Sooner or later, every business owner has asked the question: “Do I really want to outsource this process, or can I find a way to keep the costs in house?” To some, it’s a matter of job preservation. To others, strictly profit. But whatever the litmus, the decision will have serious consequences — for owners, for employees, and for customers.
More than 2 million U.S. jobs were outsourced in 2013, including 12 percent of call center work, 38 percent of research & development, and 43 percent of IT services. In the information services industry alone, the contract value exceeded $28.5 billion, and that’s a relatively small portion of the $104 billion Business Process Outsourcing (BPO) market, made up in greater part by financial services and manufacturing, and to a lesser degree by human resources, customer services, administrative services, energy, healthcare, retail, logistics, travel and telecom.
But “outsourcing” doesn’t always mean off-shoring, and “on-shore” doesn’t always mean “U.S.”
Outsourcing includes all of the functions an organization could have chosen to scale up to do internally, but chose to buy from other providers instead. Many marketing services, for example, are routinely purchased from freelance writers and designers, advertising agencies, BPO providers, and strategic consultants. These services are outsourced for many reasons, including insufficient volume of steady work to keep full-time staff productive year-round, inability to attract the highest caliber of employees to job functions that may be peripheral to the organization’s core discipline, and a desire to avoid distraction from the core competencies that define an organization’s competitive distinction.
And the U.S. is not the only country outsourcing — in fact, we’re not even the biggest player. Globally, the outsourcing market amounted to $104.6 billion in 2014, with Europe, the Middle East and Africa leading the charge, followed by the Americas and Asia.3 To help put that number in perspective, $104 billion would be enough to build New York’s One World Trade Center, twenty-seven times. Some estimates, including one by market information provider IBISWorld, put the global number even higher, at $136 billion, funding over 900,000 jobs at 162,000 businesses.
The long view
From a distance, this may look like hemorrhaging. Why would any organization (or country, for that matter) surrender so much revenue? And with that point, arguments often become emotional and lines blur. Basing its numbers largely on trade deficits, the Economic Policy Institute claims the U.S. lost over 3.2 million jobs to China between 2001 and 2012. But those “lost” jobs, three quarters of which were in manufacturing, were not outsourced in the sense discussed in this whitepaper. Many of those jobs were completely undesirable in the context of the American economy. Price points which the world sets for computers, televisions, cameras and other electronics, for example, dictate very low wages — far lower than U.S. workers would tolerate; the health, safety and environmental standards set by Western countries drive much higher manufacturing costs than component parts can bear; and China’s educational emphasis on science, technology, engineering and mathematics (STEM), combined with that country’s high population density, provide it with an abundant supply of technology workers and a simple competitive advantage. Clearly, trade deficit numbers are the result of a complex set of economic factors that may include outsourcing but are not solely driven by it.
Nevertheless, significant job losses do occur from outsourcing, and domestic economic factors play a large part in the decision. Wage increases and the spiraling cost of U.S. health insurance make off-shore sourcing more attractive to U.S. businesses, and the rapid expansion of the finance and credit-card services industries, which comprise a large portion of global outsourced services, contributes significantly to off-shore job migration.5
According to Avasant, the world’s leading BPO advisory firm, outsourcing will continue to grow, and its growth will be exponential. But the work itself will change radically. Avasant foresees a digital revolution, driven by social media, mobility, analytics and cloud-based Intelligence (SMAC), that will enable businesses to reinvent their product delivery, customer experiences, and services offered. In this new economy, outsourced services will transform from tasks to platform-centric/outcome-linked models, eliminating human intervention in services. In other words, the jobs won’t simply migrate, they will begin to disappear.
In the meantime, pros and cons
Even if we were to assume that Avantas’ vision for the future is accurate, business leaders still need to make decisions in the real world, today; and that requires a careful analysis, and weighting, of the pros and cons of outsourcing as they affect your business.
On the positive side of the equation, outsourced suppliers are often more flexible with their availability, offering services round the clock and even on weekends and holidays, often at “normal” price levels. The level of available talent increases, too, as geography expands, simply because the pool from which talent can be sourced expands from “commutable” to global. And because many outsourced services can be virtualized, they may be accessible from any internet-connected device, even while mobile.
Cost containment is a major driver in most outsourcing decisions, but many other benefits exist as well, including improved efficiencies, greater sense of business continuity, mitigating risk by leveraging specialists, and freeing staff to focus on core services and strategy.
Selecting an actual partner, of course, requires its own set of criteria. New-Zealand-based Grant Thornton, one of the world’s leading financial and tax advisory firms, surveyed business executives from 36 world economies to better understand why companies outsource and why they choose to bring services back in house. Among the 2,571 business leaders who responded, the most important criterion for a partner was reliability of service (56 percent). And though cost was ranked second (43 percent), it was closely followed by trust in the supplier (40 percent), understanding of my business (35 percent), track record with similar clients (27 percent) and ability to provide innovative solutions (22 percent).
On the other hand, 44 percent of business leaders say they are unwilling to outsource key processes for fear that they will lose control. A global survey published by Deloitte indicated nearly half of business leaders found their outsourced partners more reactive than proactive; nearly 40 percent cited a lack of innovation and underqualified resourcing.
MicroSourcing, a Philippines-based provider of managed offshore operations with more than 3,300 employees in five locations, is quick to point out several drawbacks to outsourcing. These may include management and control challenges, breach of confidentiality, exposure to malicious attack of data systems, and possible erosion of brand value.
Other possible issues facing U.S. businesses that offshore include the instability of some international governments, challenges presented by foreign laws and regulations, changing perception of the U.S. by peoples of foreign countries, differing worldwide ethical expectations, and managing cultural differences between domestic business units and their international suppliers.
Keys to success
Whether you choose to outsource locally or across the globe, you will want to mitigate as many risks as possible. Here are a few suggestions from the experts:
- Find a balance point where you can be comfortable.1 Outsourcing provides opportunities to control costs, gain access to new talent, and free up your existing resources. At the same time, it will cost some people their jobs and it will require that you place your trust in an outside provider. Each business will find its own balance point.
- Hire people you can trust. It’s your business, and they are your customers, which means your success is in the hands of your partners. More than simply capable, your outsourced provider must be reputable. Get references, ask for samples, and make sure you know exactly who will be doing the work.
- Allocate time and resources for vendor management.10 According to Deloitte, “the market is currently underinvested in the area of vendor management, particularly when it comes to tools, methods and processes.” Don’t assume that your outsourced suppliers will manage themselves. Invest in people and infrastructure to ensure their work continues to meet your standards and your customers’ needs.
- Be prepared to resolve disputes.10 In the end, it’s best to know how problems will be settled. But the end is not the best place to start. Map out a series of well-defined steps that will lead to successful resolution for both parties before terminating contracts. Any gains realized in the original outsourcing plan can be quickly erased by restarting with a new provider.
Tips for startups and entrepreneurs
Finally, Michael Evans, managing director of the Newport Board Group and 34-year-veteran of Ernst & Young, suggests six areas to outsource when starting a business:
- Manufacturing. Building, equipping and staffing a manufacturing facility is a costly endeavor. Chances are, someone else has already mastered most of the lessons you will need to learn to build your product. So, until you’re sure of your product’s final design and the most efficient way to build it, leave manufacturing in the hands of the experts — especially if they have geographic, economic or cultural advantages over manufacturing domestically.
- The fractional CFO. Startups, small businesses and smaller middle-market businesses seldom need a full-time CFO. Consider outsourcing as much of your finance department as you can — particularly the senior leadership.
- Leveraging the cloud. Cloud computing allows you to scale your business using fewer employees and less capital. It enables you to operate both globally and while mobile, and access to customer data will help you make your relationships more “sticky.”
- Administrative costs. Consider co-locating with another company to share office space and administrative support. This can limit fixed costs such as rent, utilities, security, phones, office equipment and full-time staff.
- Professional Employee Organizations (PEOs). Professional Employee Organizations can manage most of your human resources and payroll needs on an outsourced basis. What’s more, they are far more likely to be current on benefits management and HR compliance issues, and may even be able to provide you with shared staffing resources.
- Sales and marketing. For many companies, e-commerce and social media marketing can be substituted for traditional outbound marketing expenses. In addition, you may be able to find a sales outsourcing company that will run your entire new business acquisition process.
Jenna George contributed research for this article.
 Statista. (2015). “Total Contract Value of the Business Process Outsourcing Market Worldwide From 2000 to 2014 [Information Services]. Statista. Sourced 24 August 2015. http://www.statista.com/statistics/190150/industrywide-contract-value-business-process-outsourcing/
 Statista. (2015). “Global Market Size of Outsourced Services from 2000 to 2014.” Statista. Sourced 24 August 2015. http://www.statista.com/statistics/189788/global-outsourcing-market-size/
 Statista. (6 November 2014) “One World Trade Center is the World’s Fourth Tallest Building.” Statista. Sourced 12 October 2015. http://www.statista.com/chart/2917/tallest-buildings/
 IBISWorld. “Business Process Outsourcing Services in the U.S.: Market Research Report.” IBISWorld. Sourced 25 August 2015. http://www.ibisworld.com/industry/business-process-outsourcing-services.html
 Avasant. “10 Trends that Will Reshape Global Sourcing in 2015.” Globalization. Sourced 13 August 2015. http://www.globalizationx.com/global-sourcing-trends-2015/
 Statista. (2013) “Leading Drivers for Outsourcing Back-office Services Worldwide.” http://www.statista.com/statistics/330000/leading-drivers-for-outsourcing-back-office-services-worldwide/
 Grant Thornton. “Outsourcing: Beyond Technical Expertise.” (2015) Sourced 12 October 2015. http://www.grantthornton.co.nz/Assets/documents/pubSeminars/IBR-2015-outsourcing-report.pdf
 Statista. “Statistics and Facts on the Business Process Outsourcing Industry Worldwide.” (2013) Sourced 12 October 2015. http://www.statista.com/topics/2257/business-process-outsourcing-industry-worldwide/
 Deloitte. “Deloitte’s 2014 Global Outsourcing and Insourcing Survey.” (December 2014) Sourced 13 August 2015. http://www2.deloitte.com/content/dam/Deloitte/us/Documents/strategy/us-2014-global-outsourcing-insourcing-survey-report-123114.pdf
 MicroSourcing. “Outsourcing Drawbacks.” Sourced 24 August 2015. http://www.microsourcing.com/info/outsourcing-drawbacks.asp
 Staff. “Small Business Encyclopedia: Outsourcing.” Entrepreneur. Sourced 13 August 2015. http://www.entrepreneur.com/encyclopedia/outsourcing
 Evans, Michael. “6 Key Areas To Outsource When Starting A Business.” Forbes. (13 April 2015) Sourced 24 August 2015. http://www.forbes.com/sites/allbusiness/2015/04/13/6-key-areas-to-outsource-when-starting-a-business/