Outsourcing is the process by which a firm identifies a portion of its business process that could be performed more efficiently and/or more effectively by another corporation, which is hired to develop that portion of the business. This frees the first organisation to focus on the central function of its business. That is to say, the outsourcing consists in that a company contracts, to an agency or specialised external signature, to do something in which it does not specialise.
A good example is payroll. Every business has to manage it, but there are specialised firms that can do it better and at a lower cost than that of any business. The company you hire provides basic information about your staff, the hired firm is responsible for calculating payments and making checks. This is more economical since it avoids having an entire department responsible for payroll, paying the salaries of people in the department, running expenses such as social security, pension funds, etc.
Here at Elite Finance you can outsource bookkeeping services and ensure your business is cost-efficient and highly productive.
Another example is the computer service, these can be rented, along with their maintenance, repair and update, which avoids unnecessary personnel costs and equipment renewal for example.
Almost everything can be hired under outsourcing, the rule is to compare the costs of what is going to be contracted with the costs of doing it ourselves, in many cases it is better to contract, but in many others it is not. Before doing outsourcing, several aspects should be well analysed, among them:
- The background, references and experience of the firm that will be hired.
- To know, as far as possible, the concept of another company that has outsourced in the area we intend to hire.
- Establish the importance of the area or function that we want to hire, if it is considered of vital importance for our company we should not give it outsourcing.
- The basic and most important norm is not to outsource any of the functions or areas that we consider fundamental in our company. Microsoft will never outsource the programming and development of its software, that is one of its fundamental tasks, but it will do so with the cleaning service of its headquarters, for example.
Outsourcing is good but doing it lightly can result in high costs and possible business interruptions. Another factor to take into account has to do with the legal part of the contract, to make clear the conditions and penalties in case of breaches by the signing contractor. Outsourcing has a lot of subcontracting, but not only that, it’s more about establishing alliances with collaborating firms that will make our non-fundamental tasks more efficient.
The causes of outsourcing may be supported in:
- Increasing the capacity of the company to develop certain activities in which it is not specialised, allowing to delegate such development in specialized organizations.
- Reducing investment to acquire assets that can become a drag on the organization.
- Reducing the time and costs of implementing new development
- In times of economic readjustment, outsourcing is an attractive option for companies to reduce the costs of a part of the business development quickly, getting rid of assets that may be unnecessary to comply with the business strategy.
But outsourcing is not an ideal option where all are advantages, one of the main disadvantages is that it conditions the development of one company to the strategy of another.
It is said that there is a process of outsourcing when a certain activity stops being developed by the workers of a company and is transferred to another company. This other company is a “third”, hence the name of “outsourcing” the process by which activities are transferred. Given the nature of what happens in such cases we could find another name to baptise this process: outsourcing. The activity that was previously developed internally, within the company (and therefore was “internalised”), becomes “outsourced”, that is to operate outside the company.
Outsourcing, or outsourcing, is a process that can have two independent aspects, although not exclusive:
- The deactivation, partial or total, of productive sectors (such as the cutting of cloth in the garment factory). The company that outsources stops “producing” and goes on to “buy” products from other companies;
- The hiring of one or more “third” companies that locate workers for the execution of a service within the client company. Or from another angle, they go on to perform services that were previously performed by workers of the outsourcing company. The most common cases are with cleaning, surveillance and porter, transport, certain maintenance activities, dining room and other services
Advantages of Outsourcing
- Manufacturing costs decline and investment in plant and equipment is reduced.
- It allows the company to respond quickly to changes in the environment.
- A raise in the company’s strong points.
- Helps build a shared value.
- It helps define the company.
- Builds a long sustained competitive advantage through a change of rules and a greater scope of the organization
- It increases the commitment towards a specific type of technology that allows to improve the delivery time and the quality of the information for critical decisions.
- It allows the company to possess the best of technology without the need to train personnel of the organization to manage it.
- It allows to have information services in a fast way considering the competitive pressures.
- Application of talent and resources of the organisation to the key areas.
- It helps facing changes in business conditions.
- Increasing the flexibility of the organisation and decrease its fixed costs.
Disadvantages of outsourcing
- Stagnation in relation to innovation by the external supplier.
- The company loses contact with modern technologies that offer opportunities to innovate products and processes.
- The external supplier needs to learn and have knowledge of the product in question, there is the possibility that he will use them to start his own industry and become a supplier to a competitor.
Here at Elite Financials we can help you have well-organised bookkeeping and accounting information.