Outsourcing Is On The Rise - What To Know as a Small Business Owner

June 10, 2023

Outsourcing is already big business. Still, demand for these services is only getting bigger. A recent report from Technavio projected that the market for business process outsourcing, or BPO, is expected to grow by $40 billion through 2025.

What does this mean for small business owners? The situation could point to a dramatic opportunity to control costs and accelerate your growth. But it's important to understand the complexity surrounding BPO.

In this article, we will look at what processes can be outsourced and why more businesses are outsourcing in recent years. At the same time, you'll get the information you need to start thinking about whether outsourcing makes sense for your small business.

What is outsourcing?

In general, outsourcing involves tapping a third-party provider for tasks that you once had (or could conceivably have) as part of your internal operations. Instead of hiring employees to get something done, you turn to an outside firm.

The practice is often known as business process outsourcing. Almost every small business takes advantage of some level of BPO. With limited resources and small staffs, startups often need to utilize third-party providers for critical functions. This includes a broad range of services, like:

  • Legal
  • Recruiting
  • Accounting
  • Payroll
  • Benefits management
  • Customer service
  • Marketing
  • Data collection/analysis
  • Manufacturing
  • Logistics

Meanwhile, companies of all sizes often tap into the outsourcing market to complement their core operations. Firms will reach partnerships to handle tasks like manufacturing or logistics. Apple provides a famous example of this, as the tech giant relies on manufacturing firms like Foxconn to produce its iconic iPhone products.

Why is the outsourcing market growing now?

Outsourcing has represented a key business strategy for decades. Still, more and more firms have turned to BPO in recent years. One study from UpCity showed that more than eight in 10 business owners (83%) expect to increase their level of outsourcing this year.

One study from UpCity showed that more than eight in 10 business owners (83%) expect to increase their level of outsourcing this year.

In part, the pandemic helped spur this latest uptick in outsourcing interest. With companies relying more on remote operating structures, the barriers between employees and contract workers have grown fuzzier. Meanwhile, the post-COVID cost increases, spurred by inflation and trends like the Great Resignation, have further incentivized BPO.

At the same time, ongoing tech and communication improvements have made outsourcing a viable option for a growing set of companies. In the past, many small businesses were priced out of the market or didn't have the tech backbone necessary to properly integrate outsourced contributions. Now, startups have many new outsourcing possibilities that were not available even a few years ago.

What are the benefits of BPO

The fact that small businesses are flocking to outsourcing in increasing numbers suggests that the process offers significant potential to enhance their operations. This can come on multiple fronts at once. Here are some of the benefits you can expect from a well-structured BPO strategy:

Lower Cost

Expanding your internal operations comes with significant expense. Launching a new product or performing a peripheral function yourself involves adding staff. At the same time, it can also involve purchasing new equipment or acquiring new physical space.

These investments can be economical if done at scale. However, small businesses rarely benefit from this advantage. As a result, outsourcing often offers the lowest-cost option to complete certain tasks.

Easy to Start Small

As a small business, your needs in certain areas might be limited. You have a function that you need to do but not to the scale that would justify a full-time staff or the acquisition of specialized equipment. This provides another notable benefit from outsourcing.

For instance, you might need someone to fill HR functions. However, with only a few full-time employees, you don't have enough work for a 40-hour-a-week staff member. In this circumstance, turning these tasks over to a third-party HR services provider becomes a worthwhile alternative.

Possibility of Scaling Quickly

You're a small business now. But you want to grow — and grow quickly. Outsourcing can facilitate this. You can usually expand your outsourcing arrangement incrementally. This lets you add capacity as needed as your firm builds its customer base.

Less Commitment

Along with reduced expenses, turning to BPO usually involves less commitment as well. Depending on the contract you negotiate with your third-party provider, you can exit the partnership relatively easily. This process becomes more complicated when you have your own employees and/or a sizable capital investment dedicated to the function.

Added Expertise

Third-party providers don't just complete required tasks. They also offer a deep understanding about that particular part of your business. As a result, you receive expertise that might not be available from you or your staff.

How to decide when to outsource

Outsourcing often brings significant upside potential. However, the process also comes with risks and potential drawbacks. As such, you should base your decision on the specifics of the situation.

Here are a few steps to keep in mind as your weigh your BPO options:

  • Identify Your Core Competencies: To maintain your competitive advantage, concentrate on the activities you do better than anyone else. For everything else, consider outsourcing.

  • Consider How the Specific Function Fits into Your Operations: Think about how easy it would be to outsource an activity. Consider retaining direct control over vital areas or tasks that are deeply enmeshed in your overall organization.

  • Know Your Outsourcing Partners: Don't make an outsourcing decision in a vacuum. Look at your specific options and let the details inform your strategy.

  • Protect Your Supply Chain: When you outsource, you become dependent on another organization. As such, you lose a measure of control. To avoid critical breakdowns, maintain backup plans and necessary redundancies.

  • Periodically Review Your Options: Don't view your decision to outsource as an irreversible choice. Rather, regularly assess the various parts of your operation and determine which ones to consider outsourcing and which ones to retain (or bring back into the fold).

Deciding if outsourcing is right for you

More and more small businesses have started to outsource their operational and administrative processes. The pandemic, along with long-term advances in technology and communication, have created significant BPO opportunities. These can be captured by companies of all sizes.

Outsourcing can facilitate [growth]. You can usually expand your outsourcing arrangement incrementally. This lets you add capacity as needed as your firm builds its customer base.

However, benefitting from this strategy requires a considered approach to the situation. The information provided here will help you weigh your options. That way, you can identify potential opportunities and get the most out of your BPO partnerships.