Understanding the Basics: What is Outsourcing and How Does it Work?

Published: April 23, 2024
An infographic to help you understand the basics of what is outsourcing and how it works.

In today’s interconnected global economy, outsourcing has become a common strategy for businesses looking to streamline operations, reduce costs, and focus on core competencies. However, for many individuals and organizations, the concept of outsourcing remains vague or misunderstood. 

You may ask yourself, “What is outsourcing? How does it work? Can I use it to my company’s advantage?” Don’t worry; we’ll guide you through every question and concern you may have about this business strategy.

In this article, we’ll delve into the basics of outsourcing, exploring what it entails, how it works, and its various forms and applications.

Back to Basics: What Is Business Process Outsourcing?

Outsourcing involves contracting out business processes or services to external vendors or third-party providers. Instead of handling these tasks in-house, companies delegate them to specialized firms or individuals, often located domestically or internationally. 

The definition of outsourcing has changed so much in recent years. In the past, outsourcing referred only to manual labor or call center work. Today, however, businesses can outsource various solutions, including specialized functions like software development or data science.

One of the main advantages of outsourcing is that it allows businesses to leverage external expertise, resources, and economies of scale to improve efficiency and effectiveness in non-core areas of operation.

What Is Outsourcing in Business, and What Are the Motivations Behind Its Adoption?

Businesses opt for outsourcing for various reasons, with cost reduction being a primary driver. By offloading non-core functions such as IT roles, customer support, or back-office operations, companies can lower labor and operating costs while accessing specialized skills and technologies. 

Beyond cost saving, outsourcing also enables companies to focus on their core competencies and strategic objectives, enhancing agility and competitiveness in the marketplace. Instead of spending time and money on recruitment and training, companies can outsource business functions to outsourced specialists and focus on doing what they do best.

Another advantage of working with an outsourcing provider is improving operational scalability and flexibility, which is particularly essential for industries with fluctuating demand. As customer demand rises, your BPO partner can support your in-house team by expanding your workforce and capabilities.

How Does Outsourcing Work?

Contrary to what some believe, outsourcing is a fairly straightforward process that involves five simple steps, starting with identifying your needs and continuing with regular communication and updates. Let’s break down each step in the process one by one:

  1. Goal Setting: The first step is identifying the tasks or processes suitable for outsourcing. Businesses may ask themselves: What aspects of their operations would benefit from outsourcing? What are the gaps in their departments that need to be filled?
  2. Evaluation: Once identified, businesses select suitable outsourcing partners through a rigorous evaluation process, considering factors such as expertise, reputation, cost, and cultural fit. 
  3. Negotiation: Then, the next step is to negotiate the contracts and service level agreements (SLAs) to formalize the outsourcing arrangement, outlining roles, responsibilities, deliverables, and performance metrics.
  4. Execution: After the contract is signed, the outsourcing provider assumes responsibility for executing the outsourced tasks or services, often using established workflows, technologies, and quality control measures. 
  5. Regular Communication: Effective communication and collaboration between the client and provider are essential throughout the outsourcing engagement to ensure alignment, address issues promptly, and drive continuous improvement.

What Are the Different Types of Outsourcing?

Outsourcing can take various forms, depending on the nature of the tasks or services being outsourced and the desired level of control and oversight. The common types of outsourcing solutions include:

  • Business Process Outsourcing (BPO) refers to offloading a part of (or all) business processes to a third-party provider.
  • Customer Service Outsourcing includes working with an outsourced team of support specialists. They can handle 24/7 customer service; some call centers may even offer omnichannel and multilingual support capabilities.
  • Back Office Support Outsourcing involves delegating administrative and support functions to an outsourced provider. Tasks may include data entry, accounting, bookkeeping, and virtual assistant services.
  • Information Technology Outsourcing (ITO) means hiring an offshore or nearshore team for IT functions such as software development, infrastructure management, cybersecurity, and technical support.
  • Knowledge Process Outsourcing (KPO) involves outsourcing specialized knowledge-based tasks such as research and analysis, data processing, and financial modeling.
  • Recruitment Process Outsourcing (RPO) includes trusting a third-party provider to handle hiring, recruitment, candidate assessment, onboarding, and other human resources tasks.
  • Legal Process Outsourcing (LPO) refers to outsourcing non-core legal functions, such as legal transcription, legal research, document review, paralegal services, and more.
  • Specialty Healthcare Outsourcing involves delegating non-clinical administrative and support tasks to a BPO provider. Some functions they can handle include medical transcription, medical billing and coding, insurance claims processing, and medical call center services.

What Is the Difference Between Outsourcing and Offshoring?

Although outsourcing and offshoring may seem similar, they have one key difference: location. Offshoring means delegating tasks to outsourced partners in a country far from yours. For instance, some U.S. businesses set up customer service operations in countries like the Philippines.

Meanwhile, outsourcing can mean delegating business processes to providers in any location, within or outside your home country. The particular BPO destination you choose should depend on the nature of your industry, the roles you want your outsourcing team to perform, and your specific business strategy.

What Types of BPO Destinations Are Available for Outsourcing?

Location is a crucial consideration for outsourcing. After all, the benefits you reap from your BPO arrangements will depend on the economic and market conditions of the country you choose to hire from. Here are the three main location-based outsourcing models you should be aware of:

What Is Offshore Outsourcing?

Companies looking for a cost-effective way to expand their capabilities often choose offshore outsourcing solutions. Offshoring involves outsourcing tasks or services to vendors in a faraway country, often chosen for lower labor costs or access to specific expertise.

What Is Onshore Outsourcing?

Meanwhile, businesses that prefer keeping their operations closer to home while taking advantage of lower costs in a less populated city may opt for onshoring. This BPO solution involves outsourcing tasks or services to providers within your home country, usually chosen for tax incentives or control reasons.

What Is Nearshore Outsourcing?

Depending on the nature of your business or industry, you may benefit more from an outsourcing solution that blends the cost-saving advantages of offshoring with the geographic proximity of onshoring. Nearshoring involves outsourcing tasks or services to a BPO company in neighboring countries, often with similar time zones and fewer cultural differences.

Building a Successful Outsourcing Partnership: What Should Be Your Key Considerations?

Although outsourcing offers numerous benefits, it also presents challenges and risks that businesses must navigate effectively. If you want to outsource services to a reliable BPO provider, here are some of the best practices you should follow to make the most of your partnership:

  • Identify your needs and clearly define your objectives and expectations. Knowing your needs will make it easier to determine what roles your BPO partners will play in your operations. Establishing clear goals, timelines, and performance metrics upfront ensures alignment and accountability for both parties.
  • Practice due diligence when choosing between different BPO providers. Although plenty of outsourcing providers worldwide exist, not all can meet your particular needs and expectations. As such, it’s critical that you thoroughly vet potential outsourcing partners by conducting site visits and checking references. Doing so helps mitigate risks and ensure compatibility.
  • Practice effective communication and collaboration with your BPO partner. As with every partnership, communication is vital for building trust and facilitating teamwork. Make sure to maintain open lines of communication with your offshore, nearshore, or onshore team through regular meetings and performance reviews. These can foster trust, transparency, and alignment between you and your provider.
  • Don’t overlook contract management and governance. A comprehensive service level agreement (SLA) and outsourcing contract can help you and your provider avoid misunderstandings. Implementing robust contract management processes and governance structures ensures compliance, risk management, and dispute resolution mechanisms are in place.
  • Monitor your outsourced team’s progress, performance, and improvement continuously. The best way to assess whether your BPO team is performing according to your expectations is by setting KPIs and metrics and regularly evaluating their performance. Ideally, you’d also collect their feedback and implement corrective actions to drive continuous improvement in your working relationship.

Let an Experienced BPO Company Guide You Through the Basics of What Is Outsourcing

Outsourcing is a strategic business practice that offers significant opportunities for cost savings, efficiency gains, and competitive advantage. By understanding the basics of outsourcing, including its definition, motivations, process, types, and critical considerations, businesses can make informed decisions, mitigate risks, and unlock the full potential of outsourcing to drive success in today’s dynamic business environment.

Here at SuperStaff, we are passionate about helping companies, both big and small, maximize their business growth. With our comprehensive and scalable BPO solutions, we can address your most pressing concerns, whether finding specialized talent for a specific project or expanding your capabilities to meet growing customer demand.

What is outsourcing, and how can it strengthen your business? If you want more detailed information, don’t hesitate to contact our sales team. We’ll help you assess your particular needs and help you come up with a customized strategy that works for you!

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