23 Nov 4 Types of Outsourcing
Outsourcing can have a good or a bad reputation depending on which side you look at. For those who outsource to a country with low living costs, it can mean significant business growth brought by cost-effective and efficient services. For workers in companies from highly industrialised countries though, it could mean losing their jobs the next day. As with all business strategies, success is not guaranteed with outsourcing. A growing company will require one, two, or even a couple of strategies to ensure their business stays afloat and relevant.
Outsourcing means integrating third-parties into your business to take on tasks or processes that can add value to the business, whether in cost-effectiveness, efficiency, or higher quality work. It’s typically divided into four types: professional, manufacturing, process, and operational.
Professional outsourcing is the most common type that a lot of businesses don’t realise they already avail of—namely legal, accounting, and IT services. Companies or even individuals who employ these services are skilled and knowledgeable in their industry, but are not necessarily exclusive to one client only. The service or job required can be long-term and payment can be fixed for repetitive monthly tasks.
Manufacturing outsourcing involves products instead of services. Manufacturers contract another company take on its production process in order to reduce labour or material costs. These outsourcing companies can take on the whole production process or just work on parts of the product. Electronic gadgets have been made cheaper due to production being outsourced to other countries.
Process outsourcing is just like professional outsourcing, but caters to more specialised, unique, or inclusive processes that a company wants delegated. It can have something to do with accounting or IT services as well, but more personalized for the company’s needs. Human Resources (HR) and customer service are well-known in business process outsourcing.
Operational outsourcing also applies to the manufacturing industry. Equipment repairs, installation, and even cleaning and maintenance are tasks that companies choose to delegate to specialists.
The most significant part of a business outsourcing partnership is the contract. It details all the tasks required, expectations, and the costs. There are three types of contracts that can be utilized: time and material contract, fixed price contract, and target cost contract.
Time and material contracts are based on an outsourced employee’s work time, which is usually on an hourly rate. It can also depend on the materials used if products are included. These contracts are for short-term projects and can have high risks for the client if the outsourcing company is inefficient.
Fixed price contracts, like the term implies, is based on an agreed cost to be paid on a certain period of time for a certain scope of work. This contract is perfect for clients who expect deadlines and who don’t want too much involvement in supervision.
Target cost contract or cost-reimbursable contract is for long term projects that are complex to be costed in one go. Since the scope of work is uncertain or changing, this can be high risk for clients, but not impossible to pull through. An accurate accounting system can be used to make transaction and data trackable.
Outsourcing is a perfect business strategy for companies who know the value and risks involved. Globally, it contributes in levelling up business competition and enforcing customer-oriented service, which opens up opportunities for innovation in the business industry.