Key Drivers of Software Outsourcing

Outsourcing is understood to be a process, when a company establishes a contract with a third party service provider to accomplish and deliver an agreed amount of work, for an agreed period, budget and of an acceptable quality.

There are pros and cons for a business to outsource part of its activities and in this article let’s take a look, what are those key drivers to consider.

Outsourcing Drivers

According to researchers there is a huge amount of companies already outsourcing part of their business nearshore or offshore and more than 40% of the companies globally are in the coming period considering to outsource one or more business processes. The key drivers for outsourcing are boosting efficiency and reducing the cost.

Let’s take a look at the findings made by Grant Thornton network (Grant Thornton IBR 2014: Key reasons for outsourcing processes) regarding the drivers in outsourcing and why do companies find it attractive for their business. Despite the fact that 5 years have already passed, the key drivers are still the same.

Cutting the staff

In some cases it may be difficult or even impossible for an employer to fire the employee before the circumstances are fortunate to do so.

E.g., in the US it is against the law for an employer to fire an employee if that employee has filled complains about the health or safety violations or if that employee is taking a family or medical leave.

If there is a contract signed between employer and employee and there is a length of an employment specified within a contract then employer is bound to the terms of a contract and can’t simply fire the employee.

Even more if an employer tries to cut the number of employees then there may be the brand damage emerged and it will be much more challenging for an employer to get the critical mass of employees back the other days.

On the other hand once the part of business is outsourced to the third party service provider, employer is not bound to the contractual obligations with the actual staff that performs the part of the business activities. Employer is rather bound to the third party provider.

That provides the flexibility to the employer to shrink or enlarge the staff, to properly react to the circumstances and changing business environment.

Reducing the cost

Once you think about outsourcing you may easily see the benefits by calculating the difference between the salary in developed countries and developing ones. But there are more than that, because there are other expenditures, which are lowered if company decides to outsource.

If your company hires an employee to work within an office, then there is an obligation to pay not only the monthly salary, but also cover the insurance, pay the taxes, cover the desk price, computer and other office appliances.

By contracting with an outsourcing service provider the company doesn’t have to cover all of the above expenditures, but rather it has to pay usually fixed rate per person, as that is agreed between the company and provider in a contract.

Business continuity

It isn’t rare for the company to outsource its Business Continuity process to the third party service provider. Business Continuity is hard and burdensome, but it is one of the most critical parts of the operations to be done, without it the business faces the risks of being unable to recover a disaster and just not to survive.

Outsourcing is the possibility to involve professionals to help defining and maintaining the Business Continuity process, so the company can rather concentrate on a market and competitive advantage, whereas the complex part of stability and disaster recovery is handled by the professionals.

Access to expertise

Usually the business expertise is being built during the long period of time, companies do not become successful immediately and it takes from 3 to 5 years for the company to get the professionals on board and to build the team from them, which then can lead the company towards the success.

But what if the market of the employees is limited within the region, country or even area, where the company is located. Consider also the competition between the companies within the same business domain. Probability of hiring a professional lowers and companies then require to undergo the hard path of growing the professional themselves. Then what if the professional you’ve taught leaves the company?

Outsourcing makes the pressure to the business less intense. By contracting with third party provider the company can get access to the professionals from around the globe or even get access to the expertise of the third party provider that has already gone through the path of building a team of professionals.

Focus on core competence

If business isn’t big enough and the funds are tight it looks reasonable to do everything by yourself in order not to incur additional expenses. At first it looks like a cost-effective decision.

On a practice however, such a strategy is not effective for a company, as the company tries to build the expertise and there is always a learning curve that isn’t taken into account.

As a result the company doesn’t improve its core competencies, but rather introduces the new ones and by that reduces its value on a market. Moreover, the employees become demotivated as they don’t improve their core skills.

The right strategy for such companies would be to concentrate on a core competence, to improve the value proposition and get the competitive advantage on the market. Everything else is rather to be outsourced.

Reducing the headcount

Outsourcing allows the company to do more with less number of employees being physically present within a physical location, like an office. It is an important driver, as it helps the companies to drastically reduce the expenditures.

Recall the reducing cost driver, number of employees has a significant impact to company’s expenditure, because every employee requires the office space, desk, computer and office supplies to enable the employee at work.

Improving efficiency

Every business is seeking for an efficiency and it is rather the most challenging to achieve. In order for a business to be profitable, that business has to minimize the cost of development / manufacturing, to make the price of the product more attractive to the customers, thus to win the customer.

Outsourcing allows the company to achieve efficiency. There is no single reason, that allows that achievement to happen, but it is rather a collective measure, where the above drivers add to.