11 Types of Outsourcing: To Make Business Successful

Whether small businesses hire in-house employees or outsource operations, they can expand in two ways. It will be necessary to obtain capital, loans, or initial financing if you hire in-house employees to build your team and expand into new locations. 

The capital or funding needed to expand a small business is often lacking. When they are just beginning to grow and scale their business, they often turn to outsourcing.

Entrepreneurs benefit from it since it enables them to access talents and expertise they might not otherwise possess. In addition, outsourced services are often provided remotely, so it is not necessary to purchase or rent a new physical location.

Is there anything a small business can (or should) outsource?

Here are a few types of outsourcing available to small businesses, each with its own advantages and disadvantages. By utilizing this information, you will be able to make a more informed decision regarding your business.

What is Outsourcing?

A company or service provider can be contracted to handle specific business functions through outsourcing. Outsourcing is used when a company lacks expertise, skills, technology, resources, or time to perform certain tasks in-house.

What are the Different Types of Outsourcing?

Let’s figure out different types of outsourcing along with their real life examples:

1. Process-specific outsourcing

An outsourcing service provider assigns specific tasks to process-specific outsourcing, also called business process outsourcing (BPO). It is possible to outsource tasks such as sales, claims processing, and customer service, for example. As a result, costs are reduced, efficiency is improved, and resources are allocated to other areas of the business.

Third-party service providers specializing in a specific area are used for process-specific outsourcing. Customer support operations are a real-life example of process-specific outsourcing.

For example, in the tech industry, a call center specializing in technical support might handle customer service. Assisting with hardware setup, troubleshooting software problems, and providing general product information are just some of the services that the call center agents are trained and equipped to handle.

2. Professional Sales Outsourcing

Types of outsourcing may include Professional sales outsourcing that occurs when a  business hires an expert or specialist to handle a specific task or project for example their sales. Often, this occurs when an organization lacks the internal expertise or skills to handle the task. As an example of outsourcing, if an external accounting or legal firm can handle the responsibilities if the company does not have its own accountant or legal department.

Among the services executives outsource to professional services in the Deloitte report mentioned above are:

• Legal (64% outsource)
• Tax (61% outsource)
• Finance (51% outsource)
• Product development (45% outsource)
• IT (76% outsource)

Having an expert in a technical field provide insights for your business is a great option.

Founder and CEO of Science Marketer, Adam Goulston explains, "I am not equipped to dive deeply into diverse and complex subjects like biology, chemistry, and medicine as a science marketer." The author continues, 'I collaborate with researchers and practitioners who have advanced degrees or practical experience worldwide for my projects requiring scientific insight.

The financial records and tax filings of a small business are managed by an external accounting firm with professional outsourcing. An accounting firm can, for example, handle the accounting and bookkeeping for a small law firm. In addition to managing accounts payables and receivables, preparing financial statements, and ensuring compliance with tax laws, the accounting firm has the expertise to handle complex financial matters.

3. Logistics outsourcing

Logistic outsourcing refers to the process of hiring an outside company to oversee and organize the transportation, storage, and distribution of goods. Business owners who lack the resources or know-how to manage these operations internally often use this approach.

Take the example of a company seeking help with tasks such as order fulfillment, inventory management, or freight forwarding. Their logistics operations might be outsourced to address this problem. While achieving timely and proper delivery of their products, the organization can concentrate on its primary strengths.

You can take advantage of the expertise and technology of third-party logistics companies (3PLs) through logistics outsourcing. Several 3PLs are offering advanced tracking systems that let you keep an eye on shipments and allow customers to follow their orders from purchase to delivery.

4. Operational outsourcing

An external agency takes over specific operations in your company through operational outsourcing. You can outsource the operation of a laundromat such as dry cleaning to a service provider if you wish to introduce a new service such as home delivery.

An example of an operational outsourcing service is the management of payroll, marketing, product development, and supply chain logistics. Small businesses can benefit from operational outsourcing by reducing their internal workload or expanding into new areas.

Pest Keen is founded by biotechnologist Gulshan Hajara Banu. As part of her outsourcing program, she delegated various services to professionals, such as pest inspection, prevention, and control, as well as rodent control and wildlife control.

To deliver top-notch service quality, Banu hires a team of certified professionals who are trained in the latest techniques. "Our services come with a satisfaction guarantee," Banu adds.

5. Manufacturing outsourcing

Rather than producing products internally, a business hires an external manufacturer to do so. In the retail and e-commerce industries, companies often outsource manufacturing to countries with cheaper labor and materials, such as China and India.

Outsourcing manufacturing allows small companies to increase production without hiring more staff, buying more equipment, or renting bigger facilities. Instead of producing goods or components in-house, outsourcing involves contracting with external manufacturers. 

A clothing company that outsources its garment production to countries with lower labor costs is a real-life example of manufacturing outsourcing. For example, clothing lines made by American fashion brands may be outsourced to factories in Bangladesh or Vietnam. Factory-based production allows garments to be made at a lower cost compared to domestic production.

6. Project Outsourcing

Among different types of outsourcing, there is project outsourcing, where a company employs a service provider for the completion of a specific task. The development of a mobile app by a third-party development team is an example of project outsourcing.

An app development startup, for example, may receive a request for a complex app that requires a high level of expertise beyond what their team can provide. If this happens, the startup may outsource the project to an experienced and specialized app development company.

Web development companies might be hired by marketing agencies to make new websites clients. Likewise, contractors may hire fencing companies to construct fences for new communities.

Companies seeking quality and speed benefit from project outsourcing. Professionals can start right away, and you'll need to provide minimal guidance to them to do the work.

7. Multi-sourcing

An organization that outsources a project to multiple service providers is called a multi-sourcing organization. In a video game studio, for example, various processes may be outsourced, such as level design, audio production, animation, or audio editing.

Having multiple experts on board accelerates the production process and ensures quality. A single contractor's limited resources and expertise might slow down or compromise the quality of production if all these tasks are assigned to one contractor.

Companies aiming to remain small can benefit from multi-sourcing. The management team of Ivy Tutors Network, which provides personalized tutoring and education, consists of four people. It employs a variety of local and international agencies and freelancers with specialized expertise. 

8. IT Outsourcing

IT outsourcing is another type  along with many other types of outsourcing. It is the process of contracting with an outside service provider to handle some or all of an organization's IT needs. Managing network infrastructure, cybersecurity, and help desk support are examples of IT outsourcing.

As an example, small businesses can outsource their IT needs to managed service providers (MSPs), who offer services like 24/7 network monitoring, data backup and recovery, and remote IT support. It is more efficient and cost-effective for a small business to hire an MSP rather than hire its own IT staff to manage its IT infrastructure.

A small business that outsources its IT services can concentrate on its core operations and strategic goals while leaving the technical aspects to the professionals. Business data and systems can be protected through this arrangement, which can increase IT performance and reduce downtime.

9. Offshore Outsourcing

A company or organization located in a foreign country provides business services or functions under an offshore outsourcing contract. As an example of offshore outsourcing, a US-based company hires an Indian firm to develop a new mobile app.

For example, a U.S.-based tech company might decide to outsource the development of its mobile app to a software development firm in India because of its lower labor costs and availability of skilled developers. High-quality development services can be provided by the Indian firm for a cheaper price than hiring in-house developers in the United States.

As a result of offshore outsourcing, the U.S. company can save money, gain access to specialized skills, and get its mobile app to market faster. The offshore outsourcing arrangement, however, comes with some challenges such as time zone differences, language barriers, and cultural barriers that need to be managed effectively for it to be successful.

10. Nearshore Outsourcing

The process of nearshore outsourcing is similar to offshore outsourcing, except that it is conducted with a service provider located in a country that is neighboring or nearby. Geographic proximity, cultural similarity, and overlapping time zones are some of the reasons for choosing this approach. An American company that hires a Mexican software development company to create a new e-commerce platform is an example of nearshore outsourcing.

For instance, E-commerce companies in the United States may choose to nearshore the development of their platforms to Mexico. In contrast to offshore outsourcing to a country with a significant time difference, the Mexican firm can provide cost-effective development services while maintaining a similar time zone.

Nearshoring the development work can be cost-effective for U.S. companies, as well as provide access to skilled talent pools and cultural affinities that facilitate smooth collaboration. To ensure the success of nearshore outsourcing, however, it is also necessary to manage communication, cultural differences, and expectations effectively.

11. Local Outsourcing

Wondering if local outsourcing is also one of the types of outsourcing? Well! Yes! An organization that outsources locally, also known as by onshoring or domestic outsourcing, contracts with a service provider in the same region or country as the client organization. In addition to supporting local businesses, it allows businesses to maintain control over operations and reduce logistical complexity. As an example of local outsourcing, a company based in New York City hires a local marketing agency to manage its digital marketing campaigns.

These New York City-based retail companies might hire a local agency that specializes in search engine optimization, social media management, and online advertising as part of their digital marketing efforts. It is easier to communicate and collaborate with a local agency when a retail company works with one.

When retail companies outsource their marketing work to an agency, they are able to concentrate on their core business activities while the agency manages the digital marketing campaigns. As a result, marketing effectiveness can be improved, brand awareness can be increased, and customer engagement can be improved.

Conclusion

Various types of outsourcing discussed in this article, including process-specific outsourcing, professional outsourcing, logistics outsourcing, and others, provide small businesses with flexible solutions to increase efficiency, reduce costs, and improve accessibility. specialized expertise. Businesses can improve their operations, streamline their efforts, and scale more efficiently by leveraging these outsourcing options.

The right outsourcing approach is crucial for businesses to achieve their goals. Remember that a competitive market landscape presents small businesses with a valuable opportunity to thrive through different types of outsourcing.

Frequently Asked Questions (FAQs)

1.What are the 3 phases of the outsourcing process?

3 Phases of the Outsourcing Process involves:

1- Planning and Analysis:

Identify needs and goals for outsourcing.

Evaluate internal capabilities and resource availability.

Conduct a cost-benefit analysis.

Choose the type of outsourcing (e.g., IT, manufacturing).

2- Vendor Selection and Contract Negotiation:

Define project scope and expectations clearly.

Research and shortlist potential vendors.

Evaluate vendor capabilities, experience, and references.

Negotiate contract terms, pricing, and service levels.

3- Implementation and Management:

Establish clear communication channels and processes.

Onboard the vendor and transfer knowledge.

Monitor performance, assess quality, and provide feedback.

Manage risks and address challenges.

2. Which is the most common types of outsourcing in IT?

Here are some of the common types of Outsourcing in IT:

Project-based outsourcing: Hiring vendors for specific projects like software development or system implementation.

Managed services outsourcing: Contracting vendors for ongoing IT infrastructure and service management.

Business process outsourcing (BPO): Outsourcing non-core IT functions like customer support or data processing.

3.What are the 4 factors to consider before outsourcing?

Cost-effectiveness: Compare outsourcing costs to in-house costs considering long-term implications.

Data security and privacy: Ensure adequate data security measures in place with the vendor.

Vendor capabilities and experience: Evaluate the vendor's track record, expertise, and references.

Communication and collaboration: Assess the ease of communication and collaboration with the vendor.

4. What are the 4 stages of outsourcing?

Initial evaluation: Deciding if outsourcing is suitable for your needs.

Vendor selection and contract negotiation: Choosing the right vendor and establishing terms.

Transition and implementation: Setting up the outsourcing relationship and transferring knowledge.

Ongoing management and monitoring: Overseeing performance, evaluating results, and making adjustments.

5. How many types of outsourcing are there?

Some of the types of outsourcing are:

Nearshore: Outsourcing to a neighboring country with similar time zones and cultural understanding.

Offshore: Outsourcing to a distant country with potentially lower labor costs.

Onshore: Outsourcing within your own country.

Mult sourcing: Utilizing multiple vendors for different tasks or regions.

6. What is Financial Process Outsourcing?

Financial Process Outsourcing (FPO) is a practice where a business organization outsources its financial processes to a third-party service provider. This can include a wide range of financial tasks such as accounting, bookkeeping, payroll processing, tax preparation, financial analysis, and reporting.