A Guide to Types of Outsourcing

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Saphia Lanier
Saphia Lanier

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Small businesses have two options to expand their operations: hire in-house staff or outsource. With the first option, you’ll need capital, loans, or a seed round of financing to build your team and potentially expand to new locations. 

Types of outsourcing

But most small-business owners don’t have funding or large capital to expand, so they resort to outsourcing, at least in the early days of growing and scaling their business. 

It’s a smart choice — it gives entrepreneurs access to talent and expertise they otherwise couldn’t afford. Plus, many outsourced services are remote, which means no need to buy or rent new locations. 

But what can (and should) a small business outsource?

Below are some common types of outsourcing that small businesses can pursue, along with their pros and cons so that you can make a more informed decision for your business.

What is outsourcing?

Outsourcing is the process of delegating or contracting out certain business functions to a third-party company or service provider. Businesses often turn to outsourcing when they don’t have the knowledge, skills, technology, resources, or time to perform a task themselves. 

What are the different types of outsourcing?

1. Process-specific outsourcing

Process-specific outsourcing, also known as business process outsourcing (BPO), focuses on delegating specific processes within a business to a service provider. You might, for example, outsource sales, claims processing, or customer service, among other processes. Doing so can reduce costs, increase efficiency, and free up resources for other areas of the business.

Benefits: If a small business is growing fast and is struggling to keep up with emails and calls from customers, it can outsource customer service to a BPO company. This saves the small-business owner time and money on finding, hiring, and training an in-house customer service outsourcing team.

According to Deloitte’s 2022 Outsourcing Survey, 52% of executives outsource business functions, including human resources (57% outsource) and sales (45% outsource).

Potential drawbacks: You’re giving up some control over the operations and quality assurance (e.g., shrewd salespeople talking to your customers can hurt your reputation). And there are potential security issues (e.g., if the finance or legal service provider has a data breach that exposes your company’s private information).

If you opt for this, design standard operating procedures (SOPs) to ensure the outsourced company can hit the ground running and follow the same standards.

2. Professional outsourcing

Professional outsourcing is when a business hires an expert or specialist to handle a task or project. This is common in a company that doesn’t have the expertise or skills to manage the task itself. For instance, if the company doesn’t have an accountant or legal team, then it can outsource these duties to an external legal or accounting firm. 

In the Deloitte outsourcing report mentioned above, it shows executives outsource the following to pro services:

  • Legal (64% outsource)
  • Tax (61% outsource)
  • Finance (51% outsource)
  • Product development (45% outsource)
  • IT (76% outsource)

This is a great option if your business needs insights from an expert in a technical field.

“I’m a science marketer, but I can’t personally provide advanced insight into topics as diverse and complex as cell biology, chemistry, and medicine,” says Adam Goulston, owner of Science Marketer, a marketing agency. “When I need scientific expertise for my projects, I tap into the knowledge of researchers and practitioners worldwide with advanced degrees or hands-on experience.”

Benefits: The benefits of professional outsourcing include:

  • Access to specialized skills and expertise (no need to train staff)
  • Cost savings (no salaries or benefits to pay)
  • Increased efficiency (experts can hit the ground running)
  • Scalability (you can scale up or down depending on your needs)
  • Flexibility (you can switch providers if needed)

Potential drawbacks: You may not have control over quality assurance since you’re relying on the service provider to deliver the desired results. Then there may be language and cultural barriers if you’re outsourcing to a foreign country.

3. Logistics outsourcing

Logistics outsourcing is the practice of hiring an external provider to manage and coordinate the transportation, warehousing, and distribution of goods. This type of outsourcing is often used by businesses that don’t have the resources or expertise to handle these tasks in-house.

For example, a business may outsource its logistics operations if it needs help with order fulfillment, inventory management, or freight forwarding. By outsourcing these tasks, the business can focus on its core competencies while still ensuring their products are delivered on time and in good condition.

By outsourcing logistics, you can tap into the expertise and technologies third-party logistics (3PL) companies offer. As just one example, many 3PLs offer advanced tracking you can use to monitor shipments and allow customers to keep an eye on their orders from purchase to delivery. 

Benefits: The benefits of logistics outsourcing include:

  • Reduced costs (no need to invest in equipment or warehouse space)
  • Improved efficiency (no more dealing with order fulfillment)
  • Access to insights in the supply chain (the 3PL’s knowledge and data can help you plan around disruptions and delays)

Potential drawbacks: Selecting a low-quality 3PL provider that hurts your reputation with customers. The cost can also be high if you need too many services. 

4. Operational outsourcing

Operational outsourcing involves delegating certain operations in your company. For example, if you own a local laundromat and want to offer a new service (such as dry cleaning or home delivery), then you can outsource that operation to a service provider. 

Examples of operational outsourcing include payroll outsourcing companies, marketing, product development, and supply chain management.

Benefits: Operational outsourcing is useful for small businesses that want to reduce the workload on internal staff or expand into new services. 

Potential drawbacks: If the outsourced service provider isn’t as good as you’d expect or increases rates over time, causing the outsourcing to eat into your profit margins. 

Gulshan Hajara Banu is a biotechnologist who founded Pest Keen, a pest-control company. She outsources a range of services like pest inspection and prevention, rodent control, and wildlife control to professionals.

“To ensure the highest quality of service, I employ a team of professional exterminators who are certified and trained in the latest techniques,” says Banu. “All of the services are backed by a satisfaction guarantee so that I can always provide my clients with the best experience possible.”

5. Manufacturing outsourcing

Manufacturing outsourcing involves hiring a manufacturer to produce products for your business instead of making them in-house. This is common in the retail and ecommerce industry, where companies outsource manufacturing to factories in China, India, or other countries with more affordable labor and materials.

Benefits: Manufacturing outsourcing can help small-business owners to ramp up production without hiring more staff, purchasing more equipment, or renting larger space to accommodate the demand uptick. 

Potential drawbacks: When outsourcing to factories overseas, it’s possible for a language barrier and quality issues to occur. There’s also the possibility of delays in the supply chain or caused by political issues in the manufacturer's country. 

6. Project outsourcing

Project outsourcing is when a business hires a services provider to complete a specific project. For example, a marketing agency may hire a web development firm to work on a new website for a client. Or a contractor may hire a fencing company to build fences for a community they’re developing.

Benefits: Project outsourcing is useful for companies that desire speed and quality. It enables you to hire a professional who can jump in immediately and get the work done with little to no hand-holding. 

Potential drawbacks: Because you’re working with someone you haven’t hired before, you don’t know if they’re going to deliver the results you desire. To counter this, you should keep a database of service providers you work with over time that you can contact for future projects. 

7. Multi-sourcing

Multi-sourcing is when a company contracts with more than one service provider for a project. For instance, a video game studio may outsource multiple different processes — game design, game development, audio production, animation, and level design — each to different companies or contractors. 

Benefits: This allows the studio to bring in multiple experts to speed up production and ensure quality. It beats delegating all these tasks to a single contractor with limited resources and expertise, which can slow production or hurt quality. 

Multi-sourcing is excellent for lean companies that want to remain small. For example, Ivy Tutors Network, a service company that offers personalized education and mentorship, has a management team of four. It uses multi-sourcing on a monthly basis, which includes:

  • Bookkeeping
  • Accounting
  • Creative/graphic design
  • Web development
  • Search engine optimization (SEO) work
  • Proposal writing

It hires multiple local and overseas agencies and freelancers who are experts in their fields. 

“I’m fond of developing our internal workforce, but even employee development takes outsourcing,” says Lisa Peransky, founder of Ivy Tutors Network. “When I promote a teacher to a manager role, she has a lot to learn and we may not always have the most cutting-edge experience in-house to teach that.”

So rather than tying up resources to improve the onboarding and training process, she outsources this to a service that can do it instead.

“We’ve hired marketing agencies to train budding marketers, social media experts to train internal staff, and operations experts to help us implement Zapier. Outsourcing helps us stay lean, but harness the expertise and know-how of a much larger company.”

Potential drawbacks: There is the possibility that the project will fall behind if one or two companies creates bottlenecks, preventing the others from meeting deadlines. For example, the character 3D modeler may fall behind and it delays the animator from animating the characters, which pushes back the game’s release date.

Whatever type of outsourcing you decide to use in your business, make sure the provider is reputable by checking their reviews and references. After all, it’s your reputation on the line if something goes wrong.

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