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Outsourcing – a business strategy that moves some of an organisation’s functions, processes, activities and decision responsibility from within an organisation to outside providers – is a familiar concept to many entrepreneurs.
While large companies turn to it to cut costs, small businesses routinely outsource often because they have no other choice. This is done through negotiating contract agreements with a vendor who takes on the responsibility for the production process, people management, quality, customer service and key asset management of the function.
“With the current wave of job cuts going on around the world in some of the world’s largest companies, outsourcing is fast becoming the next option of business modelling for many firms,” Victor Ekpu, CEO, Mindset Resource Consulting, a research firm based in Nigeria and in the UK, states in an email. Many firms are cutting down on operating costs, especially salaries and employee benefits as well as avoiding all legal obligations required in maintaining employees.
It is true that outsourcing can save money, but that’s not the only reason. Organisations use outsourcing as a strategic initiative to improve customer service, quality and reduce costs. The strategy can be a permanent or temporary arrangement to bridge the gap in staffing, to learn better quality techniques or improve faulty product design.
Reduce labour costs
Hiring and training staff for short-term or peripheral projects can be expensive and temporary employees do not always meet expectations. “Firms are fast engaging consultants and outsourcing firms to carry on short- and medium-term projects aimed at solving problems or exploring opportunities.
“This has the potential of making entrepreneurs rely less on paid employees and minimise fixed welfare and proprietary costs to their firms. Outsourcing lets businesses focus their human resources where they are most needed,” says Victor Ekpu.
According to Chris Chukwude, CEO, Poktho Nigeria Limited, “Outsourcing is a cheaper choice for companies. As regards human resource outsourcing, companies will save cost on keeping a permanent staff, and could readily employ the services of the professional when such expertise is needed.”
This is also the case of controlling capital costs. This involves reducing the scope, defining quality levels, re-pricing, re-negotiation and cost re-structuring. Outsourcing converts fixed costs into variable costs, and makes variable costs more predictable. It releases capital for investment in businesses, and a good way of avoiding large expenditures in the early stages. Investors become attracted to such firms, since more capital is pumped directly into revenue-producing activities.
Reduce risk and increased efficiency
Business investment comes with a certain amount of risk. Markets, competition, government regulations, financial conditions, and technologies all change very quickly. An approach to risk management for some types of risks is to partner with an outsourcer who is better able to provide the mitigation.
“In security business, there is much risk involved, and outsourcing shares such between the company and the client,’’ says Roy Okhidievbie, managing director at AugustEye Security Services Limited. The concept brings about a level playing field, most small businesses simply cannot afford to match the in-house support services that their larger counterparts maintain. Thus, outsourcing helps small firms act “big” by granting them access to the same economies of scale, and expertise that larger companies enjoy. Specialisation provides more efficiency that allows for a quicker turnaround time and higher levels of quality.
Focus on core business
Outsourcing helps small businesses shift its focus from peripheral activities toward work that serves clients and create competitive advantage. Ritesh Gupta, consultant at H.R Forex and Capital Management India believes outsourcing allows organization to focus expertise and core business. ‘‘When organizations go outside their expertise, they get into business functions and processes that they may not have much knowledge about, and thus deviating from main focus. An example will be a grocery store that decides to add video rental to its operation. If it places much attention on that, it could lose focus of the core business which is grocery,’’ he said.
“Outsourcing is the way to go for a small organization that desires to grow in quantum leaps, so it can concentrate majorly on what it is set out to do,’’ says Uwaifo Imafidon, head, Business Development at Stresert Services Limited. According to him, since outsourcing takes care of the skills necessary to run a particular business process, such businesses will be more flexible in terms of investing in key resources, instead of worrying on keeping personnel for back office operations, this will make for better people management and a focus on getting resources to grow core competencies.