Outsourcing is the contracting out of a business function to an external provider. In recent years outsourcing has gained widespread attention, particularly as online networking has allowed for easy contracting-out across international borders. However, the reality is that outsourcing has been around for as long as doing business has existed.

Businesses of every size outsource certain functions. The hiring of an accountant, for instance, is so commonplace that few people would even consider it outsourcing. However, as a business gets larger and more complex, an owner may increasingly look to bring in outside expertise. A rapidly growing business can use outsourcing to add expertise, either by introducing a new service or by contracting out a particular business function. For instance, a rapidly growing business could outsource payroll operations rather than develop an internal function.

Mature business may see outsourcing as a way to reduce costs and gain efficiencies. They may contract out activities that are already done in-house — such as human resources or information technology services — or they may find an outsourcing solution that can create a new customer benefit, such as a 24-hour customer hotline service.

Some of the benefits that companies may gain by outsourcing include:

Core business focus: One reason companies often adopt outsourcing is to enable them to focus on their core business. Many companies, including multinationals, have often found it useful to spin-off entire internal divisions — setting them up as separate companies — in order to allow the parent company to focus on its core competencies.

Expertise: A small business may not be able to as easily compete in the labor market for specialized skills that are in high demand, especially if they are only needed on a short-term basis. For instance, it may be hard to hire a software engineer for a fixed-term project writing code for a proprietary software system. By outsourcing, a business may be able to obtain reliable third-party assistance on an as-you-need-it basis.

Larger talent pool: By outsourcing, a business may be able to gain access to a larger talent pool alongside a wider selection of skills. Many outsourcing services will be able to extend your team to include professionals who are based in other geographies, including those that are overseas.

Financial benefits: By contracting out services, a business may be able to reduce the expenses associated with payroll expenses and other financial contributions (such as staff-related taxes and benefits).

Some downsides that come with outsourcing include:

Team spirit/employee morale: Although an outside resource may be professional, he or she will not have a sense of loyalty to your company. If you have an in-house professional, he or she will likely have a stronger desire to look for efficiencies or generate new ideas. Also, if by contracting out you are making internal team members redundant, this may damage morale within your business.

Loss of control: By employing an outside firm, you may suffer a loss of control of your operations. Downsides of this may include a contractor’s inability to meet quality standards, manufacturing specifications and requirements.

Security: By contracting out, you may have to trust external parties with confidential or propriety information. This may be financial data, strategic plans or, if you are contracting out manufacturing, patented formulas or designs.

Legal issues/disputes: As you are entering a contract with an external party, you may need additional legal support when striking an agreement or resolving a dispute. If you are contracting out to a different legal jurisdiction, especially one outside of Canada, resolving legal problems could be more difficult.

Businesses may find advantages or disadvantages to outsourcing depending on the nature of their enterprise and the capabilities of the chosen service provider. For instance, depending on the flexibility of a contract with a service provider, outsourcing may either enhance or slow your company’s ability to adapt to market changes.

Have you turned to outsourcing as a means to gain efficiencies in your business? If so, what were the results? Share your insights in the comments