In Pursuit of Profit
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Cost cutting is the benefit most often associated with outsourcing. Subsequently, business leaders looking to reduce expenses may jump at the opportunity to move costly functions to third-party vendors without regard to the numerous ways that outsourcing can be advantageous to other areas of the company. However, it is important to recognize that while cost savings may occur, this is not the only benefit of business outsourcing. In fact, cost cutting may not even be the biggest benefit.
Other long-term benefits include controlling fixed costs, pricing stability, improved revenue growth potential, increased business agility, greater access to skilled personnel, reduced risk, and improved process efficiency. Understanding these broader benefits allows executive leadership to identify additional activities that would be advantageous to outsource.
Cost control is not the same as cost cutting. Cost cutting means reducing spending, while cost control is about spending strategically to get cash where it can achieve business goals and make the biggest difference for the future of the company.
Outsourcing allows your business to control costs by reducing major expenses like labor, equipment, and infrastructure costs to devote more cash to revenue-generating activities. This cost savings provides a means to funnel capital into other areas of your business. Reduced costs also allow businesses to keep their prices lower instead of passing them through to customers, which can fuel sustainable revenue generation as well. The result is accelerated growth, which makes the business more attractive to investors, especially for earlier stage businesses.
Furthermore, outsourcing allows you to convert fixed costs into variable costs, which improves cash flow and makes your business more agile.
Improved agility makes the company more flexible – positioning it to respond to market changes more effectively and capitalize on opportunities when they arise. Agile companies are less likely to be negatively affected during market downturns and more capable of seizing growth prospects.
HR is another area where outsourcing can significantly improve flexibility because it allows a company to bring on additional expertise for short-term projects or urgent needs without the cost of hiring and training. Without needing to search for, hire, and train new employees, companies can hit the ground running.
Access to Advantages
Outsourcing allows smaller businesses to act larger than they are, gaining access to some of the same expertise, networks, opportunities, and economies of scale that bigger companies typically have available to them. Small businesses can gain access to highly skilled professionals that they cannot afford to hire internally. Outsourcing technical areas like accounting and IT gives these businesses access to the same level of experience that bigger companies retain among their in-house staff, allowing them to punch above their weight class.
Additionally, large corporations have legal teams to manage risk, but small businesses often do not. Outsourcing permits third-party providers assume this risk of their behalf, simultaneously reducing their risk level and minimizing compliance costs.
Handling everything in-house drives up costs and reduces overall efficiency, pulling resources away from your core areas. Outsourcing complicated activities with many touchpoints, like third-party logistics, can improve efficiency enough to not only pay for the cost of doing so, but aid in generating revenue elsewhere.
Outsourcing allows for improved process efficiency as well, allowing businesses to launch new products/services more quickly and take on more complicated accounts than they would be able to manage otherwise. In this way, outsourcing facilitates and fuels a growth strategy as well.
With more and more service companies popping up to provide third-party options, outsourcing is easier than ever before. However, outsourcing too much is as big of a problem as not outsourcing at all. So, which functions should you outsource? Read our Guide to Small Business Outsourcing for more information.