Outsourcing has transformed the way firms operate. However, the benefits of outsourcing have largely been missed by SMBs. But what exactly is it and how can SMBs benefit from it?

What is outsourcing?

Outsourcing is the contracting of a specific activity, function or process to a third-party service provider. The main market segments in outsourcing are business process outsourcing (BPO), where business-related activities, say in HR, finance and customer service, are outsourced, IT outsourcing (ITO), where IT-related activities are outsourced, and knowledge process outsourcing (KPO), where activities or processes of high value and/or high level of domain knowledge are outsourced, such as data analytics and investment research.

How much is outsourcing worth?

At the end of 2010, XMG Global projected the global outsourcing market to be worth £270bn ($425bn), this was a 13.9% increase on the £237bn ($373bn) 2009 market. In 2008, the corresponding market was worth £212bn ($334bn).

Why do organisations outsource?

Business theory and experience indicate that businesses do best when they focus on those activities that give them a particular advantage over their competitors leaving non-core activities to be performed by other firms. Therefore, British Airways focuses on managing its network of air services, leaving baggage handling to one of its outsourcing partners.

In a survey of members, the Outsourcing Institute found that the top 5 reasons why companies outsource were:

• Reduce and control operating costs

• Improve company focus

• Gain access to world-class capabilities

• Free internal resources for other purposes

• Gain resources not available internally

Thus, a firm could control its operating costs by outsourcing its internal IT support function. This could bring in technical knowhow and capabilities while significantly reducing its overall payroll and benefits costs, as employees would be transferred as part of the deal. Similarly, a firm could outsource its payroll & benefits processing allowing the introduction of newer and more cost-effective payroll and benefits processing technology.

Can SMBs benefit from outsourcing?

Outsourcing has traditionally been under-utilised by small and medium-sized businesses (SMBs), as it involved contracting with the large outsourcers to strike multi-year, multi-million or even multi-billion mega deals.

However, micro outsourcing (also known as micro sourcing) allows these firms to gain process efficiencies and cost savings by outsourcing their work to highly skilled freelance workers or independent businesses (service providers) based locally, nationally or anywhere across the globe.

Some of the key benefits of micro outsourcing for SMBs include:

1. Makes processes more efficient

As with outsourcing, micro outsourcing allows firms to gain process efficiencies and increased effectiveness, as experienced service providers with specialist skills, knowledge, best practices and up-to-date technology & equipment carry out activities and processes.

2. Delivers cost savings

Micro outsourcing has a positive effect on a businesses’ cash flow by reducing overhead costs and capital expenditures. For example, by micro outsourcing, a business could save on not only salary costs but also pension and other benefit costs. With a reduced headcount, other cost savings would follow such as office space, heating and equipment costs.

Note. Estimates indicate that cost savings of between 50 and 70% are achievable.

3. Ensures the deployment of competitively priced resources

With micro outsourcing, service providers bid for your jobs ensuring that costs truly reflect the service provided. Essentially, it is like eBay but in reverse with prices going down rather than up! Thus, firms are able to deploy competitively priced resources, sourced locally, nationally or globally, after considering not just price but also the expertise and experience of the service provider.

4. Allows "on-demand" access to skilled resources

Many businesses cannot afford to employ certain skills permanently or may need other skills only infrequently. This has been exacerbated by the recession and the slow recovery that has followed it. Micro sourcing provides access to specialist skills and expertise enabling organisations to "plug in" skills and expertise on an as-needed basis.

5. Enables greater focus on core operations

It is generally accepted that firms perform best when they focus on the core business activities, which gives them an advantage over their competitors. By micro outsourcing non-core activities, a firm can use more of its resources, e.g., management, staff and capital, on value-adding ones, like in the British Airways example above.

6. Allows jobs of relatively small duration or cost to be outsourced

Outsourcing offers a number of benefits, but these only materialise when businesses contract for several years for multi-million contract values. With micro outsourcing, jobs requiring only a few months or days can be outsourced. Similarly, jobs measured in the thousands or hundreds of pounds can be outsourced.

How to get started?

There are many sites where you can place your job ads. Popular job boards and CV aggregators include monster, careerbuilder, jobsite, hotjobs, indeed, jobs, jobserve and craigslist. You can also tweet your jobs or put them on Facebook. However, these sites do not provide a service optimised for micro outsourced jobs or, for that matter, for freelancers. Their aim is to provide you with a large pool of CVs from which you can choose a candidate.

Fortunately, there are specialist micro outsourcing sites where you can micro outsource your jobs. On these sites, you will be able to indicate your requirements, receive real-time bids from freelancers and work with your preferred service provider to agree milestones. You will also be able to invite freelancers to bid on your jobs as well as submit jobs privately, so that only the freelancers you invite can place a bid. On these sites, freelancers present their services and not their CVs, which may detail irrelevant work experience and skills.

Summary

Outsourcing is an effective method to help businesses reduce costs and improve processes. However, its benefits have been limited to large firms that could afford to engage in the outsourcing process. Micro outsourcing, through its different approach, allows SMBs to gain the benefits of outsourcing without paying the costs.

Copyright © 2011 by Peter Louis. All rights reserved