Outsourcing or externalization is the process by which a company hires another company to perform certain tasks of its business, usually those tasks in which it is not specialized.

A good example is payrolls. Many companies delegate this complicated and specialized task to an external company that can perform it more efficiently.

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Outsourcing frees up resources from the hiring company. Resources that this company will be able to dedicate to the fundamental areas of the business.

Considerations

Before outsourcing you have to take several aspects into account:

• The background, references and experience of the company that will be hired to perform the services.
• The costs of this hiring.
• The tasks that are externalized: it is not recommended to outsource tasks or fundamental areas for the correct functioning of our business.
• The contract: it must include the conditions and sanctions in case of non-compliance by the contracting firm.

Outsourcing differs from subcontracting because it is based on establishing alliances with collaborating companies that will help you be more efficient in your fundamental tasks.

Benefits of outsourcing

These are some of them:

• Hiring a specialized company gives you more possibilities of obtaining a good result.
• It is not necessary to train staff in tasks that are not fundamental for the company.
• It helps reduce manufacturing, installation and equipment costs.
• It gives more flexibility to the company when responding to environmental changes.
• It allows applying all the company’s resources (personnel, talent,…) to the key areas of the business.
• It allows saving costs because the company performs the work in a much more efficient way.
• It allows weaving collaborative relationships with other companies in the ecosystem.
• It helps redefine the company since what is not fundamental is externalized.
• It increases the company’s flexibility and decreases fixed costs.

Disadvantages of outsourcing

These are some of them:

• There is a risk that the hired company does not perform the work correctly.
• Your profit margin is reduced.
• Your control over production or the subcontracted task is reduced.
• The hired company may have a very different company culture.
• Changing supplier is complicated in case of very specialized tasks.
• The hired company learns and obtains knowledge of the subcontracted product or process and there is the possibility that it becomes a competitor.

What activities are suitable for outsourcing?

Subcontracting activities that are part of the functions or fundamental areas of your company is not a good idea.

But there are tasks that are not fundamental and that can be externalized, for example: payroll processing, cleaning, legal services,…

We hope this information is very useful to you.