For businesses, outsourcing work means specific tasks or functions are given to external service providers to handle, instead of them being dealt with in-house. There are lots of reasons why businesses do this, and it can work really well.
There are lots of different forms of outsourcing that are designed to meet a broad range of needs and functions. For example:
Business Process Outsourcing (BPO) is a wide category that includes certain “non-core” processes like customer service, Human Resources, and finance
Information Technology Outsourcing (ITO) which means contracting out IT-related tasks, including software development, maintenance, and support
Knowledge Process Outsourcing (KPO) is where more specialised and knowledge-intensive processes like research and analysis are outsourced (medical research is a good example here)
Business functions, including such marketing, logistics, and procurement, can also be outsourced
Not only can these forms of outsourcing allow businesses to become more streamlined, but they can also help reduce costs and boost efficiency.
Should I outsource or hire someone?
This depends on what your business needs, and what it can afford. For example, a business with a very low volume of transactions is less likely to need day-to-day bookkeeping, so might find it more useful to outsource this rather than becoming an employer.
There are lots of things to consider, but we go over some of the most common reasons for outsourcing below.
Outsourcing can sometimes be more cost-effective than hiring an in-house employee – particularly for short-term projects or people with very specialised skills, for example.
Taking on an employee comes with additional costs and responsibilities, such as making pension payments and employer’s National Insurance contributions, arranging Employer’s Liability Insurance, and general health and safety requirements.
Outsource to an external freelancer or agency, and you’ll only need to worry about paying the bill!
Outsourcing can speed up the completion of tasks or projects, as external providers are often specialised and experienced in their respective areas. This can lead to faster turnaround times compared to hiring and training in-house staff.
Focus on what the business does best
Businesses often choose to outsource some tasks in order to focus on achieving their goals more quickly and effectively. It’s a great way for a business to concentrate on what it does best, leading to increased efficiency and competitiveness.
Access to specialised skills
Recruiting very specialised skills and expertise can be extremely expensive and difficult – especially if there isn’t a large pool to recruit from. Outsourcing can allow you to access experience which may not be as readily available if you were to recruit someone in-house.
This is particularly beneficial for tasks that require specific knowledge or technical capabilities that are not central to the company’s core business. For example, outsourcing to someone who can design and build a website for your manufacturing business, rather than employing someone for a few months.
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Outsourcing can mean businesses are better able to scale up (or down) their operations more quickly as their needs change, without having to hire or lay off employees. This flexibility is great in industries with fluctuating workloads or seasonal demands.
Global talent pool
Outsourcing can be especially valuable for tasks that require language proficiency, cultural understanding, or around-the-clock support.
Deciding to outsource can help mitigate certain risks associated with managing specific business functions. For example, external service providers may have better knowledge of compliance regulations, which reduces the risk of legal issues or accidentally breaking regulatory rules.
Reduced infrastructure and technology costs
Hiring in staff normally means you need to provide infrastructure, equipment, and technology, but outsourcing to an external provider means they bring their own resources, cutting down capital expenditure for the business.
Focus on strategic growth
By outsourcing routine or time-consuming tasks, businesses can free up internal resources to focus on strategic planning, innovation and other activities that contribute directly to long-term growth.
What are some of the most common tasks to be outsourced?
Every business is different which means outsourced tasks are many and varied. However, some examples of commonly outsourced tasks include:
Accounting and finance: Bookkeeping, payroll, accounts payable and receivable, financial reporting, tax returns, tax efficiency reviews, someone to ask about HMRC jargon…
Customer support: Call centre services, live chat support, email support
Training and development: Employee training programs, e-learning development
How do I choose suppliers to outsource to?
When it comes to choosing external suppliers, it’s well worth doing your homework. Begin by being clear about your specific requirements and selection criteria. Additionally, think about factors such as cost, quality, reliability, and flexibility.
Once you have a shortlist of potentials, check for things like their reputation, financial stability, and experience in the industry. Openly communicate with them to understand their capabilities, responsiveness, and willingness to collaborate.
Review references from their existing clients to gauge performance, values, and reliability.
Ultimately, prioritise those that have similar business goals, and that offer competitive pricing as well as longer term commitment if needed.
Don’t forget IR35 rules!
IR35, or “off-payroll working rules” are designed to determine the tax status of anyone who works for a business but who isn’t actually an employee. The rules look at whether a worker should be considered an employee for tax purposes based on factors like control, how easily they can be substituted and what work they are contractually obligated to carry out. The rules aim to prevent tax avoidance by individuals working as ‘disguised employees.’
If a contractor is considered to fall within the scope of IR35, you will need to deduct taxes and National Insurance contributions from their pay as if they were an employee. As the client, it’s your responsibility to assess a contractor’s employment status for IR35.
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About The Author
I'm an AAT and ACA qualified Chartered Accountant with over 13 years experience working with businesses, contractors and sole traders. I also love watching live music, and quizzes!
Learn more about Dean.