Outsourcing is the practice of entrusting the operations of a business or department to an external entity. Generally, the company doing the outsourcing is the buyer while the other entity that takes over the outsourced operations is the provider. By outsourcing operations to a provider, the company can present cost savings and other benefits in the process.

The most common outlook on outsourcing is that it helps companies cut costs. It can mean anything from paying less for goods and services to cutting labor costs. In many cases, these costs can be reduced when compared to wages, benefits and other costs associated with hiring employee(s) for the same operations. Other operational expenses associated with having staff, such as equipment and technology, may also be eliminated when looking to outsource.

By outsourcing certain business operations away from the company, this allows the company to remain focused on the core aspects of their business. For instance, if a company is selling products online, they may choose to outsource their customer service operations to a dedicated call center for customer service inquiries and other related tasks. This can free up valuable resources that can help the company dedicate more attention and resources to developing their product line, building relationships with customers, or creating new marketing strategies.

However, outsourcing doesn’t come without its pitfalls. First and foremost, there is the potential for poor communication between the organization and the provider. This can be problematic when submitting instructions, feedback on work, and making sure operations are running smoothly. Additionally, when hiring a provider, it’s important to consider any security threats that may arise by having multiple parties access sensitive data. It pays to do a thorough background check of any provider before allowing them access to information that could put the company at risk.

At times, a company may even outsource for purposes beyond reducing cost. In some cases, companies may outsource in order to move certain components of their expense sheet from the balance sheet to the income statement, helping them to make their financials appear healthier. In other cases, companies may choose to outsource employees, such as through 1099 contract workers, for the purpose of reducing their payroll taxes.

Overall, when evaluating whether to outsource, companies need to weigh the potential cost savings, but also think through any potential risks associated with outsourcing. When done correctly, outsourcing can be a smart way for businesses to stay competitive and achieve their financial goals.