Facebook Twitter Linkedin
News | 02 Mar 2022
Profitability of outsourcing business processes
Przemysław Pala
ss

When is it profitable for the company to use outsourcing, and when not?

Increasing business efficiency is an essential task for every company. One of the tools to do this is to outsource non-priority business areas. It helps to concentrate on strategic tasks, reduce costs, and get uninterrupted and high-quality work of departments. It doesn't work in all cases though. This article will consider when it is beneficial for the company to use outsourcing and when it may not be beneficial.

 

Benefits of outsourcing business processes

Outsourcing business processes is interesting in three cases:

  1. All the processes within the company are already lined up, and outsourcing some of the functions can increase their efficiency;
  2. The company implements a new process, but it is not core to its activities and does not want or cannot spend a lot of resources on its control;
  3. The company outsources everything except the business processes, which constitutes its competitive advantage.

Accordingly, it is possible to outsource various functions, for example, accounting, recruiting, call-centers, reception, administrative support, advertising, marketing, IT development. And these can be business functions within divisions, as well as entire business processes in production, in the logistics block, the promotion and sale of products.

 

Form whom outsourcing business processes is profitable?

From our experience, outsourcing is most profitable for small and medium businesses. As a rule, large companies have whole departments that deal with various tasks, have their own contractors, and do not need outsourcing as such. That said, if a company is enormous, the department's functions are sometimes outsourced, and the company employs one specialist who will coordinate the work of outsourcers and resolve operational issues.

Still, when making an outsourcing decision, you should base it on your goals, not on the company's size. Companies' most frequent goals are to reduce costs, focus on priority tasks, and get quality work and expertise from outside experts. Let's take a closer look at these goals and the benefits of outsourcing to achieve each of them.

 

SITUATION 1. YOU WANT TO REDUCE COSTS

How does outsourcing business processes reduce costs? First, outsourcing is a reduction in payroll. Outsourced employees pay their own taxes, and the employer saves up to 40% of tax and insurance deductions to the government. There is also no need to pay for sick leave and vacations. An employee on outsourcing will not get ill and quit on the same day. This also includes savings on workplace equipment and rent. 

How do you know if outsourcing will reduce costs in your case? To understand that you will benefit from outsourcing, you need to first analyze how much time, financial and other resources you are currently spending on processes and then compare outsourcing offers.

For example, if you're thinking about outsourcing payroll, the first thing to look at is the number of employees. If you have less than 50 people working in your company, this type of outsourcing will benefit you economically. The fact is that in small businesses, all areas of accounting are usually occupied by one employee. To relieve him and give him the conduct of more complex areas (for example, optimizing taxation), you can transfer some of the accounting functions on the side.

An important point in calculating costs is attention to indirect costs. For example, a company wants to outsource the supplier management function. The provider of such a company will actually take on the role of signing contracts with numerous suppliers, administering them and paying for their own services, consolidating all expenses into a single, regular bill for the supplier. 

With this approach, the company saves:

  • The purchasing department's time resources. Given that a large company, in any function, may have hundreds of suppliers (and each with its own contract and specifics), the company can save a lot of working hours for its employees
  • Saves on function control. Provider, as a rule, consolidating and automating processes gives the client a transparent picture of this function. The client additionally does not need to check and recheck the provider's activity because it is all reflected, for example, in the IT system, which was implemented by the provider to manage this function
  • Saving on recruitment and training of specialists. By outsourcing the function, the provider undertakes to ensure its continuity (within the work processes). This means that the provider also takes care of all questions about the recruitment and hiring of specialists.

 

SITUATION 2. YOU WANT TO FOCUS ON THE CORE FUNCTIONS OF THE BUSINESS

Again, all companies don't have to reduce financial costs. For some, the most important thing is to give non-priority functions to an expert because they take up a lot of resources and attention. In this case, the main goal is to focus on the core tasks and gain expertise in managing the function and cost savings. First, you can buy ready-made solutions, infrastructure, specialists and not spend money on training. Secondly, outsourcing business processes is about transparency because it's the result, not the process, that counts. Thirdly, it is easier to change an outsourcer than a full-time employee.

For example, you need to review your personnel documents by a company that has recently joined the holding company. Outsourcing will also help if a company's departments such as accounting, lawyers, marketing cannot cope with the workload caused by a sharp increase in the number of counterparties. Outsourcing these processes to a contractor will save time, effort, and money on finding highly qualified personnel, including not dealing with on-boarding, contributions, tax calculations, etc.

 

SITUATION 3. YOU NEED EXTERNAL EXPERTISE

For example, you provide legal support for the personnel when the requirements are constantly changing, or you are forming personnel reserve in the conditions of staff turnover. In these cases, it is easier to involve professionals from outside, who can share knowledge and advise what problems you will face in your work and how they can be solved and prevented.

When is it not profitable to use outsourcing? First, when you have the resources - financial and time - to manage specific functions. Secondly, when the transfer function is quite complex, only rare specialists can cope with it. Thirdly, when your internal business processes are not built up, it will be difficult for you to describe how things work to the external provider. In this case, the outsourcer will need a lot of time to understand your processes.

In fact, there are many more situations where outsourcing business processes can help you solve your problems. To make it easier for you to navigate whether you need outsourcing or not below is a summary of the article. You can also get advice from our expert, who will tell you whether you should think about outsourcing or not.

 

What do we know by now about outsourcing business processes?

Outsourcing business processes is beneficial when:

  1. You want to focus your resources on core business tasks and outsource the rest to a provider with expertise
  2. You start a new project or process, and you lack your own expertise to control it
  3. You lack the time and staff resources to work on the project

Necessary - before you sign an outsourcing contract, calculate how much a particular project or process is costing you now, and then compare the costs of outsourcing. You can do it yourself or ask your outsourcer for advice.

Outsourcing business processes is not beneficial when:

  1. You want to outsource a function that only rare specialists can handle
  2. You do not have internal processes lined up
  3. You have your own resources - financial, time and labor
  4. You have already outsourced many functions - in such cases, costs can sometimes rise

 

 

You may also be interested in reading: