Outsourcing wasn’t formally recognized as a business strategy until 1989, but businesses have been outsourcing ancillary services to external suppliers even before. With industrialization bringing about specialization of services and an increase in demand for such—outsourcing has become the solution.
What’s seen as an advantage is the myriad of outsourcing services businesses can choose to outsource. There are several types of outsourcing services, based on the task or service provided, location, and relationship involved.
According to the task or service provided:
1. Professional/Specialist Outsourcing
Think about the non-core (non-essential or not part of your business core goals) but necessary tasks that keep your business operating such as finance and accounting, information technology (IT), administrative support, legal and human resources among other things.
These are tasks that aren’t part of your business goals but require experts in their respective fields. These types are usually the most commonly outsourced since there are maximum savings with the utmost value service delivery.
When you outsource professional services, you only pay for services or expert skills provided without necessarily investing on training or equipment yet still have access to high-quality resources—both in manpower and infrastructure.
A perfect example of this is IT outsourcing. Almost every type of business today deals with technology, and it is a business strategy if a company outsources its IT management because it’s less expensive than building its in-house team.
An enterprise might outsource all of its data storage needs because it cannot afford to or just does not want to buy and maintain its data storage infrastructure, which can be seen happening with cloud storage.
Professional Outsourcing has become very common that most companies multi-source. Multi-sourcing involves hiring the best of specialists to carry out business operations for finance and accounting, data management, IT, etc.
2. Manufacturer Outsourcing
This type of outsourcing has been very common ever since among product manufacturers, as it mainly involves outsourcing blue-collar jobs to a third party provider.
Most small to medium-sized businesses today survive because of this type of outsourcing. Due to the competitive market, there is a need to offer high-quality products at a less expensive price.
Without this type of outsourcing, these businesses lack the economies of scale that allow them to compete with industry giants, as not all of them can actually invest in and continuously upgrade equipment, personnel, and process technology that are necessary to compete in a market.
3. Process Specific or Operational Outsourcing
Unlike professional or specialist outsourcing where it is specific to talent or personnel, this is specific to operations. Companies choose to outsource specific operation-related aspects to other companies or units that specialize in that particular service.
For example, retail companies choose to outsource shipping and delivery to courier companies. Companies opt to outsource maintenance of their equipment with those that specialize in such services.
Similar to specialist outsourcing, this allows companies to focus on their core business and improve service delivery while reducing costs and saving time.
According to location:
1. Offshore Outsourcing
This outsourcing practice means outsourcing to another country and has boomed during the growth of the Internet and telecommunications in the 1990s.
Unlike before where this is seen as a way to simply reduce operation costs, this is now regarded as a strategic way to enter new markets and tap talent unavailable within one’s country.
When the economic crisis hit the US after the 9/11 attack, most companies decided to outsource operations offshore just to keep their businesses afloat.
As the economy got better, US-based companies started to bring more of their operations back home. This tecniquie is known as reshoring, which is the transfer of a business operation back to its home country.
This location-based outsourcing combines the benefits that offshoring and reshoring give. It allows business to strategize, letting them keep operations “near” location but still saves money and improves service delivery.
Nearshoring is simply moving business functions to a country geographically closer to a closer time zone or economic structure to the company's home country.
According to outsourcing relationship:
HfS Research outlines three types of outsourcing relationships in its white paper, “ The Great Talent Paradox in Outsourcing .”
1. “Lights On” Outsourcing
HfS Research defines this relationship with a buyer seeking to simply drive out cost without incurring any “disasters.” This buyer is satisfied with having their services done at a cheaper cost with no added value—as long as the set goals in the form of SLAs (service level agreement) are met.
2. “Efficient” Outsourcing
This relationship has a buyer that recognizes developing a management plan to facilitate continuous improvement as well as efficiency gains that deliver more strategic value.
This type of relationship has companies or buyers willing to invest in specialized skills but are not willing to invest in upgrading their talents (or training them further).
3. “Strategic” Outsourcing
This relationship category has the buyer recognizing that outsourcing work merely to reduce upfront costs is a short-term measure, which will not produce long-term savings without onshore-to-offshore staff exchanges and process improvement investments.
These types of buyers make the decision to outsource based on their companies’ goals and even see the outsourcing provider as a partner to collaborate with to improve business outcomes. They see the value their outsourcing partners provide and develop their talents according to evaluated metrics, which will help them move forward as project goals change within the business.
Which type of outsourcing is best for your business?
Regardless of the type of task or service one chooses to outsource and the location one outsources to, one should always aim for a strategic relationship with the outsourcing provider.
Do not outsource just for the sake of reducing cost operations, you should consider your business goals, identify areas you need specialized help with, analyze whether it’s easier to keep an in-house team or outsource, and then decide.
When you decide to outsource, look for a partner that doesn’t only deliver services according to set goals but also brings value to your business. That’s when you know that you have the best outsourcing partner.