What is Outsourcing? Everything to Know About Outsourcing

Everything to Know About Outsourcing

More and more, digital transformation is functioning a great place in our life as individuals, and companies, as well. Here comes outsourcing, a vital step for any enterprise to obtain a competitive edge among many other companies. Later on this blog, we are having a deep look inside Outsourcing, IT outsourcing models, advantages of outsourcing, its challenges, and its pricing models.

What is Outsourcing:

Outsourcing is a common business practice, in which a company hires a third party to perform services or tasks that were traditionally performed in-house by the company’s own staff. Although it was first recognized in 1989, it has become an integral part of business management on a global scale nowadays. In fact, outsourcing services can the best choice for any business of any field, as it is a leading business practice, deriving its importance from its advantages.

On another hand, IT sourcing, which is one of the fastest growing industries in the world, is the business practice of using external technology providers to handle information technology functions, i.e. infrastructure solutions, software support, disaster recovery, network services, software development or QA testing.

IT Outsourcing Models:

IT outsourcing services revolve around three main models. These models differ in terms of their approaches and physical location of the service vendor, as companies may choose to outsource IT services onshore, nearshore, or offshore.

Onshore :

Onshore outsourcing, also known as domestic outsourcing, means to outsource IT services from a third party that is located in the same country. Although it would be rather pricey, onshoring is one of the outsourcing models that enables a higher level of control and closer contact between the two companies. To sum it up, onshore outsourcing is the best option for businesses that need to work with technical personnel who are familiar with their country’s business environment.

Nearshore :

Nearshoring is all about selecting an IT partner in a neighboring country. For instance, many companies in Jordan outsource work to Syria or Lebanon. This outsourcing model is considered cost-effective and high-quality, rather than onshore outsourcing and an affordable yet suitable option that allows for better communication and more streamlined integration.

Offshore :

Offshoring is a common business model that many companies worldwide choose to develop, deliver and manage IT services at a much lower cost. Here, a company may hire skilled workers to handle professional services remotely. In other words, offshore outsourcing is perfect for businesses that want to take advantage of lower labor costs in foreign countries.

Advantages of it :

No matter the type or size of the business you work with, outsourcing can provide a variety of substantial benefits from cost savings and efficiency gains to greater competitive advantage. Outsourcing benefits can be summed up in the following: Getting access to professional skills, focusing on core competencies, decreasing costs, increasing business growth, and providing staffing flexibility.

Getting Access to Professional Skills:

While in-house working may keep your company from reaching highly experienced employees, outsourcing doesn’t. As it allows you get access to professional skills that may be far from reach within the company.

Focusing on Core Competencies:

Outsourcing allows you to efficiently focus your in-house human and financial resources on the profitable tasks that your business has to achieve.

Decreasing Costs:

When you choose to outsource your work, this would mean minimizing costs that you can get use of to release capital for investment in other areas of your business. Moreover, benefiting from lower labor prices is one of the greatest advantages of outsourcing, especially nearshoring and offshoring, where it reduces the expenses associated with bringing on new employees, such as: a hiring search, onboarding, healthcare and other benefits, and payroll taxes.

Increasing Business Growth:

Maximizing efficiency is the key here. As partnering with a professional third party outside that specializes in the process or service you want them to carry out for you can help you achieve a more productive, efficient service, often of greater quality.

Providing Staffing Flexibility:

Bringing additional resources to different department when necessary is much easier in outsourcing. As the outsourcing company can then be released when things slow down again, maintaining a company’s flexibility. Moreover, working with the same accounting firm or contractor each time provides consistency in addition to flexibility.

The Challenges of it :

Although outsourcing a wide range of benefits, it faces crucial challenges, however. These challenges are cultural barriers, communication difficulties, poor controlling, and intellectual property risk.

Cultural Barriers:

This is a major challenge, especially in case of offshore outsourcing, where two companies of two different cultures, in two different locations, and with two different languages are working together. Here, high-scale efforts must be done to sustain a good level of efficiency and quality, as well.

Communication Difficulties:

Internet has makes many kinds of communication easier, true. However, in daily interaction, the matter is some how difficult. This is because many employees worldwide don’t feel so comfortable with video calls, virtual conferences, and instant messages.

Poor Controlling:

Sometimes, employees may think that they have full authority over the project along with full decision rights. They may not support the change in the management of the project. This is a major challenge, but a company can overcome it through defining every detail in the contract, such as to what extent the employees of the outsourcing company can exert control over the project.

Intellectual Property Risk:

Losing intellectual properties such as business plans, and trade secrets is an essential matter in outsourcing in addition to the breach of data of a company’s customers. This may happen when the different parties underestimate the important of signing legally binding documents such as a non-disclosure agreement with the outsourcing vendor.

Pricing Models of it :

Types of outsourcing pricing models are various. Here are the most common outsourcing pricing models that companies adapt. These models are staff augmentation model, fixed price model, cost-plus model, time and materials model, consumption-based pricing model, profit-sharing pricing model,

Staff Augmentation Model:

When a client contract resources to a service provider for a specific period.

Fixed Price Model:

When a standard monthly or annually rate is set by the service provider for their services.

Cost-Plus Model:

When the two companies agree to a standard fee regardless of consumed expenses.

Time and Materials Model:

When the service providers bid on a certain project and set a proposal based on the requirements of the client.

Consumption-Based Pricing Model:

When cloud service providers charge clients based on their actual usage within a month or a year.

Profit-Sharing Pricing Model:

When the client allocates a percentage of their profit to the service provider.

Incentive-Based Pricing Model:

When clients agree to send a bonus or commission to their service provider to increase their performance.

Shared Risk-Reward Pricing Model:

When the client and service provider share the risks and developments of their operation.

In short, outsourcing is has become a fast-growing industry in 2022, that every company will adapt, sooner or later, due to its advantages for both outsourcing and outsourced parties. However, choosing the best IT outsourcing partner is not that simple. ProiTs‘ team is here to help you. Are you ready to take a step?