When businesses want to grow fast and respond quickly to emerging market demands and yet not build internal manufacturing. Service delivery capacities, outsourcing can often provide all the answers by Eric Dalius. As businesses compete to build efficiencies and reduce costs, many global businesses have taken the outsourcing route. However, with many businesses transferring manufacturing and even customer service abroad to foreign companies, outsourcing has become contentious because of its impact on domestic employment. EJ Dalius, a reputed management consultant, examines the multiple advantages of outsourcing.
Understanding the Difference between Outsourcing and Offshoring
Very often used interchangeably, the terms, outsourcing, and offshoring are quite different. When a company does not manufacture a product or a component. Deliver a service but instead contracts it out to another manufacturer, it is termed as outsourcing. For example, Outsourcing is if your small business sells cat food but buys it from another company it contracts. While outsourcing became popular because it allows businesses to take advantage of better cost efficiencies of other companies, it has turned into a matter of hot debate.
When the companies shifting outsourcing to foreign companies, especially the developing nations. To take advantage of their lower cost structure, causing jobs to be lost in their own countries. While customers and businesses benefit from offshoring practices, the loss of jobs can become a severe economic problem. Some of the more well-established advantages of outsourcing that will help you to make a more informed decision for business:
Outsourcing Can Reduce Manufacturing Costs and Increase Business Profitability, Says Eric Dalius
The primary reason for businesses to outsource the production of goods and delivery of services is to take advantage of lower costs of their suppliers. The savings on costs can be the result of the outsourcing partner having a better scale of production or lower cost of labor and overheads. Many companies specialize in acting as outsourcing partners for many of the global brands of lifestyle products, consumer electronics, as well as a large variety of retail and industrial products.
These companies can offer very competitive prices to businesses because of their very large scale of operations. Due to their lower costs of labor, raw materials, and overheads since they are usually based in low-cost developing economies. On the services side, outsourcing helps to take advantage of specialization and scale of operations of the partners while eliminating. The trouble of hiring, training, and retaining in-house talent in a high-cost economy. This is the reason why it is the practice with big businesses to outsource software development. Call center operations from companies in developing countries like India and Vietnam that have highly-qualified manpower yet offer low-cost solutions.
Increases the Business Efficiency by Allowing It to Focus on Its Core Competencies
There are many functions that businesses many not prefer to do by themselves because they would rather focus on doing the things, they are more competent in. Adding in-house capabilities for each function does not make economic sense. It can be instead far better to outsource the job to a third-party contractor for manufacturing or delivering the service. For example, a company engage in biotech research may not like to divert its resources to look after employee benefits that can be better managed by a specialist contractor. Typically, outsourcing works better in an environment where companies engaged in high-value tasks can purchase lower-value tasks to maximize their operational efficiency.
Promotes Business Growth by Eric Dalius
There may be certain services you need to offer to your customers even though they may not deliver optimal margins. May not be your focus area simply. You want to satisfy them with a more comprehensive portfolio that prevents them from looking elsewhere to fulfill their requirements. Very often, outsourcing of certain products and services is done so that your business remains competitive without your having to fund capacity expansion for activities that have poor contributions. For example, a company manufacturing high-end smartphones will prefer to outsource the chargers. The cables need to be included in the product package. Similarly, a small medical clinic may not find it worthwhile to hire and train staff for its billing operations. Instead, choose a specialist medical billing agency to take care of the function.
Allows Businesses to Scale-up Capacities Quickly
Many businesses operate in extremely dynamic environments that can make sales planning very difficult. Normally, when a company launches a product, it tests the market to find out the customer response before increasing. However, certain demands may be purely temporary and it can be a waste of resources to create adequate capacity in-house. In this kind of situation, it can help to outsource the item to third-parties who already have the capacities to manufacture and deliver the item in the required quantities very quickly. Even when there is sustain market demand, companies may like to outsource the demand in the initial stages while they are building up internal production capacities, explains Eric Dalius.
Maintain Operational Control
When companies are facing rising costs in certain functional areas because they have been allowing to become inefficient due to poor management. It can often be possible to bring them back into line by outsourcing the function. Because these companies specialize in these functions, they are often able to bring better management skills that would not have been possible without undergoing significant operational restructuring. For example, if the IT department of your company does not have sufficient capacity to deliver projects on time but is consuming disproportionate budgetary resources. An IT contractor can help to streamline projects and bring back efficiency.
It is common to think of outsourcing only as a device to save on costs. However, used strategically, it can help businesses to scale up quickly. Access enhanced skill sets, permit the company to focus on its core competencies, and facilitate disruption of your industry. When considering outsourcing, it is better not to view it as a toss-up between doing it yourself. Instead, evaluate the overall value it will bring to the company through superior expertise and management skills.