Companies, large and small, use outsourcing to accomplish many business functions. Some outsource as many functions as possible, while others outsource a few functions or none at all. Key considerations in deciding if this is a prudent strategy for a particular business is understanding the cost savings involved and the improvement in operational efficiencies.

In today’s competitive marketplace, companies must concentrate on both of these aspects to maximize profit. By leveraging the benefits with costs, small businesses can use outsourcing as a major contributor in achieving strategic goals both in terms of profit and market superiority.

Outsourcing cost and benefit analysis must take into consideration the following six financial and non-financial factors:

1) Cost Savings

In pure economic terms, outsourcing should increase bottom line profit by reducing operational expenses. This analysis can be quite simple in determining the dollar cost reduction. Does outsourcing eliminate or reduce a significant capital investment for employee costs and equipment? Along with cost reductions for outsourcing, consideration must be given to the quality of services received. Significantly lowering costs but with a resultant reduction of quality should never be an end result of outsourcing.

2) Technology and Human Resources of Vendor

The decision to outsource must include an analysis of the vendor’s technology and human resources. Is the vendor capable of handling all of the outsourced needs of the company in a particular area? Is necessary equipment and software up-to-date? Are the vendor’s employees well trained and able to execute the outsourced tasks successfully? If the vendor’s technology and resources cannot handle the demands of the outsourced functions, the purpose of outsourcing will be quickly defeated.

3) Quality and Timeliness

Quality and timeliness are equally as important as cost savings. If an outsourcing vendor fails to deliver on time without quality work, any benefit of cost reduction will be negatively offset. Inquires should be made regarding an outsourcing vendor’s quality control and disaster recovery processes. Imagine the effect on a business if the outsourcing vendor has poor quality control measures or no disaster recovery plan if a disaster should occur. A business cannot run the risk of having its operations interrupted due to a vendor’s problem.

4) The Competitive Advantage Factor

Can the outsourced vendor be a “business partner” to the outsourcing company rather than just a “vendor?” Will the vendor be reliable? Will the vendor communicate with the company treating it as a priority client? Will the vendor share the business philosophy in helping the company gain a competitive advantage in the marketplace? Is the vendor ready and capable of “going the extra mile” to help the business achieve success? Depending on the outsourced function, will the vendor provide regular progress reports? And, in the case of increased business or an emergency, will the outsourcing vendor have the capabilities — technical and non-technical — to handle all the increased needs of the business? An outsourcing vendor must be capable of maximizing their resources for the benefit of the outsourcing company.

5) Time to Focus on Core Business

One major advantage of outsourcing is to allow owners and managers time to focus on the core aspects of their business. Outsourcing decreases the time spent on non-core areas giving owners and managers more time to devote to core functions, which means that little time should be spent monitoring an outsourcing vendor. It is the vendor’s responsibility to produce agreed-upon results.

6) Reduced Liability

Many functional areas in a business carry with it a certain amount of liability such as the proper filing of various state and federal tax returns and reports. Other functional areas depending on the business might have liability exposure depending on the risk of the activity. Outsourcing these functions can reduce both liability exposure and possible insurance costs. Liability details need to be discussed with the vendor in advance of any agreement.

Outsourcing, in addition to the economic benefits, can empower a business with improved operations, increased knowledge, technical superiority, quality compliance, timeliness, market advantage, and possible limitations of liability. Outsourcing can certainly be used in small businesses to gain a competitive advantage.