Summary: Outsourcing lets businesses delegate tasks like HR, payroll, IT, and manufacturing to external providers. It’s a proven way to save money and gain access to specialized expertise. Learn about the most common outsourcing examples and how they can support your business goals.
What is Outsourcing?
Outsourcing is an activity in which a company hires another company to provide some of its services or handle some of its production.
It typically refers to an activity or a process that could be or previously was done by the company but has instead been sourced from an external provider.
If a company that makes toys buys batteries from a battery manufacturer to include with its products, this may not be considered outsourcing since the toy manufacturer never previously made batteries. However, if the toy manufacturer decides to hire a marketing firm to promote its products, this service can be considered to be outsourced as it’s something the company could do itself but chooses not to.
Goals of Outsourcing
The major goal of outsourcing services and processes is to reduce costs by hiring a provider to do something for a lower price than doing it in-house. For example, the toy manufacturer may have to recruit, hire, and train a marketing team and then put a lot of money into its marketing mix to succeed. Instead, it outsources to a pre-formed team of professionals and only pays for their services when needed, which can be a lot more cost-effective.
Other goals include:
- Flexibility of using services only when needed and accessing specialized skills and talent for specific or temporary uses.
- Help clients speed up their processes, waste less time, and get their products to market faster.
- Allow businesses to focus their energies on their core functions and export the rest to providers.
Outsourcing Examples
To help you understand how outsourcing is used in the business world and how your company can be used by your business, we’re going to look at this list of outsourcing examples.
These ten items represent the most commonly outsourced business functions and processes that help companies streamline their operations and improve their profitability.
1
Cleaning Services
No matter what business a company is in, from accounting to software development, it will certainly require cleaning services. While most offices in the past had their own cleaning staff, it was hard to balance ratios and make hiring new staff cost-effective. They might need one cleaner for every 50 other staff, but would be reluctant to hire two cleaners if they had only 90 staff. This meant that companies had to choose between hiring more cleaners or lowering their cleanliness standards.
Today, however, specialized cleaning companies exist the world over and offer their services to most other businesses. They may bill based on the sizes and types of premises, the number of hours it takes to clean, and frequency. By outsourcing cleaning services, clients usually gain cleaner premises at a much lower cost.
2
Customer Service
If you’ve ever called a support number and been helped by an agent on the other side of the world, you’ve almost certainly connected with an outsourced customer service agency. The cost of managing an entire department of service agents can be prohibitively expensive for small and medium businesses (SMBs). This is especially true when customers in time zones around the world expect support at all times. This is why so many clients outsource their customer service functions to third-party providers. These providers often use the same staff to handle support for multiple clients at once, making them more cost-effective.
More recently, customer service has begun to shift toward the use of AI assistants. These newly developed resources are usually able to handle minor customer questions and concerns while referring more complex issues to humans.
Learn more in our guide to the best customer service outsourcing companies.
3
Human Resources and Recruitment
While it may sound strange to hire another organization to manage your staff’s HR needs, this is actually one of the most common forms of outsourcing used by companies around the world. The reason is that small businesses and startups can rarely afford to hire the HR professionals they need to manage talent, handle benefits administration, and keep workforces in order. The ideal HR-to-employee ratio is in the range of 1.5-3 HR staff for 100 employees. Small companies with fewer than 30 employees would therefore not normally be able to afford HR staff, yet they need them. Larger companies can also find outsourcing HR functions cost-effective, as external agencies may be able to run their services more efficiently.
Clients can choose to outsource all of their HR needs or certain functions. Recruitment is one highly specialized function that many HR staff are not adept at, so this is the most common function outsourced. When clients want to hire in other countries where they don’t own entities, they can outsource all of their HR needs to Employers of Record (EORs), which also legally hire employees on their behalf.
Read more in our guide to Human Resources Outsourcing.
4
IT Services
IT services are outsourced by many, if not most, companies for one simple reason: this industry is in a constant state of flux. Technology continues to change, and things like cybersecurity and network management can quickly become outdated.
Many clients, therefore, choose to outsource IT services to companies that keep themselves on the cutting edge. IT service providers typically maintain IT infrastructure, manage data storage and cybersecurity, perform system maintenance, and offer technical support to their clients.
Learn more in our guide to IT outsourcing.
5
Logistics
All producers need to move their products to market, but few have the skills and resources to do this as efficiently as outsourced logistics companies.
These companies can use their large shipping and transportation networks, as well as specialized planning and efficient systems, to move products from manufacturers to retailers as quickly and cheaply as possible. They provide services that include order tracking, transportation, warehousing, and inventory management at a scale that makes them far more cost-effective than most businesses can match.
6
Manufacturing
Imagine that you’re a clothing company that wants to move into making footwear. You may already have highly efficient factories making your clothing likes but these can’t be easily and cheaply adapted to making shoes.
Instead, you might choose to outsource your footwear manufacturing to another company that already has the equipment and know-how to do it well. Outsourcing parts of the manufacturing process or entire products, especially across international borders to areas where labor is much more affordable, is a hallmark of the modern international economy. It is also one of the most controversial forms of outsourcing as it shifts blue-collar employment around the world.
7
Marketing and Sales
Your company may produce a premier product or offer a superior service, but if you don’t have the ability to get to market, it won’t succeed. Outsourcing your marketing and/or sales functions is a popular way to help businesses reach customers and build their brands.
Marketing and salespeople have specific skills that can be hard to access otherwise. Clients can make use of marketing and sales firms’ expertise only when they need to access these skills, which can be more efficient than maintaining in-house teams.
8
Payroll
Payroll is often considered a part of HR, though its tasks also relate to finance and accounting. A company may have an HR generalist at its disposal but not an expert in managing pay, benefits, and taxes. This is why payroll is one of the most outsourced functions in business, and payroll outsourcing companies include some of the biggest companies in the world. These companies use high-tech platforms to manage payroll efficiently by automating most processes while also increasing accuracy. They can provide pay to millions of workers across thousands of client companies for less than this service can be managed in-house.
Find out more in our guide to the best outsourced payroll providers.
9
Professional Services
Many startups and SMBs can afford to retain specialized professionals like accountants and lawyers if they only need to use their services once in a while. These professionals have important skills and therefore can command very high salaries. Instead of keeping them on staff, many companies outsource these services.
They hire accountants and legal support on a contract basis to perform these functions when required. Larger companies may be able to afford in-house counsel and accounting departments, but may still choose to outsource these functions to keep them cost-efficient.
We discuss this in more detail in our analysis of the top accounting and finance outsourcing companies.
10
Web and Software Development
Businesses of all kinds have discovered that if they don’t have an online presence, they’re essentially invisible in the new digital economy. While they focus on their core business activities, they can outsource web and software development tasks to third parties who have the right expertise. These agencies typically build websites and online stores, manage content and social media, and develop customized apps for their clients. They may also build software that clients use to manage their internal processes.
Advantages of Outsourcing
Outsourcing functions to external companies can provide clients with lots of advantages, including:
- Cost efficiency
- Speed to market
- Access to specialized skills and knowledge
- Access to expensive technology and processes
- Reduced administrative burden compared to in-house management
- Ability to focus on core business functions
Risks of Outsourcing
While the advantages of outsourcing are clear, it doesn’t come without downsides. Businesses that choose to outsource face the following risks:
- Intellectual property theft
- Data security challenges
- Less control over workforce and production methods
- Dependence on third-parties
- Communication challenges
- Difficulty delivering consistent quality
Outsourcing Examples in Business
Most companies in today’s highly connected world outsource at least some of their functions to other companies. They typically do so to bring down their costs, increase efficiency, and reduce their administrative burden.
When clients choose to outsource, they look for providers who can offer them special skills and technologies, speedy production, and lower costs that help them increase their profitability.
Frequently Asked Questions
Outsourcing is when a client hires another company to perform a function for it. This can be done domestically or internationally. Offshoring, however, is when the client moves a process to another country but still manages that process itself.
This is a company that is hired by other companies to provide services or production processes for them instead of doing them in-house. Outsourcing companies tend to be highly specialized and work with clients who have very targeted needs.
Authors:
Charlotte is an Human Resources Information Systems and Martech expect, Charlotte has worked for major brands in the industry including FactorialHR and Tooltester. Originally from Manchester, UK, with a Bachelor's degree from the Manchester Metropolitan University, Charlotte currently lives in Barcelona, Spain.