Outsourcing: what is externalization of tasks and when it is needed
If you run your own business or are thinking of starting your own business, knowing what outsourcing is could be a real breakthrough for you. It is certainly not a new concept, since externalization is a process that many companies have been implementing for a long time; with globalization and, especially, the advent and explosion of the Internet, however, these terms have taken on new connotations and acquired a renewed centrality.
Doing outsourcing today has become easier, which means that adopting the practice of externalization can make it much easier to run a business, especially one that is just starting up and not particularly large in size.
Even a company with not a particularly large number of employees can achieve success. Are you familiar with Amazon founder Jeff Bezos‘ two-pizza rule?
“If you can’t feed your team with two pizzas, there are too many people”.
Being few in number within a company reduces the time it takes to match everyone’s agendas, speeds up response and reaction times, and zeroes out unnecessary wasted time. If you are thinking about how a company with few employees can provide for all the activities it has to deal with, you should know that the answer (or rather, one of the possible answers) is precisely outsourcing.
Knowing what outsourcing is is only the first step in getting to understand how you can take advantage of all the benefits offered by the externalization process. Your analysis, in fact, must necessarily also consider the various steps to be followed to bring an outsourcing process to fruition, the pros and cons associated with it, and its regulatory implications. But let’s proceed in order.
Definition of outsourcing
In order to define the concepts of “outsourcing” or “externalization” one must refer to studies of business organization, according to which these terms indicate a particular entrepreneurial management technique that, for the performance of a specific function, makes use of an external production source. This practice allows the company to reduce its internal operating costs and, with them, also the management risks that, precisely as a result of the outsourcing of business functions, are borne by another entrepreneur.
The English word “outsourcing” consists of the two words “out” and “source“, which, combined, can be translated as “receiving from outside“. This is precisely how, on a practical level and in a nutshell, externalization works. In reality, however, it is a complex process that requires appropriate steps.
The process of outsourcing
In practical terms, the outsourcing process involves externalizing a single business task, a department or an entire process to a service provider. A contract determines the scope and duration of service provision. Control over service quality and response time is regulated, in many cases, by a so-called “Service Level Agreement“, which puts in black and white the type of service outsourced, its value and conditions.
As already pointed out, the process of externalizing services is complex and exposes you to several risks, such as making a mistake in choosing a supplier or entering into an incomplete and/or for you unprofitable business arrangement. It is essential, therefore, that you know the correct way to proceed and that you know when outsourcing is really appropriate and what its advantages and disadvantages are, but also the regulatory aspects that govern an externalization process.
First, you need to analyze the current state of your company and break down its operations into individual functions. Once you have identified the area in which it might be useful for you to enlist the help of outside staff, you should think about how and when the project will be carried out and what concrete benefits can be achieved. Choosing the most suitable service provider should follow a phase in which you compare the various options that the market offers. The next step is to define the contract. Only at that point does the actual outsourcing process begin, during which it is important that you regularly check that the schedule is adhered to with the key steps previously agreed upon with the provider.
When it is worthwhile to use outside personnel
For the success of your business, you should use outsourcing only if it is truly able to prove cost-effective for you and your business model.
Especially for startups and smaller businesses, saving as much money as possible (but not at the expense of the quality of service and products offered) is very important. Delegating the implementation of a particular business process to a specialist obviously has a cost, but know that this move can be an investment that, over time, can prove very beneficial to you.
In addition to cost savings, related to the elimination of the need to acquire and train employees in certain areas, there are several reasons why it may prove worthwhile to use outsourced staff. Starting a new business, nowadays, no longer means having to take on all the tasks and manage all the activities yourself: being an expert in every subject, from production to marketing, via accounting, is practically impossible, and the practice of outsourcing allows you to focus on core competencies and make up for any lack of knowledge in a particular area, as well as to improve the quality of your services in cases where there is a need to increase efficiency and optimize scalability or response to market changes.
Advantages and disadvantages of outsourcing
Specific analysis of the advantages and disadvantages of outsourcing can help you understand even better when and whether it is appropriate for you to externalize.
One of the main advantages assured by the practice of outsourcing is, as already mentioned, cost reduction: outsourcing a service to an external provider is, in many cases, cheaper than hiring specialized personnel or training your own employees. The other side of the coin is that by outsourcing an activity, you inevitably lose your company’s know-how. Keep in mind, moreover, that once you have decided to take this step, going back and proceeding to reintegrate a service back into the company is not at all easy, because it is time-consuming, requires adequately trained employees and, therefore, an additional significant expense. Also pay attention to the additional costs that you may have to provide in the event that the service provider you have chosen encounters economic difficulties, which could also affect your business.
In addition to financial gain, outsourcing also ensures time savings: by externalizing one or more services, the company can focus on its core competencies and make more targeted investments in its staff training and production. Using outsourcing strategies also ensures a qualitative advantage because it is possible to turn to professionals with a high degree of specialization. However, outsourcing also requires some sacrifices, for example in terms of security: the service provider you contact, in fact, to carry out the outsourced activity, could access sensitive company data.
Regulatory aspects of outsourcing
At this point of reflection, it is useful to open a brief parenthesis on the regulatory aspects regarding externalization. Since doing outsourcing also conditions labor relations, in fact, there are a number of individual and collective protections, which are applicable when outsourcing contemplates a transfer of business or part of it (art. 2112 civil code) or when a takeover of the contract takes place. Milder protections, on the other hand, are provided in cases of relocation.
In fact, externalization, in the strictest sense, is a process that involves the transfer of part of the organization and, in practical terms, is accomplished through the transfer of part of the business. It may be useful at this point to introduce the concept of tertiarization: it consists of the divestment and outsourcing of an activity to an external party without there being a transfer of the facilities and means necessary to carry it out. The “last frontier” of externalization is what is now universally referred to as delocalization, to be understood as the transnational transfer of part of the business.
At the regulatory level, outsourcing or externalization is as broad, varied and evolving a subject as ever, granting more or less freedom to business owners and protections to workers depending on the various cases. Keep this in mind as well when deciding whether to resort to this practice for your business.
Outsourcing: practical examples of externalized personnel
We have defined the meaning of outsourcing or externalization, examined in detail the various steps that make up this process, and reviewed its benefits and potential downsides; one final step remains, which can provide you with an even more complete picture of the wide range of possibilities that outsourcing can offer your business.
To get a clear idea of what externalization is, in practical terms, you need to consider some examples of outsourcing, that is, activities that you can externalize while running your business.
Marketing is one of the areas where outsourcing is most often used: you can delegate to professional marketers, for example, the creation of promotional content, the coordination of sms and email marketing, and the management of social media. It is important, in this case, that there is maximum agreement on the company’s values and the messages it intends to communicate, as well as on the procedures to be activated to publicly manage a possible “crisis”.
A company does not always have in-house IT or Web design experts: activities such as website design, maintenance, and performance improvement, or the development of any applications, can be outsourced to address this lack.
Another particular service that can be outsourced is customer service: by externalizing this activity, you avoid having to train your employees and can call on a team of specialists capable of responding more promptly and accurately to various customer queries. To avoid problems, even (and especially) in this case, it is necessary for the outsourced team to be perfectly aligned with the company’s directives, so that it can provide the best answers in the shortest possible time, without giving rise to misunderstandings born of incomplete or incorrect information.
Accounting is a particularly complex area and, for this very reason, it is one of the services most outsourced by companies. By entrusting the administration of accounting and all the company’s financial transactions to an external resource, you can save time and avoid making mistakes in such a delicate matter, which could have serious repercussions on your business. A similar argument can be made for other areas, such as legal or human resources consulting.
Finally, manufacturing and logistics are also activities for which outsourcing is possible: in the former case you can assign issues such as product design, component production, or assembly to external manufacturers, while in the latter case outsourcing can cover the storage of goods, inventory management, and the packing and shipping of orders the company receives.