The Pros and Cons of Outsourcing for Small Businesses - SmartAsset (2023)

The Pros and Cons of Outsourcing for Small Businesses - SmartAsset (1)

Outsourcing is the practice of hiring someone outside your company to complete a specific project or task. Work that falls to the business owner or would require in-house contracting can be done by a third party. Outsourcing is done by many types of people and companies, from individual freelancers to large corporations specializing in a single function. Outsourcing differs from offshoring, which has been an important policy issue in the past.

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Outsourcing x Relocation

The terms outsourcing and offshoring are often used interchangeably, but it's helpful to understand the difference between the two concepts. Outsourcing means hiring a third party to manufacture a product or provide a service that the company used to manufacture or provide. When a new or small business uses a third party to manage its benefits and human resources, it is outsourcing. When a consumer uses a service like TaskRabbit to hire someone else to perform a service, that too is outsourcing. You may subcontract to US-based companies or individuals. Outsourcing need not involve foreign suppliers of goods and services.

However, some companies outsource to foreign countries. For example, a US automobile company may manufacture cars in the US that contain parts manufactured in Mexico. The manufacture of these parts was outsourced to a Mexican company. But when a company moves, it transfers some of its own operations to another country. So if the same American carmaker opened its own plant in Mexico, that would be outsourcing. If a company opened call centers in other countries, it would move too. In most US policy discussions, the term “outsourcing” is used to refer to subcontracting to a foreign company or moving abroad, or both.

benefits of outsourcing

So what are the pros and cons of outsourcing? There are benefits that directly impact the subcontracting company and others that can impact the local or external economy. Here are the top four outsourcing pros.

1. Outsourcing can increase business profits

Companies often choose to outsource the production of goods and services when they believe it can save money and thus increase the company's profits. The most cited example of this has to do with labor costs. Companies can outsource and/or move to a country with lower labor costs. While some may see the loss of local jobs as a negative impact of outsourcing, companies find it difficult to resist the increased profits that can result. Companies can also outsource to save on the cost of training and hiring all in-house staff or to expand their business.

2. Outsourcing can increase profitability

Sometimes companies outsource because of the opportunity cost of in-house manufacturing or producing a good or service. For example, a CEO of a tech start-up might outsource HR because he thinks his time could be better spent in meetings.crag capitaland upgrade your technology team with employee benefits management.

When highly skilled employees can outsource lower-value tasks and dedicate more time to high-value tasks, companies benefit. Proponents of outsourcing say it can also increase the overall efficiency of the economy by distributing tasks to people who have the right skill level for those tasks and allowing highly skilled workers to be more productive.

3. Outsourcing can transfer jobs from developed countries to developing countries

Some outsourcing advocates say it's true that offshore outsourcing (and offshoring) results in the loss of some US jobs, but less developed countries benefit, and those benefits outweigh the costs for rich countries like the United States.

Americans may disagree, they say, but outsourcing can lead to higher wages and more job opportunities in developing countries to which American companies subcontract. Some analysts see this as an advantage, saying it could narrow the gap between rich and poor countries over time.

4. Outsourcing can strengthen international relationships

The Pros and Cons of Outsourcing for Small Businesses - SmartAsset (2)

Some experts believe that the more countries that trade with each other, the less likely they are to go to war with each other and the easier it will be for them to work together towards common goals. As outsourcing strengthens ties between companies in two or more countries, it can also strengthen ties between governments in those countries.

Disadvantages of outsourcing

If you decide to outsource work, no matter how much, it can have a huge impact on who you hire, the company itself, and potentially the economy. Let's look at the four biggest disadvantages of outsourcing at scale.

1. Potential loss of US jobs

The downside of outsourcing that gets the most press is the loss of jobs in the United States (or any other country you are outsourcing to). The fact that workers from other countries can create job opportunities they didn't have before is little comfort to members of US manufacturing communities hit hard by plant closures, for example.

2. Lack of transparency

Consumers increasingly want to know where their products come from and who made them. Outsourcing makes this kind of transparency difficult. A US company could outsource part of its business to a company in, say, Bangladesh, which could also outsource recruiting to another company in Bangladesh.

So when Bangladeshi factory workers work in unsafe conditions, is it the fault of the recruiting company, the Bangladeshi manufacturing company, the US apparel company, or all three? Outsourcing makes it more difficult to track cash and labor to gain insight into a company's supply chain.

3. Labor standards can fail

Some critics of outsourcing say it creates a general mismatch between the labor and environmental standards that apply to the goods and services that Americans consume. This is a criticism often cited by opponentsNAFTA.

When a US company subcontracts to a country with lower wages, lenient labor laws, or lower environmental standards, the resulting goods or services may not meet the standards the US government has agreed to agree to in our country. This isn't just an issue for US consumers who want to feel confident about where their products come from. It's also a problem for workers in other countries who aren't getting the wages they need to prosper, and for communities feeling the effects of pollution abroad.

Furthermore, the net contribution to climate change increases when more goods are produced in countries with lower environmental standards. Outsourcing can also alienate small local businesses and small farms in developing countries.

Related article:The pros and cons of NAFTA

4. It can be counterproductive for the third-party company

The Pros and Cons of Outsourcing for Small Businesses - SmartAsset (3)

Outsourcing isn't always a money-saving home run for the companies that do it. They may find that the company they outsourced to is missing deadlines, performing poorly, or negatively impacting the business. There may be communication issues or the cost may exceed expectations. For smaller companies in particular, outsourcing can be a gamble.

the end result

Outsourcing is a complicated subject that often provokes strong reactions. Your opinion on this subject may change depending on where you live, where you work, and what opinions you read or hear, but it's good to keep the basic pros and cons of outsourcing in mind when considering hearing about it in the political media. discussions

tips for entrepreneurs

  • Outsourcing is just one of many things that can affect your wealth as an entrepreneur. It's important to create a financial plan to prepare your finances for all of your goals. You can do this with the help of a financial advisor.Finding a qualified financial advisor doesn't have to be difficult.Ferramenta gratuita SmartAssetconnects you to up to three financial advisors in your area, and you can interview them for free to decide which one is right for you. When you're ready to find an advisor who can help you reach your financial goals,Start now.
  • Another tricky part of running your business is figuring out how to pay taxes and save money. Learn more through ourSmall business tax guide.

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Amelie JosephsonAmelia Josephson is a writer with a passion for financial education topics. His areas of expertise include retirement provision and home buying. Amelia's work has appeared across the web, including on AOL, CBS News and The Simple Dollar. He has degrees from Columbia and Oxford. Originally from Alaska, Amelia now calls Brooklyn home.


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