Understanding the benefits and risks of outsourcing

Regular outsourcing of services has been a growing business trend. As you weigh what to outsource and what to keep in-house, it's important to consider the risks and benefits

Regular outsourcing of services has been a growing business trend. As you weigh what to outsource and what to keep in-house, it’s important to consider the risks and benefits.

By Cleveland SCORE

There are many reasons to consider outsourcing portions of your company’s operations and administrative processes. The benefits that could be realized, however, should be evaluated against a set of criteria. Outsourcing should lower bottom-line costs, improve operational efficiency, distribute responsibility, and/or provide time for you and your staff to plan for the potential of business growth. By identifying the appropriate services for outsourcing you will be able to concentrate efforts on your core business operations.  

According to the SBA the most common and effectives services that can be considered for outsourcing are:

• Accounting: Due to the specialized nature of financials and daily accounting, utilizing the expertise of a reputable CPA will offer huge benefits over time and ensure accurate accounting practices are followed.

• Marketing: This outsourced service is most effective when the business has a growth strategy. Use of outside expertise is invaluable in designing ads and social media content creation. 

RELATED: Develop a marketing plan for small businesses

• Sales: In the event your organization does not have a dedicated sales team, outsourcing this function can be effective. This can be done through representative firms that handle sales for multiple companies. In this case, costs are only incurred in the form of commissions due upon receipt of revenue by your company. When considering this the representative firm should have compatible lines that could assist in potential sales growth through cross-selling.

• IT management: In today’s highly technical business world, the technology management function represents one of the major outsourcing functions for small business. There are two options for this service. One is to outsource the function to a managed service provider that will oversee and deliver services to your company. They can provide services such as infrastructure installation and management, networking, and security and data warehouses utilizing the appropriate expertise without your organization incurring excessive costs. The second option for outsourcing is through utilization of on-demand services. On-demand providers allow end users the ability to utilize cloud computing, storage, software, and other resources instantly and without limits. Examples of industries taking advantage of this type of service are transportation and travel, food and grocery delivery, and healthcare to name a few.  

• Administrative tasks: Virtual assistants can handle common processing tasks such as social media posting and scheduling. Depending on the level of expertise required costs may range from as low as $10/hour to $75/hour.

• Customer service: This will allow you to outsource your customer service strategy to either call centers or to chat services.

• Manufacturing: Setting up a dedicated manufacturing facility may be costly. They require capital investments not only in building facilities but also machinery. There are many facilities in the United States that can provide this service.

• Shipping and logistics: In the event you are utilizing a manufacturing service, many also offer shipping and logistics assistance. Otherwise, you can consider utilizing drop shipping service to handle this function. In this scenario the product will ship directly from the supplier to the customer. This is popular with e-commerce sellers that provide products online through shopping pages.   

• Research: This is an important aspect when there is a need to define market segments and market trends related to either existing or new products.  

• Human resources: Outsourcing services in this area can provide as little or as much assistance as you may need. This may include hiring, training, benefits administration, payroll, and time and attendance issues.  

In considering the benefits of outsourcing, however, there are questions that should be answered during the evaluation process. The information you gather will help determine the impact on your company’s overall operational effectiveness, growth strategy and/or profitability.

Consider the following:

• Does the outsourcing fit with your company’s needs? 

• By outsourcing the process will it be improved?

• What monitoring will need to be in place within your company to provide oversight of services and costs?

• How will the provider be able to meet any of the company’s changing business needs?

• Will it require changes to existing processes? If so, will this have client and/or internal processing impacts?

RELATED: Managing overhead costs to improve profitability

• If technology is outsourced, will there be technology dependencies – application interfaces with existing applications or system connectivity issues?

• Will there need to be a new position created to adequately manage the relationship?

• What risks are there related to outsourcing the function?

• What is the expected cost reduction? 

In addition to these standard questions, considerations should be given to the existing structure and staffing within the company.

This includes:

• Is there existing expertise within the company to perform the function?

• Does existing staff have appropriate time available to perform or will it mean time away from productive activities that directly support revenue generation? 

The above considerations will provide a clear financial impact to support the decision, however, another important factor in the decision should be the identification of related risks. Here there are two components. First are the risks related directly to a third-party relationship, and second are risks related to the actual process being transferred. It is important to note that the transfer of the process does not mean the transfer of the risks related to the process.  

The third-party relationship carries the following potential risks:

• Financial risk related to third-party performance that may result in fraudulent or erroneous transactions. In this scenario, who will be responsible for any losses associated with the event?

• Reputational risk for your organization in the event the third-party has a negative public opinion or news

RELATED: Three basic financial documents for business

• Operational risk related to overall poor third-party performance that may go unidentified in the short term

• Business continuity risk relates to the provider’s ability to continue to support your business needs in the event of adversities such as power outages, storms, etc.  

• Technology risks can be a major concern in today’s business environment as many businesses use third-party applications for payment processing, accounting and much more. 

• Strategic risk related to changes in process or policy by a third party that may impact your product/service or may not comply with your original requirements.

From a purely operational perspective the same risks that you would have in product/service production would be associated with the third party. Therefore, they should have similar control structure in place. To ensure these controls are adequately operating and being tested, your organization will need to have a strong monitoring mechanism in place that includes review of the third-party audits and open items.  

As most third-party relationships include some type of data transfer and use of technology, security risk is a major component of operational risk. Regulations governing privacy and data encryption should be well identified and controlled. Due diligence during the procurement process is especially critical in ensuring the supplier has sound regulatory, authentication, change management and continuity policies and programs in place.  

In summary, there are distinct benefits to be gained for the organization by employing third-party relationships, including cost savings, operational efficiencies and creation of time to foster further company growth. The risks, while they can be significant, can be controlled and managed through the proper monitoring structure within your organization and the proper initial due diligence of suppliers.  

In the event your business may have a unique need for outside assistance with operational issues, growth initiatives or other business matters, SCORE mentors can offer you expertise and support. Mentors with a wide range of technical and user experience are available upon request.

The Cleveland Chapter of SCORE was founded in 1965 to foster and support the small business community in Northeast Ohio through mentoring and education. There are currently 80 volunteers with experience in the fields of business ownership, managers, accountants, attorneys, and other business fields that are ready to share their knowledge through mentoring. For more information about our services for small business visit the website at or call (216) 503-8160.  

In addition to mentoring services, there are also webinars and on-demand classes listed on the website. To attend a webinar, visit the site and register. 


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