The opportunities and risks of outsourcing for small businesses

What opportunities and risks does outsourcing present? Here, Amelia Bishop presents the top five of each for small businesses.

Outsourcing means contracting out one or more of your business functions to another company, often referred to as a third party.

Companies of all types and sizes use outsourcing. Some because they prefer to concentrate purely on their core activity, others to save money. A local vehicle repair centre, for example, may outsource its bookkeeping function as its business grows. It may find its simple spreadsheet, which was fine for recording day-to-day receipts and invoices, is now too cumbersome and time-consuming to maintain as the finances grow more complex. In this scenario, the cost of a third party’s services is outweighed by the time freed up to do fee-earning work.

So, what opportunities and risks does outsourcing present? Here are the top five of each.

Outsourcing – the opportunities

You’ll save costs. Outsourcing can cost far less than employing an expert, not to mention setting up a whole new department. Professional services are, of course, tax deductible and you won’t have to pay employee National Insurance Contributions or meet other employment-related obligations. You’ll also save on items such as workstations, IT equipment and other office-based expenditure. It’s definitely worth working out how much money outsourcing could save you.

It’ll speed things up. By outsourcing to an established expert, you’ll get things done much faster than you would if you chose to recruit and / or train a staff member. Depending on the size and complexity of the function to be outsourced, you can be up and running with an outsourcing partner within days.

You could become more efficient. You could discover ways to increase efficiency across your business when you outsource – and this in turn could enable you to streamline other areas of your business. This will benefit your customers and sharpen your competitive edge.

You can demand quality. As the client, you can set the service levels you want your outsourcing partner to adhere to. You can benefit from best practice in the discipline without having to make any investment beyond the contract fee.

You’re in control. Whether you need the outsourced service for a few weeks, several months or indefinitely, you’re in control. You can negotiate an outsourcing agreement that works around your budgets and business cycle

Outsourcing – the risks

You won’t be directly in charge. In most cases, outsourced services are provided from the service provider’s premises and overseen by their staff. This means you won’t have direct managerial control. So, if you’re really hands on or like to micro-manage, outsourcing may not be for you.

You’ll be sharing data. Depending on what function you’re looking to outsource, you could be entrusting sensitive data to the third party. If you outsource payroll or HR, for example, that provider will have access to your employees’ home addresses, salary information and bonuses, etc.

What if your partner goes out of business? There’s a risk of disruption to your business if your outsourcing company goes out of business. Do your homework on any service provider before entering any agreement and assess whether the risk is real and if so, how it would affect your business.

Your reputation could be on the line. If you outsource customer-facing functions such as aftersales care or complaints handling, how your outsource partner handles these interactions will directly affect your reputation and ability to retain those customers.

System compatibility. If your service provider uses different IT systems or requires you to install and learn how to use new software, the time and costs involved could negate the financial benefits of outsourcing.

Seven steps to outsourcing success

Think carefully about the function you wish to outsource and identity who in your organisation it will affect. Be particularly sensitive if it will impact on people’s jobs. Think too about any changes you’re making to customer-facing functions. Could they lead to frustration or dissatisfaction?

Analyse the benefits of outsourcing the business function. Do they outweigh the costs?

When a new restaurant was looking to market itself through local and social media, it was struggling to come up with designs for flyers etc. After engaging a marketing company the business outsourced the problem, saving itself time and acquiring superior marketing materials.

On the other hand, a catering sole trader who provided catering for events decided against outsourcing food preparation and delivery after assessing risks such as:

  • the outsource partner being unable to deliver food for an event
  • whether everyone who would be involved were food hygiene trained
  • whether the partner’s cooking facilities were fully health and safety certified.

Write a plan. Detail your approach, state what’s going to change and who will be affected – and how. Decide when the time will be right to implement your outsourced arrangement.

Insist on ownership. In your negotiations with outsource suppliers, make sure you retain ownership and control of the function. Document this clearly in the agreement or contract.

Consider cultural differences. If you outsource to a company outside the UK (known as offshore outsourcing) consider any legal, contractual or cultural differences this may involve and how they could affect your business.

Lead and manage. Stay in control and protect your business and employees by managing the transition of the function.

Keep your employees involved. It’s vital to communicate with – and where necessary retrain – employees whose jobs have been affected by the outsourcing. Keep them fully engaged.

Amelia Bishop is founder of Weenie Small Business Solutions

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