Outsourcing is a format of building working relationships in which non-core business processes, functions, and operations of a company are handed over to external contractors or organizations.
In other words, one company turns to another to take over tasks that the firm cannot handle on its own. For example, it may not be cost-effective for a business to have an in-house accountant or HR specialist, so accounting or HR tasks are outsourced.
Three parties are involved in this process:
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The Client (Customer) – an organization that delegates certain tasks;
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The Provider – an outsourcing company that takes responsibility for completing these tasks and receives payment from the client;
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Employees – individuals who directly perform the work for the client but are employed by the provider and receive wages from them.
Difference Between Outsourcing, Freelancing, and Outstaffing
In addition to outsourcing, there are other forms of labor relations such as freelancing and outstaffing. The difference between them lies in the scope of work, terms of cooperation, and responsibility distribution.
Freelancers are hired to solve one-time tasks or to implement specific projects. They are not part of any company's staff and are usually registered as individual entrepreneurs or self-employed. Most often, a contract for work or services is signed with them.
In outsourcing and outstaffing, the client hires personnel employed by a third-party organization. However, in the first case, the goal is to delegate specific business processes to the provider, whereas in outstaffing, the client needs to fill a vacancy. That means the client receives an employee for a specific position for a long period. Therefore, this format is also called labor provision.
Such services are provided by private employment agencies with the appropriate accreditation. They supply employees to the client, who then defines their scope of work and controls its execution. In outsourcing, the client sets tasks for the provider, and the employee reports to them.
What Companies Need Outsourcing?
The client of outsourcing services can be a company of any size and industry:
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Small and medium businesses. Many non-core departments, such as accounting, IT, technical maintenance, etc., are necessary for the company, but they are not involved in production and do not directly impact revenue generation. Therefore, it is more cost-effective for small companies to outsource these tasks to optimize expenses.
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Large industrial companies. In large corporations, secondary processes take up a lot of time and effort. Employee recruitment for different departments, training, administration, and other similar functions are easier and cheaper to delegate to competent specialists.
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Startups. At the beginning of operations, it is impractical and risky to hire a full staff, purchase equipment that is not involved in the product creation process. It is much more reasonable to turn to experienced contractors.
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Organizations with uneven employee workload. This especially applies to seasonal businesses where periods of high demand alternate with downtimes. In this case, providers' services are utilized during peak seasons without overpaying staff who are idle during off-season periods.
Thus, companies turn to outsourcing firms to focus on their core activities, increase business process efficiency, improve service quality, or get professional help.
Types of Outsourcing
A client can outsource any processes depending on their needs. Most often, these are operations that support the organization’s activities but are not key.
Outsourcing is divided into several types:
By service volume:
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Full outsourcing. The provider is responsible for the entire function. For example, completely handling accounting.
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Partial outsourcing. Only part of the business process is outsourced, such as payroll calculation instead of the entire accounting process.
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Consulting. The company handles all tasks itself but consults with the outsourcing company’s specialists on specific issues.
By execution method:
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A contractor is hired for each task, and the client’s manager personally supervises their work;
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The client has an employee responsible for selecting contractors, assigning tasks to them, and checking the quality of their work;
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The client signs a contract with the provider and fully delegates control over the processes to them.
By direction:
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Accounting. One of the most popular types of outsourcing. This includes accounting, tax reporting, expense reports, primary document processing, etc.
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Legal. The provider prepares contracts, represents the client’s interests in court, and verifies the legality of transactions.
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Marketing. Advertising, public relations, various types of promotions, focus groups, and other market research are outsourced.
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Administrative. Functions like secretary and reception work, call centers, courier services.
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HR. Recruitment and training of employees, personnel record keeping, and documentation – issuing employment orders, maintaining employment records, and preparing certificates for employees.
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Production. One or more stages of production are outsourced to a contractor.
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Logistics. Tasks related to transportation, storage, and distribution of goods.
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IT outsourcing. Delegation of tasks related to maintaining the company's IT infrastructure to a third-party organization. This may include office equipment maintenance, software development, technical support for the website, creation of corporate networks, etc.
