Since the onset of COVID-19, businesses of all kinds have increased efforts to search for ways to cut costs, increase efficiency, and eliminate operational obstacles. One notable way companies are achieving this is clear: outsourcing.
In short, outsourcing is transferring the primary responsibility of certain business functions/processes to an external party. Business functions that might be outsourced include accounts receivable, accounts payable, bookkeeping, logistics, information technology (IT), cybersecurity, marketing, and human resources (HR), among numerous others. In 2019 alone, the global market size of outsourced services was $92.5 billion. Clearly, businesses are finding value in outsourcing certain operational responsibilities. Though outsourcing brings many benefits to an organization, there are several factors to take into account when considering whether to keep a function in-house.
Benefits of Outsourcing
When a business chooses to outsource, the primary drivers are likely cost savings, access to skill, or meeting a required timeline.
The cost savings are typically a result of the outsourcee having a niche or specialized skill in the outsourced area. For example, a small business may save thousands each year by outsourcing its bookkeeping responsibility to a third party. In addition to cost savings related to labor, additional savings in other areas might be a byproduct of outsourcing. For instance, by outsourcing IT functions, a company could potentially save thousands or even millions of dollars, because it doesn’t need to house expensive hardware, such as servers or data centers. As an extension of this, a company can realize even greater cost savings when it no longer needs to maintain equipment or heavily invest in disaster recovery plans for such hardware.
On top of adding back dollars to the bottom line, outsourcing can potentially give a company access to skilled, best-in-class resources. It allows a business to gain access to specific niched skills, applications, or other resources that it otherwise could not afford. For example, a small retail shop that outsources its cybersecurity function to a high-quality IT/cybersecurity company will likely be much more successful in protecting its customers against credit card theft (and a multitude of other data threats) due to the sheer knowledge and capabilities the IT-specialized company affords.
Other benefits of outsourcing, like increased efficiency and freed-up time for the business to focus on its main operations and objectives, go hand-in-hand with having access to the specialized skill. With access to such specialized skills, deadlines may be more likely to be met.
What to Consider Before Outsourcing
While outsourcing can help cut costs, outsourcing too many facets of a business may ultimately negatively impact the overall profitability of the company. It directly reduces the number of employees at a business, thereby limiting or eliminating the skill-set diversity and capabilities. In other words, the company that outsources excessively may have less of a competitive advantage than it did before outsourcing. Additionally, to promote efficiency; ease; and, perhaps most importantly, trust, there should be a thoughtful analysis and selection process to determine which business will perform the outsourced work.
Perhaps the most important element in any outsourcing arrangement is the contract. The agreement should include clear terms that outline service levels and expected deliverables. The contract should be a guide to assist both parties in maintaining a productive relationship. A poorly negotiated contract could squelch many of the desired outsourcing benefits.
How PYA Can Help
As noted, outsourcing is a great way to achieve cost savings, increase efficiency and productivity, and allow a business to focus on its foremost operations. However, thoughtful consideration should be given to determining which part(s) of a business to outsource, as well as which company will perform the outsourced work. A successful outsourcing function saves a business time and money, but does not cause the organization to lose value in its service or product offering. It enhances and balances the business, rather than reducing it.
PYA offers Client Accounting Advisory Services (CAAS), Internal Audit, Tax, IT Advisory and Consulting, and many other services that may increase efficiency and serve your business well. If you are interested in learning how PYA can help you or your business through the outsourcing of such services, one of our executive contacts would be happy to assist. You may email them below, or call (800) 270-9629.