What is the definition of a company? It used to be quite straightforward. It was an entity that took inputs, combined them with labour and then produced a product it sold on to the next person in the chain of production. But today, the lines around what makes a company are becoming increasingly blurred thanks to outsourcing.
Outsourcing has always been a part of business. Ever since the earliest days of capitalism, firms would take advantage of ancillary companies and get them to do the tasks in which they had no expertise. But since the digital revolution, outsourcing has accelerated, and now many companies are able to outsource vast swaths of their operations.
From an economic perspective, all of this is rather exciting. With greater specialisation comes greater efficiency and lower prices for consumers. But it’s also an exciting prospect for businesses themselves. No longer do companies have to expend enormous amounts of money and effort carrying out basic business functions: somebody else can take care of all that right now, allowing companies to focus exclusively on value added.
Cutting costs is important, of course. But there are plenty of other reasons why companies are now choosing to outsource.
To Get To Market Faster
In many startup environments, getting to market quickly is essential. Often the best protection against competition is to be the first mover. But getting to market quickly is difficult if you’re trying to do everything yourself.
Even large companies have found that outsourcing some tasks can help get them to market more rapidly. Take Procter & Gamble, for instance. The company realized that it needed to adapt its consumer products to the rapidly changing market. Instead of trying to do all the research in-house, it outsourced the projects to third party companies. Procter & Gamble says that it experienced a 60 percent uplift in R&D productivity with the move which helped the firm generate more than $10 billion in additional product sales.
For software startups, the rewards may be even larger. If you’re looking to launch a platform which relies on a network of users, then you could benefit from getting your administration done by a third party company. Without having to worry about accounts on marketing, you’re free to get on with the core business, such as building robust code and ensuring that your product has the features that your users want.
To Add To Existing Product Stack
Companies tend to think of outsourcing as a way to reduce their costs and the burden of administration. But in many cases, outsourcing can actually add to their existing product stack.
Synergist Medical Management says that an increasing number of medical practices are experimenting with outsourcing medical services which they wouldn’t ordinarily be able to perform in house. Things like cancer and screening which are expensive and difficult to offer within any particular doctor’s office can now become a part of the medical services available by connecting with outside facilities. For doctors and their patients, it’s a win-win. Patients get access to the latest treatments through a single provider, and doctors are able to monitor the progress of their patients without having to liaise with multiple institutions.
Essentially, outsourcing is turning more and more businesses into supermarkets. Just like supermarkets, they’re increasingly able to offer everything under one roof that a customer might associate with their business. This isn’t something that’s limited to the hospitality industry anymore – where hotels might have connections with local attractions. This is something increasingly found in financial services, tech and health.
To Move Beyond Traditional Business Models
Today, one of the world’s most successful computer companies is Acer, just behind Dell in terms of its market share. But what made the company so successful wasn’t actually it’s in-house development: it was its ability to coordinate multiple companies to produce incredible products.
Back in 2005, Acer was struggling as a company. It was widely considered to be a third-rate, knock-off personal computer manufacturer with a poor quality rating. The company tried to do everything by itself. But it realised that it simply couldn’t compete with the larger manufacturers. Instead of carrying on as normal, the company decided that it could only rise to the top of the computer market if it radically changed its business model.
Thus, instead of trying to develop its own products in house, the company started outsourcing different aspects of development to specialists. One of its most successful strategies was outsourcing its high-end gaming peripherals, like monitors. Before the change, its products were boring, and consumers simply weren’t interested. But by jumping on new refresh rate technologies early and packaging monitors in a style that consumers actually wanted to buy, the company won market share and a big slice of industry profits.
Today, the company employs just 7,000 staff, less than 10 percent of its nearest competitor. Why? Because it’s outsourced the vast majority of its production to cheaper, better alternatives.
To Benefit From Booming Local Markets
Outsourcing can benefit companies that are looking to break into new, overseas markets. The reason for this has to do with the difficulty of adapting business models to unfamiliar cultures. For decades, international brands like McDonald’s, have struggled to find the perfect formula to break new markets. But because of a whole host of cultural subtleties, this is difficult. That’s why smart companies don’t bother actually trying to learn the local culture. They just employ people who already do.
When AstraZeneca wanted to break into the booming Chinese pharmaceuticals market back in 2010, it didn’t do its own marketing. Instead, it hired a bunch of Chinese marketers to do the work for it, allowing it to penetrate the market much faster than would have otherwise been possible. It also used other companies to manufacture its drugs so that it didn’t have to go through the complexities of setting up its own facilities in the country.
The result? Now AstraZeneca is the largest drug company in the whole of China. With the country’s massive and increasingly wealthy population, that’s a great place to be.