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Why do companies outsource?

Outsourcing a strategy for improved efficiency

It’s time to clean up your outsourcing objectives, dust off those outsourcing offers and re-evaluate your IT development strategies – spring is upon us! And with that a whole year of decisions about which activities should be outsourced, and which should be kept in-house. What benefits does outsourcing bring? Here’s a quick “Why outsourcing” – just in time for spring cleaning.

Why do companies outsource?

According to Gartner, the IT outsourcing market was worth $288B in 2013. That’s a lot of outsourcing (and that’s just IT!). Regardless of all the political jargon that’s been thrown around, outsourcing is a legitimate strategy to maximize efficiency, and improve core services.

Top reasons for outsourcing is because it increases:

1. Flexibility: Duke’s Fuqua School of Business found that 66% of companies saw increased flexibility in 2011 because of outsourcing activities. (And we all know why flexibility is important.)
2. Growth: 60% outsource because of growth (according to IAOP’s State of the Industry Survey). Concentrating on all back-office tasks can actually inhibit your business from growing, because you’re wasting time managing your IT systems when you could be dealing with customers or creating new product lines. That’s the time you won’t get back — unless you give those task to someone who knows what they’re doing. “By outsourcing the day to day back-office tasks, the business owner has more time to focus on generating income,” said Laura Lee Sparks in an article on
3. Cost Savings: For years, outsourcing has been chiefly known as a tool to cut costs. According to Harvard Business Review’s 2006 research, 97% of companies employed outsourcing as a cost reduction strategy. That has been changing though, in 2013 IAOP Survey found that about 50% of companies outsource for cost-effectiveness — both long-term and short-term. (That may be because of reason #4.)
4. Innovation: Innovation is definitely of huge value in an outsourcing relationship. After all, you don’t want to work with someone that barely gets tasks done – but someone who can genuinely enhance your services and products. According to MIT-Sloan, majority of companies (35%) want new innovations for tools and technologies, 16% want better processes, and 12% want automation innovations when they outsource. Nowadays, companies sometimes even require a 4-5% process improvement in their outsourcing contracts. Obviously, companies have figured out that outsourcing is not just cost-efficient; it can bring real value to a company’s processes.
5. Access to talent and skills: Globalization allows access to a greater number of resources – and that includes access to new talent and skills. The global talent shortage rate , where companies are having a hard time finding people with the right skills to fill their positions, is currently 35%. And it’s actually higher in places like Germany and Japan. And it’s especially hard to find right talent for IT positions (7th hardest job position to fill globally). No wonder 39% of companies outsource to get access to new skills (according to IAOP Survey).
6. Access to new markets: Same 2006 HBR research found that 25% of companies outsource to get access to new markets. And in 2011, HBR found that for the next 10 years over 50% of multinational revenue will come from developing countries. Getting access to new markets is becoming a huge topic – and it’s even been suggested as a potential growth strategy to outsourcing providers themselves.

In sum: outsourcing helps maximize profit and increase efficiency. But how is this helpful to your business?
Stay tuned for “What activities to outsource” next week – the answer may surprise you.

(Or if you want more info now, download the “Why & What Outsourcing” white paper.)

Photo via Graphicstock

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