Why do companies outsource?

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A lot of businesses ask themselves, “Why do companies outsource?” After working as an outsourcer for most of my professional career, I can tell you I have seen two major reasons why companies outsource:

  1. Conservation of Resources
  2. Lack of Capabilities

Let me explain both.

Conservation of resources

Companies usually outsource operational tasks of a business or specific projects. Operational tasks usually do not require specific business knowledge, like managing a Help Desk or Call Center. Yes, you can operate a Call Center or Help Desk more efficiently but it’s not the area of the business that creates the most value or growth for the enterprise. These areas of a business are prime for outsourcing to conserve resources and re-assign them to the areas of the business that can provide the most potential success.

There are other times when the business needs something specific to be done, like building a new product, performing specific research, or modernizing an existing asset. Most employees in a company are tied to their day-to-day operational tasks and have little time to work on special projects. This is another area of a business that is usually outsourced in order for a company to complete a project on time.

Both of these are examples of what I call “conservation of resources.” A company outsources a specific area of the business or specific project because it wants to conserve resources, and cash is usually the resource that is conserved. Cash is conserved to be spent on another area of the business or conserved by not hiring additional employees (and using outsourced resources to complete the specific projects).

Lack of capabilities

The other main reason companies outsource is because their internal resources do not have the necessary capabilities, experience, or expertise to perform the needed tasks. It might be the need for specific software developers in a new technology or a fraud expert that can create a new fraud detection template for your Fraud Detection Department, for example. The important thing is that the company needs something very specific to be done and it does not have the internal resources or expertise to perform them. This is outsourcing helps.

By outsourcing specific needs, the company can to get the job done well and hopefully train some internal resources to perform the task in the future. Take, for example, the need to build a new Apple Watch App. The company does not have an internal Apple Watch developer, but it can outsource the development and have the outsourcer perform knowledge transfer to internal resources at the end of the project.

Although every company’s specific reason to outsource may be unique, in my experience the reason is usually either a lack of capabilities or conservation of resources. So if you have limited resources or lack of experience in your team and need something done, then outsourcing may be your solution.

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