An outsourcing strategy is a strategic framework using which a company delegates certain tasks or projects to an external service provider or specialist.
Many businesses are turning to strategic outsourcing to gain a competitive advantage. For instance, the IT outsourcing market is expected to surge from $512 billion in 2024 to $777 billion by 2028 (growing 10.99% annually), according to Statista.
Why?
The right outsourcing strategy lets these businesses access specialized global talent, boost innovation, and offers much better cost efficiency than in-house hiring.
We’ll explain the pros and cons of outsourcing and give you the exact 10 steps to follow to build a winning outsourcing strategy.
We’ll also introduce you to one of the best outsourcing partners — Distillery.
| Further Reading: Discover the Benefits of IT Outsourcing and How To Make it Work. Looking for Quality Assurance Experts? Here’s a Complete Guide to QA Outsourcing. |
This Article Contains:
- What Type of Projects Can You Outsource?
- The 6 Most Compelling Benefits of Outsourcing
- The 7 Risks of Outsourcing You Should Keep In Mind
- How to Create an Effective Outsourcing Strategy: 10 Steps and Best Practices
- Trends in Outsourcing Strategies in 2024 (and Beyond) + How To Be Prepared
- Optimize Your Outsourcing Strategy by Partnering with Distillery
What Type of Projects Can You Outsource?
These are some of the projects you can outsource, along with examples:
| Types of Project | Examples |
| Web Development | A retail company outsources the redesign of its e-commerce website to improve user experience and increase sales conversions. |
| Mobile App Development | A health tech startup partners with an external agency to develop a mobile app that helps users track their fitness goals and dietary habits. |
| Software Development | An insurance firm outsources the development of customized claims processing software to streamline operations and reduce manual errors. |
| Digital Marketing | A boutique hotel chain employs a digital marketing firm to enhance its online presence through targeted social media campaigns and SEO. |
| Graphic Design | A publishing company outsources the creation of engaging book covers and promotional materials to a freelance graphic designer. |
| Content Management & Creation | An online news portal collaborates with freelance writers to produce daily content on current events and special interest stories. |
| Customer Service | An online retailer outsources customer service operations to a specialized firm to handle inquiries and round-the-clock support. |
| IT Services | A financial services firm outsources cybersecurity and maintenance of its IT infrastructure to an IT services firm. |
| Data Engineering | A retail company outsources data analytics to a firm that uses big data to analyze customer purchasing patterns and optimize inventory management. |
| Human Resources | A tech startup outsources its entire human resources operations, including recruitment and payroll, to focus on product development. |
| Accounting and Finance | A non-profit organization outsources its financial operations to an accounting firm, including budgeting and tax preparation. |
| Legal Services | A real estate company outsources the drafting and review of lease agreements to a property law firm. |
Now, let’s explore the reasons why businesses outsource projects.
The 6 Most Compelling Benefits of Outsourcing
From achieving cost savings and optimizing internal resources to accelerating product launch timelines, these are the advantages of adopting strategic outsourcing:
- Cost efficiency: Outsourcing helps you eliminate expenses of hiring new in-house staff, including salaries, benefits, office space, utilities, and equipment costs.
You can further reduce costs and gain a competitive advantage by outsourcing to nearshore countries like Argentina and Mexico, thanks to these regions’ lower living and salary costs.
- Access global skills and resources: You can connect with specialized experts from anywhere in the world who possess niche skills and expertise in advanced technologies.
- Focus on any core competency: It lets you focus on your core business activities and innovation while the outsourced team handles ancillary projects.
- Mitigate project risks: It reduces potential errors and operational failures, especially in areas requiring niche expertise. For instance, a healthcare firm can outsource cybersecurity management to an IT firm, reducing the risk of data breaches and compliance violations.
- Improved flexibility: Helps you adapt quickly to market and project demands by scaling professional services up or down based on your needs — without the constraints of hiring permanent internal resources or in-house hiring costs.
- Reduced time-to-market: Helps you expedite product launches since the external team can hit the ground running quickly and work in parallel with your in-house staff.
Now, let’s take a look at the flip side of the coin.
The 7 Risks of Outsourcing You Should Keep In Mind
Before engaging in an outsourcing arrangement, be aware of these seven potential risks that could impact your project’s success:
- Risk of losing sensitive data: Sharing sensitive data with an outsourcing provider raises the risk of leaks or breaches.
- Lower project control: An outsourcing arrangement may lead to diminished oversight and authority over project execution and decision-making processes.
- Hidden costs: Unexpected outsourcing costs can arise from scope adjustments, emergency troubleshooting, software licenses, external team training, and more.
- Lack of business or domain knowledge: Outsourcing partners might not fully grasp the nuanced requirements of your specific industry, leading to solutions that miss critical business needs.
- Language and cultural barriers: Outsourcing (especially when offshoring to far-away countries) can cause communication hurdles due to differences in work culture and languages.
- Timezone issues: When outsourcing to distant countries, time zone differences can delay feedback loops.
- Legal and regulatory issues: Delegating tasks to an outsourcing provider in another country poses risks of non-compliance with legal and regulatory standards.
But rest assured, having a solid outsourcing strategy and working only with a reputed outsourcing service provider will eliminate all of these risks.
So, what should you do to craft a successful outsourcing strategy?
How to Create an Effective Outsourcing Strategy: 10 Proven Steps and Best Practices
Crafting an effective outsourcing strategy is all about leveraging global talent to boost your business efficiency and drive innovation.
Here are 10 essential steps and best practices to guide you through the process:
- Evaluate Your Outsourcing Readiness
- Outline Your Project Scope and Resources Needed
- Choose a Budget and Pricing Model
- Choose an Outsourcing Model
- Select a Reliable Service Provider
- Set Up Communication Channels
- Onboard and Train Your Outsourced Team
- Have Clear Contracts and Agreements in Place
- Monitor Progress and Have Regular Quality Checks
- Have an Exit Strategy in Place
1. Evaluate Your Outsourcing Readiness
This step lays the groundwork for a successful partnership, matching expectations and capabilities with potential outsourcing challenges.
How do you assess your outsourcing readiness?
Simply follow these steps:
- Define your goals: Define what you hope to achieve through strategic outsourcing (for example, cost reduction or improved efficiency.)
- Internal Capability Assessment: Audit your current performance and capabilities to identify how outsourcing can fill existing gaps.
- Resource Allocation: Confirm the availability of necessary resources, including budget, staff (for example, an outsourcing manager), technology, and facilities to support the outsourcing agreement.
- Support from Management: Engage with key stakeholders to coordinate the strategy and address any concerns or resistance.
- Risk Management: Pinpoint potential outsourcing risks and evaluate your preparedness to manage them.
2. Outline Your Project Scope and Resources Needed
Outlining your project scope involves a detailed description of the project’s objectives, features, user experience goals, integration with payment gateways, deployment timeline, key milestones, and so on.
You also need to identify the skills and team composition necessary to execute the project, such as front-end and back-end developers and UX/UI designers.
3. Choose a Budget and Pricing Model
Estimate your budget based on market rates for the specialized expertise required, considering how it influences the caliber and number of developers you can afford. This will help align your project’s financial constraints with your outsourcing goals.
What pricing models can you opt for?
- Fixed-Price: Best for projects with well-defined scopes, allowing for a clear upfront cost.
- Time and Material: Offers project flexibility with changing scopes and billing based on the actual time and resources used.
- Milestone-Based Payment: Payments are made as specific milestones are achieved throughout the project, aligning payment with progress.
4. Choose an Outsourcing Model
You need to choose the right outsourcing model to align your project’s objectives, budget, and communication needs.
What are the different types of outsourcing?
A. Based on Location
- Onshore: Outsourcing a business process to companies within your own country. Expect ease of communication and cultural alignment but at higher outsourcing costs than nearshoring and offshoring.
- Nearshore: Partnering with an external provider in nearby countries like Mexico or Argentina. This model offers minimal cultural and time zone differences at lower costs. (Distillery is one of the best nearshore outsourcing services partners for software development.)
- Offshore: Delegating a business process to teams in distant countries like China or Poland. While offshore outsourcing offers significant cost savings, you may face time zone, cultural, and linguistic challenges.
B. Based on Function
- IT Outsourcing: Delegating IT functions like software development, hosting, and IT maintenance to an external service provider.
- Business Process Outsourcing (BPO): Outsourcing backend operations such as HR, finance, customer support, and more to external agencies.
- Knowledge Process Outsourcing (KPO): Outsourcing high-level tasks involving specialized skills in fields such as engineering, pharmaceuticals, and biotechnology to experts in these areas.
- Manufacturing Outsourcing: Contracting the manufacturing of goods, often to countries with lower labor costs.
5. Select a Reliable Outsourcing Company
The outsourcing company you select can either make or break your project’s success.
Here are the steps to choose the best external partner for outsourcing:
- Select a region that suits your time zone, cultural compatibility preferences, and budget.
- Examine your potential partner’s track record, client feedback, and case studies to gauge reliability and expertise.
- Conduct thorough interviews to confirm if their methodology and offerings match your project needs.
- Assess their communication protocols and project management tools.
- Check if their corporate culture and values resonate with yours for smooth collaboration.
- Verify their financial stability to build a sustainable partnership.
- Ensure robust intellectual property (IP) protection and risk management practices exist.
- Implement a trial project to assess their performance and compatibility with your team.
- Confirm if they adhere to legal and compliance standards relevant to your industry.
6. Set Up Communication Channels
To enhance collaboration with your outsourcing partner, select communication tools and platforms such as Slack for messaging, GitHub for code sharing, and Zoom for video calls.
Establish regular updates and designate clear points of contact for efficient issue resolution and urgent communications.
7. Onboard and Train Your Outsourced Team
Host onboarding sessions about your company’s tools, methodologies, and project goals to ensure a successful outsourcing strategy with seamless integration of processes, culture, and expectations.
For instance, introduce the external team to the project management tools you use, like Jira or Asana, through practical demonstrations, which equip them to operate efficiently right from the get-go.
8. Have Clear Contracts and Agreements in Place
The following professional outsourcing services contracts and agreements help set clear expectations and provide a legal framework for resolving disputes:
- Master Service Agreements: Specify the project scope, payment terms, and confidentiality. Includes the Statement of Work (SOW) and Service Level Agreements (SLA) to outline deliverables and performance standards.
- Non-Disclosure Agreements (NDAs): Protect confidential information shared during the project. For example, an NDA to safeguard proprietary software code and business processes.
- Intellectual Property (IP) Agreement: Defines ownership of new intellectual property created. For example, an agreement specifying client ownership of developed software.
- Data Processing Agreement (DPA): Ensures compliance with data protection laws for handling personal data. A good example of this type of outsourcing contract is outlining procedures for secure data processing under GDPR guidelines.
9. Monitor Progress and Have Regular Quality Checks
Monitor progress and conduct regular quality checks to make sure your outsourcing project meets your goals and quality standards.
- Request progress reports: Get regular updates from the external partner on completed tasks and upcoming milestones. For example, weekly reports detail tasks completed, challenges faced, and plans ahead.
- Set up dashboard tools: Use software like Tableau for real-time project data visualization to track progress and performance against objectives.
- Establish KPIs: Define Key Performance Indicators (KPIs) such as feature completion rate or quality progress ratio to measure progress.
- Conduct on-site visits: Visit your outsourcing team in person to gain more insight into their operations. (This is easier to do in nearshore or onshore outsourcing setups.)
10. Have an Exit Strategy in Place
Develop a robust exit strategy that includes protocols for terminating your outsourcing contract, ensuring knowledge transfer and asset handover, and resolving financial and legal issues. This will help safeguard your interests and maintain operational continuity.
Outline steps for smoothly disengaging from projects and addressing potential disputes during the exit process.
Follow these ten steps rigorously to make your outsourcing strategy a success story.
Next, let’s look at the emerging trends that could shape your outsourcing strategy in the future.
Trends in Outsourcing Strategies in 2024 (and Beyond) + How To Be Prepared
Here are the hottest outsourcing trends and how you and your external provider can be prepared for them:
- Rise of Robotic Process Automation (RPA): RPA involves automating routine tasks to enhance efficiency and accuracy. Train your developers in RPA skills or hire experts implementing RPA solutions.
- Cybersecurity Outsourcing: As cyber threats evolve, outsourcing cybersecurity allows access to specialized skills and technologies. Look for partners with a track record in cybersecurity and robust security protocols in place.
- Increased Adoption of Cloud Outsourcing: Companies are moving their data and applications to the cloud for better scalability and flexibility. So, evaluate potential outsourcing partners based on their security measures and reliability.
- Global Workforce Collaboration: This gives you access to a broader skill set and round-the-clock productivity. So, hire full-time or part-time global talent with diverse expertise to enhance speed and innovation.
- Focus on Sustainability: Integrate environmental, social, and governance (ESG) goals with outsourcing practices. Look for outsourcing companies that prioritize energy-efficient operations and are committed to reducing their carbon footprint.
- Data Analytics Outsourcing: Outsourcing data analytics gives deeper insights into business operations and market trends. Select partners with deep analytical capabilities who can translate big data into business intelligence.
- Skill-Based Outsourcing: This involves outsourcing specific skills for particular projects. Define project requirements clearly and pick specialists who align with the skills you need.
- Smart Sourcing with AI and Machine Learning: Artificial intelligence (AI) and machine learning (ML) are being used for data analysis and automated decision-making. Make sure your outsourcing partner uses them in their processes.
- Outcome-Based Contracts: These contracts focus on achieving specific results rather than merely procuring professional services. Work with your outsourcing partner to set measurable goals and metrics that meet your goals.
- Data Security and Compliance: Adherence to regulatory standards and advanced security protocols is critical, especially in sensitive industries. Outsourcing companies should maintain high data protection standards and regularly undergo security audits.
- Ecosystem-Based Outsourcing: This involves collaborating with a network of specialized partners for integrated solutions. For example, a software development company might partner with a cloud services provider and a user experience design studio to deliver a comprehensive solution.
- Smartshoring: This is about combining onshore, nearshore, and offshore outsourcing strategies to balance cost and quality. For instance, you might outsource blockchain projects to Estonia and web development tasks to Mexico.
To stay ahead of outsourcing trends for 2024 and beyond, all you need to do is team up with a competent outsourcing services provider like Distillery.
Make Your Outsourcing Strategy a Success by Partnering with Distillery
Distillery is a premier nearshore software development firm renowned for delivering top-tier tech expertise from Latin America at competitive rates.
Here’s how we work:
- Our seasoned specialists in Mexico and Argentina are skilled in all aspects of development, spanning custom software development, web development, quality assurance, and more. We can easily help you build cross-functional teams (with expertise in QA, project management, cloud, SRE, product strategy, experience design, and more).
- Our experts have specialized expertise in diverse tech stacks like Drupal and Cypress.
- We follow a rigorous hiring and interview process – just as you would if you were hiring directly.
- You can choose from flexible outsourcing models like staff augmentation, dedicated teams, and end-to-end software outsourcing.
- Our Service Delivery Approach (SDA) is built on the agile software development process. So we can integrate our talent with your existing team easily.
To maximize the benefits of a successful outsourcing strategy, get in touch with Distillery now and leverage our cutting-edge expertise.