs Without Sacrificing Quality

Outsourcing: Strategies to Cut Costs Without Sacrificing Quality

If you’ve taken a taxi lately or had some food delivered to your door, it’ll be no surprise to learn that the gig economy is taking over the world of work. Consultants have been a fact of life in business for decades, but more companies than ever before are now turning over critical day-to-day tasks to freelancers and outsourced talent. While debates continue to rage as to whether this is a good thing for workers and the economy as a whole, there are some clear benefits for business owners.

Especially for tasks that are static. What do we mean by that? You're probably not going to find a lot of companies looking to outsource a sales team. A successful sales team can't operate in a vacuum.

However, having a dedicated resource tasked with helping ensure that your email server remains available, or that your company computers are free from viruses is something that needs to be functioning all the time, without interruption (hopefully). This is an excellent area to consider when factoring where outsourced solutions can help the bottom line without sacrificing productivity or quality.

Today on the blog, we’re looking at some of the ways outsourcing can save your company money and some strategies you can use with your contracted service providers to get the most bang for your buck.

What is outsourcing?

 Per the ever-reliable Investopedia,

Outsourcing is the business practice of hiring a party outside a company to perform services and create goods that traditionally were performed in-house by the company's own employees and staff.

Examples of this include outsourcing call center work to foreign countries with lower wages and a highly trainable labor force, or keeping a specialist on retainer to handle a complex business need (such as IT) which doesn’t require the day-to-day attention of a full-time employee.

How common is outsourcing?

Thanks to Deloitte’s 2016 Global Outsourcing Survey we can get some insight into the latest trends. Respondents representing some of the world’s largest companies reported on their outsourcing habits:

  • 72% of respondents currently outsource some or all of their IT needs
  • Other commonly outsourced functions included legal (63%), real estate & facilities management (60%), tax (53%) and HR (47%)
  • 59% reported using outsourcing as a cost-cutting tool, while 57% noted that it helped them to focus more on their core business

How does outsourcing reduce costs?

Labor Costs: For many aspects of business, there just can't be a substitute for full-time salaried employees. Working the same job day in and day out means they understand their roles in a way that it would take months or years to effectively replace.

However, full-time employees come at a premium, commanding higher wages and benefits packages. Many companies need to carefully assess which positions require a firm commitment to HR, and which can be productively outsourced.

Outsourcing downloads labor costs to a third party. In many cases, a flat fee is paid to the outsourcing company for services rendered, out of which the third party pays its own employees or subcontractors. Of course, these situations will vary, but for business owners, the terms of a service contract are very important.

Some freelancers and freelance groups that specialize in taking on outsourced business have multiple clients at any one time—by combining their earnings from each, they can earn an equivalent (and sometimes, superior) wage without being “overpaid” by any one client.

If you’re a small company, you may only bring in your bookkeeper for one or two days a week; many businesses use Continuous to handle one or two aspects of their overall IT needs, such as hosted private servers or having us consult on their security.

Clients value the agility of being able to augment their core staff with specialists in the latest trends in complex areas, like business technology, without the expense of having to re-train existing team members.

Overhead: Similarly, outsourcing can also save significantly on overhead. Consider for example the costs associated with purchasing, operating, maintaining and replacing the hardware required to run a private server farm versus simply paying a monthly rate to a cloud storage provider.

The calculus varies here of course: infrastructure investment has high up-front costs, but owning your own hardware may save you money in the longer term. Assuming you have the talent in-house to operate and maintain this technology (Think of buying a hammer that you will use every day, versus paying a fee each day to rent it).

Outsourcing has become so embedded in how business operates that it’s easy to forget how greatly it changed supply chain management.

Prior to the early 1990s, most manufacturers made all of their parts and components in-house. Today, virtually all companies integrate parts made by other companies into their products.

Outsourcing Strategies

If you’re going to make outsourcing a focus of your business strategy going forward, one area you don’t want to scrimp on is legal; and specifically how you draft your contracts with service providers. The language of these contracts can offer you greater flexibility and opportunities to maximize your ROI—or lock you into a disadvantageous situation for the long haul.

We've discussed this at great length in the past on the Continuous Networks website. In fact, we've created a FREE helpful guide called "The IT Buyers Guide". You can find it here on the website and get the important information you need about service contracts.

Let’s say there’s a fluctuation in the market value of a service or product you’ve contracted a third party to provide. If your contract includes an early termination clause, you can always simply end the existing contract (possibly paying whatever fee is specified in the contract) and renegotiate a more attractive rate.

Simply by communicating your intention to break your contract, you may be able to nudge your provider into accepting revised terms.

Benchmarking is another useful tool. A benchmark clause in a contract essentially compares the price specified in your contract with the market price and sets out each party’s responsibilities based on that comparison.

In general, the costs of technology tend to go down over time thanks to advances in efficiency (though your needs may also increase over the same period, creating a tricky equilibrium). It’s worth checking on occasion to see if the price you’re paying is still appropriate given the conditions of the market.

Outsourcing-Law.com provides a useful overview of the methodologies and applicability of benchmark clauses to different kinds of services; as they note, the cost of administrating the benchmarking process may in some cases outstrip the savings it provides.

The suitability and terms of a benchmarking become more complex and nuanced when the BPO resources require the application of unique technologies or methods of doing business that the service provider has developed as a matter of proprietary intellectual property rights.

You also always have the option of revisiting the service package you initially selected as well. After a few months of evaluation, is it actually what you need?

Could you get along with a lesser package for your requirements?

Making the leap

Once you reflect on how much outsourcing you already do, through basics like using an outside printing company or property management firm, it’s easier to conceptualize how further outsourcing might help your business become more dynamic while simultaneously trimming costs.

Can you put your core employees in the best position to succeed by augmenting their talents with outsourced resources? You might be surprised by some dramatic results.