Outsourcing has become the norm in the business world today. Many companies work with third-party vendors to run their operations. From inventory management to content development and web development teams, outsourcing is widespread.
Essentially, outsourcing is the engagement with an external party to manage business activities. The third-party may either be local or international, an organization or individual within the region or outside.
In 2018, the outsourcing market size hit the $85.6 billion mark, as per Fortunly. Large, medium-sized, and small businesses –all outsource their services. While some outsource an isolated function, others may outsource an entire project.
What is IT Outsourcing?
Today, you can’t survive in the business world without a strong IT setup. However, it may so happen that your core business is not directly linked to IT.
For instance, if you are a mat producing company, you may not have an in-house software development team. In that case, you may hire third-party software developers to get a competitive edge. IT sourcing allows you to have a top-notch team of software developers to handle your IT functions.
Unsurprisingly, IT outsourcing (ITO) and Business Process Outsourcing (BPO) lead the global outsourcing market. Last year, the revenue generated by the global ITO and BPO industries was $62 billion and $23.6 billion, respectively.
Types of Outsourcing
Based on the physical distance between your company and the third-party service provider you have chosen. Outsourcing is divided into three types:
Let’s explore each of these types and what they have to offer for your business.
On-shoring is, perhaps, the most beneficial type of outsourcing in terms of access. On-shoring refers to getting the services of a company or individual within your national borders. The service provider may either be based in the same city or another part of the country.
Look at this example. Your company is based in Michigan, and you outsource your IT functions to a software development company located in New York; this is on-shoring.
- Many big organizations choose on-shore outsourcing for close proximity. You can easily reach out to the company whenever needed.
- Also, locating your operation to a nearby location reduces the operational cost.
- You don’t have to face cultural barriers as you understand the language, political, and social setup of the service provider.
- Above all, on-shore outsourcing saves you from the communication and accessibility issues linked to time zone differences.
Perhaps, the only major disadvantage of on-shore outsourcing is the scarcity, i.e., you may not have enough options. The limited choices may come with a higher price.
When you step past national borders and source your services from a neighboring country, this is referred to as Near-shoring. Since the country is located within the same region, the time difference is not usually more than two hours.
For instance, when an organization based in England hires a third-party contractor in France, it is the case of near-shore outsourcing. Similarly, American businesses may near-shore their services to Mexico, or the UK-based company near-shore to Eastern Europe.
- Only a 2-3 hour time difference makes communication easier.
- You may hold face-to-face meetings with the service provider more often at reduced travel expenses.
- The frequent visits allow you to enjoy more control over your business.
- Cultural compatibility helps avoid misunderstandings, thereby facilitating the work coordination.
Similar to on-shoring, you may have limited options when it comes to near-shoring services. However, that’s not the case always.
Off-shoring is going “beyond the shore” for outsourcing your services. The outsourcing company might be located in another region or continent far away. In off-shoring, the time difference of your company with that of the service provider is 5-6 hours.
We are living in a global village, and many countries are focused on different industries. For instance, Germany and Japan are considered the hub of automobiles, the UK and Switzerland have the best financial services, and for IT outsourcing, India and Ukraine are the best choices. Many US-based companies outsource their IT functions to India.
- Off-shoring reduces your operational costs.
- Low operational costs allow businesses to remain competitive in the market.
- Off-shoring your IT services help you focus on core business operations.
- You have a plethora of options, allowing you to hire experts from a large pool.
- Since there are so many options, companies offer their services at competitive prices.
While off-shoring has so many benefits to offer, it has some drawbacks too. First, the different time zones can affect work coordination. Also, cultural differences and communication barriers come into play. Since the service provider is located in another region, you cannot monitor the operations directly.
Choosing the right outsourcing form might be a tricky decision. However, with a thorough analysis of the costs and benefits, you will be able to make the right choice. Weigh in the pros and cons of each type and see what suits best to your organization. You may also incorporate a mix of on-shoring, near-shoring, and off-shoring for your services.