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As startups or enterprises grow, they often find themselves in the tight spot of needing more bandwidth to handle their business. At this point, companies are forced to make a decision of how they want to continue, ie: outsource vs offshore. For example, a savvy entrepreneur might decide to hire extra resources, directly increasing head-count, or he or she might opt for outsourcing particular functions to expert third parties which could mean working with offshore partners.
For the sake of clarity, outsourcing refers to the practice of contracting with external parties to complete work. Offshoring means contracting with companies located in a different country. The first decision to make, in most cases, is to determine if, what and why you need to outsource, then you can consider offshoring services. The decision to outsource or not often depends on multiple variables and each needs to be weighted within the specific context of the situation.
The following guidelines apply to a variety of industries. For the sake of clarity and expertise, we will provide a separate section focusing on the variables involved in deciding whether or not to outsource software development. As a leading provider of software services for over 30 years, we are intimately acquainted with the process for determining whether or not to outsource. Nevertheless, our experiences allow us to accurately apply the following guidelines to a variety of industries.
Outsource vs Offshore: The Guidelines
Don't outsource: Activities that require extra bandwidth and are core to your business --i.e. They involve the preparation or distribution of your "secret sauce," are often best kept in-house. After all, these activities are the lifeblood of what you do, and for IP reasons as well as for ensuring that you own your own destiny, it would not make sense to outsource them. Consider investing in new talent and taking the time to train them and make them an integral part of the company. This way, as your company expands and changes, your employees have growth opportunities and are invested in the success of the business.
Strongly Consider Outsourcing: Activities that are generic in nature present a more clear answer. More specifically, these activities include data entry, research, and development, general accounting, accounts receivable, etc. In most businesses, these activities are a necessary chore but not a key business differentiator. In fact, often these are seen as "business commodities" that can be outsourced from a variety of vendors that have vast experience dealing with these kinds of activities. Additionally, these things can be switched without much pain to an enterprise value proposition. We say go ahead and outsource these…
Grey Zone: Depends on your situation. Some activities fall in a "grey zone" of sorts because they depend more specifically on your situation. Consider customer service, for example. For businesses that sell a complex service or product that clients use continuously and for the long-term, customer service can be a differentiating factor in the success of your product. As such, this service could be risky to outsource. For companies whose product is more simple or offers template solutions, it might make a lot of sense - and save you a lot of money and trouble - to ask a third party to run this process for you.
The Benefits of Outsourcing: Outsourcing provides additional flexibility to grow or decrease the bandwidth and associated costs of a particular function within an organization. Furthermore, it allows a company to access expert resources in an area that is non-core, and because of this, an area in which it would not make sense to spend effort and money specializing. Rather, these activities are better left to the experts so you can spend more effort and resources running and expanding your core competency.
Crucial Component* Whenever you detect that a particular function is a strong differentiating factor in your value proposition, or if "doing it wrong" carries a disproportionate amount of risk for your business, then it becomes more critical to really delve deeper before handing the task to a third party.