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Thursday, September 16, 2021

How Much Money Can You Save? Short Analysis of the Outsourcing Market

Recruiting or recruiting as a service has been around for over 100 years and is imported from America by large international companies around the whole world.

Despite periodic economic downturns and collapses, the recruiting market has shown steady growth since 2013. That is, the services of recruiting agencies are more relevant than ever.

With the growth and development of the economy, the demand for the selection of quality personnel is growing. How exactly in this case the outsourcing market is influencing the business? Let’s talk numbers.

Who Is Outsourcing?

According to Investopedia, outsourcing is the transfer of part of a company’s tasks or processes to third parties on a subcontract basis. This is an agreement under which work is performed by people from an external company, who are usually also experts in this type of work. What is the essence? Through outsourcing, a company can focus on making or creating its key product. And do not spray on processes that are added to it.

What are the benefits of outsourcing for companies? Of course, outsourcing has many advantages. A firm that does this professionally has in its staff the appropriate qualifications of employees, tests and improves the skills of its employees. Also, outsourcing companies have the opportunity to focus their company’s efforts on the manufacture of the product for which it was created. Such companies operate more reliably and stably than any employee in the company. By concluding a contract with an outsourcing company, you can fully prescribe liability.

Why Does the Company Choose Outsourcing? Theory

Now let us turn to the effect of scale known in economic theory – the ratio between the change in the volume of resources used and the change in the volume of production. Usually, at the first stage of expansion of the enterprise, the positive effect of the scale of production operates: there is an economy on mass production and expenses per unit of production decrease. However, the scale of production cannot be inflated indefinitely. As the enterprise expands, the positive effect of scale begins to fade. And there may be a stage of constant return when long-term average costs stabilize, and from a certain point, the total costs begin to grow faster than the number of products. In this case, the negative effect of scale, or diseconomy on the scale of production.

At constant resource prices, the effect of scale determines the dynamics of costs in the long run. It is tracked using the long-term average cost function.

To scale up, a company must decide how it will do so. The choice can be made from the following options:

  • use the internal factors of an individual enterprise (plant),
  • vertical integration,
  • horizontal integration,
  • diversification,
  • outsourcing (subcontracting).

Modern large enterprises have largely exhausted the possibilities of obtaining the effect of scale within a single enterprise (plant). There are known internal factors: specialization of labor, equipment, management; use of modern high-performance equipment – production lines, automated modules, etc.

The main options for obtaining a positive effect of scale are a vertically integrated company, a horizontally integrated company, and a diversified company. For decades, this is the way large companies around the world have developed.

This process is called “internalization”. It is carried out on the basis of various types of contracts, both intra- and inter-firm. Internalization is the process of reducing or eliminating negative externalities by turning external factors into internal ones.

However, there are risks of negative scale effects in integration and diversification. First of all, this is the known immobility of the company’s resources, especially in vertically integrated structures, in which fixed costs are particularly high, as they support production capacity throughout the vertical chain. The traditional subcontracting was a way out. The choice is made in favor of subcontracting, rather than vertical integration, in cases where the production processes of the “parent” company require special technology or use specific production factors, such as special mechanisms or unskilled labor in the secondary labor market.

While maintaining all these approaches, companies are constantly looking for new ways to avoid the negative effect of scale. In modern conditions, outsourcing provides such opportunities. With its help, the company gets the opportunity to maintain and regulate the optimal size of the business, flexibly responding to market changes.

At the same time, there is a process of externalization, which is an alternative way to reduce transaction costs compared to internalization. Transaction costs are reduced not by including certain activities in the internal structure of the firm, but by transferring certain operations to independent firms, i.e. by outsourcing. That is, outsourcing is the transfer to other entities of their own transaction costs.

Outsourcing Numbers for Business

Sharing principles are conquering not only the B2C market but also the B2B market. More and more companies are outsourcing their business processes. This applies to both large corporations and very small companies. The pandemic has predictably spurred the growth in demand for Business Process Outsourcing (BPO). By 2025, its volume will reach $ 114 billion with annual growth rates of 5-6%, and in some segments, in particular, in the field of HR, even higher. It will grow primarily due to customers from the USA, Germany, and Japan. The most active users of outsourcing services in the United States are medical and airlines, in Europe – telecommunications, and the automotive industry.

The main supplier of BPO services in the world is India, followed by Ireland, and the third by Asia, McKinsey analysts write. In some countries, BPO has become a significant source of economic income – for example, before the coronavirus, it accounted for about 8% of the Philippines’ GDP. Eastern Europe has a very small share of the global BPO market, but it has great growth potential.

The largest market segment is engineering outsourcing. According to the forecast of Technavio, in 2018–2022 it will grow by almost $ 80 billion. You can check global engineering services at Engre and find out how the platform could contribute to solving the key issues that many companies face.

In general, the global business outsourcing market can be divided into several blocks.

By the type of what they give:

  • Horizontal processes are common to all industries. The easiest way is to outsource what is not at the heart of the business: accounting, recruiting, legal consulting. Marketing and sales fall into the same category.
  • Vertical processes. What the main business is tied to. For example, data analytics or complex IT processes.

By the way, it is organized:

  • Conventional outsourcing. Everything is clear here: a company orders a solution to a business problem from a third-party firm on a turnkey basis.
  • Cloud-based. In this case, outsourcing services are more standardized. They are usually provided by a platform that is used by several clients at the same time. Such solutions are called SaaS – software as service (software as a service). Forbes predicts that this form of outsourcing will be actively developed in the near future: 95% of American companies already use the cloud in one form or another.

As you can see from the infographics below, startups face lots of problems at the beginning and outsourcing can help overcome the key issues. The outsourcing market is developing at the same time as start-ups are prospering.

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Kiara Dawson
Kiara Dawson comes from an Engineering background, with a specialization in Information Technology. She has a keen interest and expertise in Web Development, Data Analytics, and Research. She trusts in the process of growth through knowledge and hard work.

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