Outsourcing is a familiar term to those working in the IT field, and it is also a common form of recruitment that brings efficiency to many businesses. So what is outsourcing? What are the benefits and significance of it to the development of each enterprise? Let’s explore this issue further with Paracel in the following article.
What is outsourcing?
Outsourcing refers to businesses using external resources to perform tasks that would typically be handled by internal staff. Businesses often hire individuals or organizations with expertise and capabilities to provide top-quality services. In specific cases, It is also used to refer to the transfer of employee functions from a company to specialized service providers.
Is outsourcing popular?
Outsourcing is applied in many industries. Among them, the field that utilizes outsourcing the most is the Information Technology sector, with notable examples being the two major brands: Dell and Microsoft. For a long time, Microsoft’s workforce has not handled all the steps of software production. The company’s leadership team made a decision to outsource – utilizing the expertise of labor forces in other countries at a lower cost than what they would pay for programmers in Redmond.
Similar to Microsoft, Dell also effectively utilizes outsourcing. In producing Dell laptops, they not only rely on internal staff but also delegate the production of components to over 40 suppliers. These are manufacturing facilities and factories located in various countries around the world.
Therefore, it can be seen that many businesses have recognized the advantages of outsourcing and successfully applied it to their enterprises. Outsourcing helps companies significantly save effort and costs, and reduces the burden on internal staff while ensuring that tasks are completed effectively, and products are of high quality when supplied to the market. Businesses can reduce investment costs, streamline operations, and still achieve desired revenue. What could be better?
What is an outsourcing company?
An outsourcing company is a specialized entity that provides outsourcing services to businesses in need. They are hired to perform tasks requested by other businesses. Outsourcing companies do not own the products they create, nor do they promote those products as the ownership rights belong to the hiring business. Their main job is to take on tasks, complete them, and receive compensation. The amount of compensation they receive is based on the number of hours they work or is calculated based on the value of each project.
The history of formation and development of Outsourcing
After understanding what Outsourcing is, it is possible to learn more about the history of the formation and development of this service. Although it has been around for a long time, it was officially recognized as a business strategy only in 1989. Later, it became an important business strategy, indispensable throughout the 1990s. To this day, Outsourcing remains popular and widely used in many businesses due to the significant benefits it can bring.
However, this form of outsourcing also sparked considerable controversy among experts, and to this day, these ‘wars of words’ have not concluded. Many support it because it motivates businesses to allocate resources more reasonably and efficiently. At the same time, it also helps maintain the essence of a free-market economy worldwide.
Nevertheless, there is also a group of people who oppose outsourcing because they believe it leads to job loss for many domestic workers. They also argue that many businesses opting for contracting out deprive domestic labor of opportunities. Despite the potential consequences, however, this form of third-party services is still chosen by many businesses and large corporations because it can bring them significant benefits.
The benefits of outsourcing
It’s not without reason that many businesses choose to use external services. This is because outsourcing also brings many benefits to the hiring entity, such as:
High level of expertise
When hiring external personnel, businesses can choose outsourcing service providers with expertise to meet their requirements and goals. With a high level of expertise, businesses can easily achieve the desired efficiency while saving time and costs compared to doing it themselves.
Cost minimization
When hiring personnel, in addition to salaries, businesses must also pay for other expenses such as health insurance, personal income tax, social insurance, or other welfare benefits. Therefore, the cost of external services is often much lower. Additionally, because there are many companies providing outsourcing services, businesses have the right to choose and hire at attractive prices thanks to promotional programs and discounts.
Access to advanced technologies
To be chosen among many outsourcing companies, these entities also need to have a team of experienced staff. Along with that is the application of advanced technology to create satisfaction and trust for each customer. Therefore, businesses that outsource also have access to modern technologies without requiring significant initial investment costs.
High labor productivity
The workforce of outsourcing services is highly efficient; they can even allocate personnel as needed. With diverse, experienced, and highly skilled personnel, they can quickly resolve any issues that arise.
Current forms of outsourcing
Currently, there are three common forms of outsourcing applied, namely: labor subcontracting, service leasing, and labor leasing. Specifically, they are as follows:
Labor subcontracting
Businesses organize their own recruitment according to their needs but will hire another service company to sign contracts with the workers and directly manage these personnel.
Labor re-leasing
The service company will recruit workers and manage them, but they still have the right to work with other companies. The workers are managed by the new company but still maintain a labor relationship with the service company that hired them.
Service leasing
Businesses with outsourcing services directly manage, train, and lease their workforce. At the same time, they are also responsible for business results and manage the work of the workforce. This form is often known to hiring entities as an agency.
Disadvantages of outsourcing
Despite bringing many benefits to businesses, outsourcing services also have some disadvantages, such as:
Making businesses unable to react in time
Companies offering external services can suddenly go bankrupt or face challenging, insurmountable issues. When this happens, the businesses that hire them will experience direct impacts. If the unfinished work requires a third party to take over, it will face interruptions, and in some cases, businesses may need to restart the hiring process from scratch at a relatively high cost.
Cost Incurred
Choosing to outsource can help a business save costs compared to handling tasks internally with its own workforce. However, this does not necessarily mean that using outsourcing services always leads to cost savings. If the contract between the two parties is loose and not well-defined, the hiring party may incur additional costs.
Low-Security Level
This is also a concern for many businesses, especially when using outsourcing. After all, the service users are outsiders. Although they have committed and promised not to disclose customer information, there is still a possibility that they may secretly sell the company’s information to competitors.
Key considerations for achieving high effectiveness
When aiming for efficient outsourcing services, businesses and investors should take note of the following issues:
- Define the requirements and desires of the business at each specific time.
- Take a moment to reassess the internal resources within the business to see if they align with the aforementioned requirements.
- Clearly identify the positives and limitations of using third-party services.
- Select an external team that is committed, and understands the product, as well as the goals and efficiency that the business is aiming for.
- Evaluate the reputation, expertise, and customer service of the external service provider.
- Specify specific terms in the outsourcing contract.
- If the business currently lacks the resources to build a specialized workforce, contracting out services are considered an optimal method.
Hopefully, the information shared above can help you understand what outsourcing is, as well as the benefits and limitations that this service brings, thereby avoiding complications when using it.
Furthermore, if businesses want to minimize the risks of contracting out services, avoid outsourcing, and need a high-quality, experienced, and specialized workforce to efficiently carry out their projects, they can rely on our expertise. With over 6 years of experience in IT third-party services and numerous successful projects, we can certainly help businesses develop suitable products, ensure quality, and excellently fulfill the requirements set forth by valued enterprises.
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