There has long been a question in business about insourcing and outsourcing. Each strategy has its fans and proponents, but one thing is extremely clear, a single company, no matter how large, cannot cover all the processes. There are many companies that outsource, and they have come to realize that there are significant benefits available to them in doing so.
Outsourcing has become a widely adopted business practice, enabling companies to access specialized expertise.
A study from Deloitte highlighted that the most common reasons for outsourcing include:
In recent years demand for outsourcing services increased because of lockdown and quarantine measures.
As you can see, there are many different reasons why companies outsource. In many cases, there is no one single reason for why outsourced services make sense. Many different reasons might apply based on where a business is in its growth. In most cases, it might be a combination of factors – skill and cost, or capacity and time to market. One fact is clear, though – outsourcing, when done right, can help companies become significantly more efficient. Let’s now illustrate the reasons to outsource with outsourcing examples.
The organizations listed below have understood a fundamental truth – namely, by focusing internally on the core business processes and outsourcing non-core functions, they can not only be more effective; they can also grow faster, and save money.
Outsourcing services are in demand all over the world, and relevant to businesses of all sizes. Some examples of companies that outsource include:
Google started as a simple search engine but has since become a massive organization offering hardware and software services in addition to its advertising services with employees distributed around the world. Today Google is almost a proverb for the internet itself, and its name has become a verb used by everyone when talking about searching online.
While Google’s creed of “Don’t be evil” is no longer part of its code of conduct, it is a company with exceptional business practices and policies. Google is a technology company – that is, its strength and the heart of its business. They are one of the major companies that outsource and have been outsourcing non-core functions like admin and IT work for years.
However, Google also understands that even with its size, it cannot do it all. To that end, they have also been outsourcing development work, email support for products like AdWords, and more. Google is expanding this even further and in addition to email support, also offering phone support with staff around the world. These individuals are seamlessly blended into their in-house support team, providing clients with improved response times at a reasonable cost. All these make Google a perfect outsourcing example to illustrate the reasons for companies to outsource.
Reasons for outsourcing: accessing the pool of talents and skills, solving capacity issues, improving quality, and reducing costs.
Lessons to learn
Google understood that size is irrelevant when it comes to outsourcing. By understanding what work can be outsourced and what work needs to stay in-house, Google was able to maximize its budget utilization.
When talking about online eCommerce firms, several names come to mind. You have Amazon and eBay, of course, but a company that has quickly come to the fore is Alibaba. Alibaba is another example of companies that outsource, but unlike Amazon and eBay, Alibaba is based in China, which makes the challenges of outsourcing somewhat different.
In most cases, companies that outsource do so based on cost. Often this is to lower-cost countries like India, China, and the Far East. However, when the company itself is based in that region, the paradigm shifts. Alibaba understood that while they could keep their manufacturing and resource costs low locally, the skills they needed to grow were not available at scale in their region.
With this in mind, Alibaba started looking for partners and outsourcers early in their development across a host of different projects and found many of the skills they needed in the US. By outsourcing web development to the US, the site flourished and grew at an astronomical pace.
Reasons for outsourcing: accessing the pool of talents and skills, improving quality, greater focus on core business.
The main point to pick up on here is that you need to have an understanding of your requirements. By knowing what skills were lacking in their region, Alibaba was quickly able to find an outsourcing company to accomplish the tasks they needed to get done.
WhatsApp is a well-known name when it comes to communication. It’s being used globally by millions and has recently started making forays into online payments to benefit customers further. However, WhatsApp did not start out as the company you see today.
When thinking about companies that outsource, WhatsApp is a good example of outsourcing as it has been doing it from the very beginning. As early as 2012, WhatsApp was a small organization with only 30 full-time employees and five part-timers. Based out of Mountain View California, they understood that if they wanted to grow, they needed to keep costs down. For WhatsApp, partnering with a third-party vendor was a good business strategy, sourcing development resources from Europe for a small fraction of what they would have had to pay in the US.
Reasons for outsourcing: reducing costs, a greater focus on core business.
The WhatsApp team understood that geography should not be a boundary. To that end, they identified what they needed to grow and then looked globally for where they could gain access to those skills cost-effectively.
For project managers and others interested in a tool to keep tasks on target, Basecamp is well known. Basecamp started out small, and while they are prevalent in the project management field, they maintained a small footprint of in-house resources.
Basecamp actually understood that trying to do everything by themselves was not the right strategy for the organization. They saw that while their tool was being used by others to manage projects and work, they were having problems internally with workflow and client support. To resolve this situation, Basecamp decided to outsource some essential functions so that their internal teams were able to focus.
With Basecamp, improving the app was a task that needed to get done, but Basecamp understood that others could also perform that task. In this outsourcing example, by using remote developers, Basecamp was able to continue driving improvements into the product, which helped it grow. Simultaneously, the internal staff was able to focus on internal processes and organization, which ensured the company thrived.
Reason for outsourcing: a greater focus on core business.
The critical point to understand with Basecamp is that companies need to know where their problems are. In Basecamp’s case, it was not with development or skills, but rather their own internal business operations, human resources, and time. By outsourcing work to others, Basecamp was better able to focus on running their own organization.
Skype was a precursor and leader in the online video field. With software clients that work across smartphones and PCs almost everyone has used or knows what Skype is. Skype, like WhatsApp, realized that product development was not the key to its success. Instead, Skype needed to find the right talent and skills at a cost point that made sense so they could continue to develop the software while keeping costs low.
Skype is another major company that resorts to outsourcing businesses, and they picked Estonia (East Europe) as a source of talent and brought on several developers to work on the product. As time progressed, and these developers demonstrated success, Skype brought them in as partners further cementing the relationship. The strategy worked for Skype as Microsoft bought them for $8.5 billion in 2011.
Reasons for outsourcing: reducing costs, solving capacity issues, accessing the pool of talents and skills.
Skype demonstrates a similar experience to the WhatsApp example by focusing on finding talent globally. Both organizations have shown that the most critical requirement is the skills available and not just their geography.
Slack has revolutionized the way companies work and changed collaboration as we know it. In many cases, Slack has perhaps done too much to improve communication as employees sitting beside each other will often just slack each other instead of conversing in person!
Started in 2013, Slack has quickly become the de facto standard within high-tech organizations for internal communication. With its simple-to-use interface and its integration capabilities, it’s a definite winner, but this success didn’t happen by itself.
Slack had a core team of only four developers that built the product and took it to market. However, this group knew that for their product to be successful, they needed to ensure that it looked good and worked flawlessly. To that end, Slack engaged an outsourced design firm for beta testing. This feedback about what worked and what did not with the product helped Slack build a solution that businesses embraced.
Reasons for outsourcing: improving quality, accessing the pool of talents and skills.
In Slack’s outsourcing example team understood that design elements and product beta testing were beyond their skillset. They knew that, like any good author, editing your own work is often the most laborious and challenging task. By using a trustworthy outsourcing company, Slack was able to gain valuable insight into what worked from a customer’s point of view.
For developers and coders, GitHub is one of the most important tools and resources available. Launched in 2008, it quickly became a “go-to” repository for developers looking to document, share, and host private code. While GitHub promptly became one of the best ways of sharing details on entire projects, it was not really suitable for smaller code snippets.
This was when Gist was born as an idea. After identifying what they wanted to do and how they wanted it to look, the question was who would build it. The founders of GitHub did not have enough financial capital to do the work themselves, so their solution was to hire an outsourced developer as a Git contractor.
Reasons for outsourcing: solving capacity issues, reducing costs, and a greater focus on core business.
With over 56 million projects and more than 600 employees, GitHub has come a long way since its humble beginnings. In the GitHub example, its success is purely down to an understanding of what to focus on internally and what can be better done through the use of outside resources.
The browser wars between Internet Explorer, Firefox, Chrome, and Opera were hard-fought. Internet Explorer is no longer relevant with Microsoft’s move to Edge, and while Firefox is still around its market share is stagnant. Opera, however, has had some fervent fans for many years, and for a good reason.
As an extremely lightweight web browser, Opera is straightforward to use and continues to offer cutting-edge features that users need. Launched at the dawn of the internet era in 1995, Opera was initially a side project inside Telenor – one of Norway’s largest telecommunications companies. Opera eventually began as a separate company outside Telenor’s umbrella, but Oracle Software ultimately acquired it.
Reasons for outsourcing: solving capacity issues, accessing the pool of talents and skills, and reducing costs.
While initial funding for Opera was provided by its parent company when Opera became its own entity, resources were limited. Understanding these limitations was a critical decision as it helped influence Opera’s use of development outsourcing services. Opera is an example of outsourcing development around the world based on developers’ skills and capacity.
MySQL has been around for a while, and right from its inception, it was just that little bit different in comparison to its competitors. MySQL understood that success for them was through a GNU General Public Licence linked with an outsourcing strategy from day one.
In this example outsourcing strategy paid immediate dividends for the company and its growth skyrocket. With an almost fully outsourced development team along with operational staff distributed around the world, MySQL is used by millions of organizations globally.
Lessons to Learn
MySQL knew and understood that to compete, they needed to be different from their competitors. They took this strategy to heart and built a plan that included outsourcing tasks to third-party providers to maintain costs at very low levels.
When discussing revolutionary technology companies, Apple’s name needs to be at the top of everyone’s list. This company that started with the humble desktop became one of the key innovators and then completely changed the world of music and mobile phone technology. Currently valued at over $2,8 trillion, Apple is nothing if not innovative, and millions of consumers swear by its products and ecosystem.
However, while Apple designs excellent products, it does not make or manufacture them all by itself. Apple is another example of a company that hires outsourced teams, and it depends on multiple partners in the US, Asia, and the Far East for producing hardware and services. In some cases, these relationships go back decades. By outsourcing their supply chain and manufacturing facilities, Apple is able to focus on its core strength – designing great products that people like to use.
This relationship benefits both parties, though. Apple gains the ability to focus on their strengths. The partners also gain as they know that Apple is always innovating and changing. For these organizations, they know that Apple will be launching new products on a regular cycle. Products that consumers will want to purchase.
Reasons for outsourcing: reducing costs, a greater focus on core business, and solving capacity issues.
Apple has understood its strengths well. Also, Apple has recognized that outsourcing is about building relationships and ensuring that both parties benefit. It’s a mutually beneficial relationship that Apple has been able to navigate successfully, and it’s a relationship that has benefited all of us also.
The list of companies that outsource we have provided is only the tip of the iceberg. Today the question about whether or not your business should outsource is almost irrelevant.
Companies that want to compete on a global scale need to look for the most cost-effective and useful strategies possible, and outsourcing is high up on that list. It is clear that regardless of the size of the business and its services, there are benefits that can be realized by outsourcing. Companies around the world have started to understand this concept to an ever greater degree. They have recognized and grasp the fact that by outsourcing non-core functions, they are better able to focus on what their business was founded to do.
At NIX, we have been helping provide outsourced software development services for companies worldwide for almost 30 years. Our team of engineers and analysts can work with you to understand how an outsourcing service provider can benefit your organization. We can help you grow through outsourcing services, so you can benefit in cost and efficiency. Contact us to find out how we can help.
What do companies outsource without jeopardizing the quality of their product? The range includes but is not limited to payroll processing, recruitment, legal services, marketing activities, and more. One of the most demanded outsourcing services is software development related to consulting, design, development, testing, and maintenance. Clients may need partial coverage of tasks or end-to-end services. Businesses choose to delegate routine tasks that create backlogs and prevent experts from focusing on their primary duties. Another reason for outsourcing is driven by skill gaps. If a company starts a new project that requires a specific expertise, delegating it to a team of professionals could be beneficial.
Why do companies choose to outsource work to external parties and freelancers? The primary reason for outsourcing is money and time saving. Hiring an IT partner from Eastern Europe will lower your HR and software development expenses, no matter whether it’s outsourcing manufacturing, healthcare, educational, banking, or any other industry-related software development. This allows companies to focus on the core business operations. Project delegation also offers the flexibility and scalability often required in the tech industry. You will also have access to a much larger pool of candidates, including niche specialists that might not even reside in your area.
One of the most prominent outsourcing success stories involves Procter & Gamble, a global manufacturer of consumer goods. After deciding to outsource their research and development tasks, they experienced a 60% growth in innovation productivity. Over the next few years, the company launched 400+ new products and earned more than $10 billion USD in revenue. In the tech world, companies that benefited from outsourcing include LinkedIn, Wells Fargo, Pfizer, Unilever, etc.
The main concerns associated with outsourcing are communication and security issues. Privacy concerns may derive from sharing sensitive data with a third party. Oftentimes, your IT partner may be located in a different time zone which can make communication difficult to navigate. There is also a chance of choosing a wrong or unreliable company that lets you down. So why do companies choose to outsource work despite the drawbacks? All of these drawbacks can be mitigated with certain precautionary measures like NDAs, IT partner vetting, business communication tools, and more.
The first step is to evaluate the need for outsourcing. Take your weaknesses into account when determining whether you can benefit from it and which areas can be delegated. However, consider conducting a cost analysis to determine whether in your case outsourcing is cheaper than hiring internally. For example, if it’s a one-time task then delegating it will make perfect sense, but outsourcing a project that needs continuous work may not be that lucrative for you. Another critical consideration is the importance of the task. If some work is not crucial for the business’s success, it may be a good reason for outsourcing.
The cornerstone of successful outsourcing is communication. You can utilize business communication tools that will allow you to continuously stay in touch with your external team. Another tip is to clearly define goals for the project and convey them to your IT partner. You cannot objectively measure success without determining the end goal and vital metrics. Keep in mind that the primary reason why companies outsource is to focus on core business operations and save money. If outsourcing does not achieve these goals, you might want to reconsider the collaboration, redefine the scope, and look for a new partner.
Having more than 7 years experience in IT and Software Outsourcing as a business analyst, project manager and sales engineer, Anna helps businesses leverage digital transformation, achieve their ROI goals and speed up time to market by imposing optimal technical solutions and product roadmaps.
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