Outsourcing business processes is becoming more common in companies across industries and business sizes. By some estimates, 68% of U.S. companies outsourced some portion of their business. According to Deloitte, that number is only expected to increase, as the COVID-19 pandemic and shift to remote work challenged the importance of physical co-location.
There’s no question business process outsourcing is becoming an increasingly common practice. But why are companies turning to outsourcing services? And what areas are they outsourcing?
In this post, we’ll cover the top four reasons for outsourcing business processes, and the most common functions being entrusted to third parties.
Reason #1: Cost
The number one reason companies outsource is to reduce cost. For most companies, this is an effective strategy: according to Deloitte’s 2019 Global Outsourcing Survey, 91% of firms saw a boost in their annual productivity when they used outsourcing services. This also freed up capital that the companies could then invest in other areas, such as adopting new technology.
When executed properly, outsourcing can reduce expenses associated with hiring, training, or otherwise expanding operations. For example, companies may outsource business processes that are seasonal in nature, require significant ramp-up, or for which there just isn’t enough work to hire full-time staff. In these scenarios, companies are able to transition from a fixed cost to a variable one, paying for services only when they’re needed.
Reason #2: Skills
Another major benefit of outsourcing is that it offers companies a low-risk way of acquiring new or necessary skills. This is common for companies that are expanding to new markets or operating in regions where local expertise is essential, though it can also include knowledge – and access to – certain software, market trends, and industry-specific resources.
Of course, domain expertise isn’t the only value-add in this category: outsourcing can also help you build social capital. Third parties often have extensive networks, which you can leverage to build relationships in local cities or jurisdictions. Third parties can even act as an additional voice in political lobbying, if needed.
Reason #3: Scale
As companies scale, finding top talent and ramping up internal teams can quickly lag growth. Ultimately, this can impact growth and hurt your bottom line. On the other hand, when a business function is managed in-house by a single person or small team, you expose yourself to the “single-person risk,” which can hamper operations in the event of extended leave or turnover.
Of course, with the right technology, single-person risk can largely be mitigated, if not avoided completely. But scaling personnel remains a challenge.
Outsourcing business processes can aid growth in a scaling company, as it allows you to quickly ramp operations up or down as needed. And since you’re operating on a contract or project basis, you’re able to wind down engagements as required.
Reason #4: Focus
One of the most important reasons companies outsource business processes is to allow them to focus on their core areas of expertise. It doesn’t make sense for highly trained or senior team members to work on tasks that don’t require specialized knowledge.
By freeing up internal resources on time-consuming tasks or hard-to-manage business areas, teams can focus on areas for which they’re specialized. When employees are able to perform more high-value tasks, companies become more efficient and productive.
The most Common Business Processes to Outsource
In general, companies tend to outsource areas that don’t add value when done in house and aren’t part of their “special sauce.” Some of the most common functions that companies outsource include:
- Accounting: Financial services such as bookkeeping, payroll, and accounts payable and receivable are common to outsource. Many financial contractors and firms will bundle services together too, which further brings down the cost of outsourcing this function.
- HR: Recruiting firms can help you identify qualified candidates for a new position at a significantly lower cost than doing it in house. HR firms are skilled at advertising and applicant screening, and can leverage specialized technology and vast networks to speed up the recruitment process.
- Legal Services: Many companies choose to outsource legal services, rather than keeping legal counsel in house. This opens up a broader network of legal specializations, which can then be accessed when needed.
- Administrative tasks: Tasks like data entry, transcription services, and inventory management are all examples of administrative tasks that can be easily outsourced. While this category is vast, it can include day-to-day activities that eat up resources but don’t directly contribute to your company’s bottom line.
As a rule, it’s not recommended to outsource business strategy or major decisions. However, you can engage third parties to provide evidence or context that supports your decision-making.
Up Next: Outsourcing in Property Tax Management
In the next post, I’ll dive into property tax management specifically. We’ll explore the property tax “lifecycle,” and what can be outsourced at each stage. I’ll also give a brief overview of what we don’t typically see being outsourced, and why.
This post is part of Rethink Solutions’ Rethinking Your Property Tax Management Outsourcing Strategy series, where we provide tips and advice for optimizing outsourcing engagements. This series is written by Mordechai Katzman, President of Rethink Solutions. Mordechai has more than 20 years’ experience advising firms on property tax management strategy, technology, and processes. He has spoken locally and internationally at events for the International Property Tax Institute (IPTI), Insititute for Professionals in Taxation (IPT), and the Council on State Taxation (COST), to name a few.