Outsourcing myths and misconceptions: Are they true?

People judge outsourcing based on myths they've heard from others. Biased opinions increase the perception that outsourcing is dangerous or unhealthy.

A popular misconception about outsourcing is that it only aims to cut costs, and only companies that aim to achieve cost leadership avail outsourcing services. In the absence of explanation, this misconception can adversely affect a company's outsourcing decisions. Many companies also fear outsourcing because it exposes confidential data to third-party service providers. This myth will be discussed further below.

As a service, outsourcing enables third-party providers to carry out a certain task for a client. Letting third-party providers handle the task creates a concern for most businesses. Outsourcing service providers are usually viewed as a threat to quality work by companies.

The outputs should be aligned with the company's goals, the third-party service provider should provide high-quality outputs, and the company's data should be secured by the outsourcing service provider.

In addition to security and quality concerns, outsourcing has many limitations and scopes. Is outsourcing only available to large businesses? Will outsourcing limit the company's control? Is outsourcing only available to established businesses? These questions can make or break decisions to outsource, and uninformed decision makers may just miss out on the opportunities outsourcing offers.

Historically, Business Process Outsourcing (BPO) has been surrounded by myths and misconceptions. It is easy for people to believe hearsay and naysayers when they speak negatively about BPO. People tend to rely on unreliable sources that present biased and uninformed opinions when they speak negatively about BPOs.

In addition, when it comes to outsourcing-based decisions, it's better to consult with experts rather than rely on online sources. There are many arguments about outsourcing that can be found online.

It is a myth that BPOs thrive and continue to grow and develop, despite the myths and misconceptions about them. Outsourcing industries accounted for $76.9 billion of global market share in 2016. However, in 2014, outsourcing companies' global market share reached $104.6 billion. Outsourcing companies' strong foundations continue to stand firm and steady, even though the trend fluctuated in 2015 and 2016.

Fortunately, this article will debunk 15 myths and misconceptions that have plagued the image of BPO companies for years. If left unanswered and unclarified, these myths and misconceptions could affect future business decisions.

1st MYTH: Outsourcing lets you lose control of your business

It is common for companies to outsource specific business tasks to third-party service providers. Companies might outsource accountants for payroll or receivables, for example. Outsourcing accountants means that these individuals will only work on the specific tasks they are outsourced to - no more and no less. Their authority over other matters not related to the assigned tasks is minimal.

There are two questions that need to be answered here regarding significance.

1. Is there a significant amount of control they have over certain aspects of the business?
2. Is their influence on upper management significant?

Having significant control and influence might not make them BPOs at all, if they do. Companies hire BPOs to reduce the amount of non-value-added workload to the company. Activities that do not contribute to or enhance the quality of the products or services of the company are considered non-value-added activities.

Moreover, non-value-added activities can also be called "non-core activities." In contrast to non-value-added activities, value-added activities provide value to the firm's product or service, as well as achieving the firm's core objectives.

Activities that add value to the company's product or service should possess the following characteristics to differentiate them from non-value-added ones:

1. A product or service can undergo significant changes as a result of an activity.
2. Since this is not a rework activity, it is done correctly the first time.
3. This activity would be charged to customers.

To illustrate, suppose Arizona Electronics has an outsourcing agreement with New York Manufacturers, Inc. to manufacture and assemble one of its flagship smartphones. New York Manufacturers will buy, process, assemble, and package Arizona's product. Can you explain the value-added and non-value-added activities in the work provider?

A value-added activity is the processing of direct materials, but assembly and packaging are also necessary to make the product sellable. These two activities are also value-added activities. However, some business processes are also necessary to maintain production flow.

An example of a business process that is not value-added, but still necessary for operations is processing a purchase order, using a storage facility, transferring finished goods, preparing a cost of production report, inspecting, quality checking, and preparing a client's billable.

Cycle time is a measure of the total time it takes to deliver a product or service to an end user. Non-value-added activities should be reduced in order to increase the manufacturing or service cycle efficiency, which in turn would increase the value-added ratio. In manufacturing and service cycles, efficiency is measured by the ratio of value-added activities.

In order to determine the efficiency of the manufacturing or service cycle, the business must construct an initial process map and determine which processes are value-added. Add all the hours or days it takes to complete a certain process to determine the total cycle time. Divide the total value-added time by the total cycle time to determine the total cycle time.

The cost of manufacturing or service can be reduced by keeping non-value-added activities to a minimum. Outsourcing specific non-value-added activities can reduce costs even more and keep the production or service lines moving smoothly.

The main reason why companies hire BPOs is that they want more control over their employees. It is a waste of resources and talents to hire full-time employees to perform only non-value-added activities. It's their goal to take advantage of the internal talent that's stuck making payroll slips or managing uncollectible accounts.

It is possible for companies to achieve full control over their businesses if they hire outsourcing companies for non-value-added activities since workers are fully engaged in activities that achieve the mission, vision, goals, and objectives of the company.

Deloitte's 2016 Global Outsourcing Survey found that 78 percent of respondents were satisfied with their outsourcing provider. This result indicates that most companies who outsource are not suffocated.

2nd MYTH: Outsourcing only reduces your operational costs

According to the previous myth, outsourcing allows companies to control their talent for growth. However, BPOs do not only handle tasks such as payroll, customer service, etc.

In addition to cutting costs, BPOs do business by performing services and providing talent. Companies can hire BPOs to achieve strategic goals. They can, for example, hire BPOs that provide crisis management services to help them deal with scandals or corporate issues.

Among the benefits of outsourcing are cost reductions, which mainly focus on fixed costs. As an example, Arizona Electronics hires an IT expert to improve its IT management. The company will pay this IT expert around $50,000 at the very least or even $90,000. Aside from the IT expert, a team with facilities and tools should be working in IT management. This will result in higher salaries for the company.

Alternatively, Arizona can hire an outsourcing company at a fraction of the cost of hiring new employees in-house. In this case, Arizona would be assured that IT Solutions would provide the best employees to establish Arizona's IT management. In other words, the client would receive high-quality service at a lower price.

Moreover, companies can also outsource financial consultants and management consultants. Outsourcing is a wise decision if the company is expanding. Remember that BPOs succeed because of talent. When a BPO is able to assist its clients in financial or managerial difficulties, it becomes more credible.

Thus, the cost advantage is not the primary driver of why outsourcing is popular. BPOs can offer more advantages than just cost reduction. Based on Deloitte's 2016 survey, companies outsource mostly to reduce costs (59 percent), focus on business goals (57 percent), and solve capacity issues (47 percent).

3rd MYTH: Outsourcing guarantees a lack of knowledge about the services

Those who have had to resort to using call center service tend to be perturbed at its quality, especially when it comes to the customer service agents' ability to adequately attend to their complaints. Usually adhering to a strict protocol, this approach proves ineffective when not able to provide resolution. This illustrates the inadequacy of the agents, as they fail to demonstrate familiarity with what they are representing, causing an unfavorable impression of outsourcing in general.

Whether it’s a call center service provider or an IT service provider, businesses are questioning whether outsourcing companies can perform services on their behalf. It is not easy to start a BPO company. One may think that one can start an outsourcing firm by gathering individuals who are proficient in certain activities.

There is, however, much more to outsourcing than that. Outsourcing isn't just a matter of performing services; it's about expertise and experience backed by performance. Companies that outsource services do business by acquiring a deep understanding of the services they offer and offering them to companies that need them.

The core of outsourcing is the dedication to its services and customers. The objective of outsourcing in this matter is to do the job well at a high standard, and through this objective, BPOs commit to continuous improvement and learning. Their knowledge would be outdated if they entered a battlefield with sticks and stones against tanks and rifles.

Deloitte's 2016 survey found that "third-party advisors added value during strategic assessment, business case development, RFP/vendor selection, and negotiation and contracting."

4th MYTH: Only large companies outsource

Despite outsourcing companies' preference for bigger clients, small and medium-sized enterprises (SMEs) are their top customers.

Small and medium-sized companies can save money by outsourcing to BPOs due to the cost savings that SMEs can get. BPOs tend to choose SMEs with growth potential, because they want to become long-term service providers for them.

In fact, 27 percent of companies who outsource have one to less than five billion annual revenues, according to Deloitte’s 2016 survey. In addition, 23 percent of outsourced companies have annual revenues of 25 million, indicating that both large entities and SMEs are involved in outsourcing.

5th MYTH: Outsourcing will compromise your company's privacy

Most companies believe outsourcing is a breach of privacy when discussing outsourcing. At first glance, many would assume that BPOs can see through a company's true image. It may sound scary, but this is exactly why companies believe outsourcing is a privacy breach.

Trust is the key to successful and long-lasting business relationships. BPOs earn the trust of their clients through their honesty and integrity.

Companies are at risk when revealing financial information to BPOs, and this is a reality that cannot be avoided. BPOs want the trust of their clients to be strong and firm. Companies need to find the right outsourcing work provider to reduce the risk and worry of giving confidential information to them.

Moreover, it is the BPOs' responsibility to use this information for the client's best interest. Keeping a company's data secure and safe is the top priority of BPOs. If they mismanage the data of their clients, companies will lose trust in the BPO industry, and they will be outlawed from the market.

Businesses shouldn't worry about privacy protection as long as they choose the right outsourcing company. BPOs aim for a going concern.

In Deloitte's 2016 survey, only 23 percent of respondents said cybersecurity risks affected their outsourcing decisions. This result shows that more companies trust their outsourcing providers with their information.

6th MYTH: There is no difference between outsourcing and offshoring

It's not even related. As defined, outsourcing is a contract between a client and a third-party service provider in which the latter provides the client with services. Offshoring is just a way to get a job done in another country, but the employees remain a part of the company.

The advantage of offshoring is that some countries have lower wage and tax rates than the company's home country.

Companies can still hire BPOs from other countries. For example, businesses in the United States can hire BPOs in the Philippines and India for customer service jobs.

Here's a guide to help you determine whether the service is being outsourced or offshored.

STEP 1: Does the company elect other entities to perform specific business tasks?

IF YES,              STEP 2: Is the entity located abroad?

IF YES/NO        STEP 3: Is the entity a subsidiary or a partner?

IF YES:    Well it is offshoring.

IF NO:      Then it is outsourcing.

There is a thing called offshore outsourcing, which is a hybrid of outsourcing and offshoring, and it combines the advantages of both.

It involves hiring a third-party service provider from another country to perform services for the company. So, the service is performed in a foreign country and the service provider is a third party.

The main difference between offshoring and outsourcing is the status of the service provider. Offshoring and outsourcing share characteristics when combined through offshore outsourcing.

7th MYTH: Outsourcing results in low-quality services and products

To illustrate, take an accounting firm as an example. Financial statements (FS) are one of the services offered by accounting firms.

Publicly-listed companies require outsourced financial accountants to prepare their financial statements. Listed companies are companies on the stock exchange. With that kind of status, they have a public liability.

Aside from that, future investors also use Financial Statements (FS) for financial analysis since some stockholders don't get involved in the internal operations of the company.

There is a lot at stake, so accounting firms need to send the best accountants. These accountants are experts in financial reporting, particularly in accordance with IFRS.

Outsourcing this knowledge and talent ensures companies' financial statements are prepared correctly and carefully. If accounting firms deliver substandard services, their credibility would suffer.

Data from 2014 and 2016 was compared in Deloitte's 2016 survey. Data showed that concerns about poor service quality dropped to 20 percent. In 2014, 48 percent of respondents reported poor service quality. These significant decreases indicate that outsourcing industries are now improving and innovating.

The best way to reduce the risk of getting low-quality output is to select the best outsourcing service provider among the rest.

8th MYTH: Outsourcing weakens a country's economy

A fragmented and biased viewpoint tells people that outsourcing kills the economy. From an economist's perspective, outsourcing strengthens a country's economic status.

Outsourcing is a cost advantage for companies. Additionally, in-house talent can be redirected to work on important goals that will lead to the company's growth and development. By combining cost advantage with refocusing company talent, this combination increases efficiency and productivity.

Companies that are productive and efficient provide better goods and services to the market, resulting in a healthy market where goods and services can be offered at better prices without sacrificing profit objectives.

As a result of a healthy market, more jobs and investments are created. When companies are improving, the country can be sure that they will persist for decades to come. Outsourcing secures more tax revenues and employment opportunities for skilled individuals.

9th MYTH: Outsourcing increases unemployment

Outsourcing jobs, especially offshore outsourcing, leads to job losses, according to this myth.

The unemployment rate in the United States has dropped. Jobless claims have decreased 10 percent from the 25-year average, according to Statista. As a result of the household survey in the United States, 2.2 million Americans are now employed compared to the number during the recession.

In fact, outsourcing helps a company expand. When companies expand, more jobs are created. Cutting costs through outsourcing permits a company to expand.

However, outsourcing does not necessarily equate to offshore outsourcing, as there is a branch called "onshore outsourcing." For example, U.S. companies can use onshore outsourcing by hiring U.S.-based BPOs.

10th MYTH: Outsourcing is not a long-term strategy

People think outsourcing is for short-term only because they look at the outsourced tasks that are non-value-added. To name just a few, outsourcing companies also offer strategic services like financial consulting, supply chain management, and enterprise resource planning.

It is in the best interests of BPOs to have long-term clients. Long-term clients provide stable revenue and cash flow for BPOs. From the client's perspective, companies should opt for long-term contracts with BPOs.

BPOs are trained to come up with business solutions aligned with the client's ideas by learning about the client's business goals, strategies, and vision. As a result of a long-term agreement, these business solutions will be more accurate and more reflective of the client's ideas.

A long-term partnership with BPOs can improve the quality of outsourced services for both parties.

11th MYTH: Only established companies outsource

According to a myth, outsourcing is only for the big guys. That might sound true at first, but it's not the truth. The target market of outsourcing doesn't depend on the existence of a company.

It is true that small businesses are in need of outsourcing companies. BPOs can offer consultancy, advisory, and other services to keep their businesses growing. Small businesses face a major challenge: longevity. It is common for businesses to fail because of mismanagement, complacency, fraud, and declining customer loyalty.

BPOs can offer solutions for that. These solutions are not just for a short-term plan, but also for a long-term plan. Outsourcing companies can send management experts to assess the business plan and offer solutions to keep it viable. The most common cause of mismanagement is agency issues.

The problem of agency arises when there is a conflict of interest in the management, particularly in the key personnel running the business. When agency problems arise, there will be agency costs.

Agency problems arise when there is a conflict between increasing shareholders' wealth and managers' wealth. When such problems develop, the interest of the business as a whole - which refers to the cooperative effort between shareholders and management - is not taken into consideration.

Outsourcing can help by realigning individual interests with the company's overall objectives. Financial and management advisors can prove invaluable in assessing the organization's issues, and demonstrates why using third-parties is so beneficial. Advisors who are not directly involved in the company can ensure total neutrality when evaluating its status and suggesting solutions which will benefit all those involved.

BPOs can assist startups in identifying their market. BPOs, based on their experience with other clients, can help startups develop a marketing plan that matches their ability as a startup. A startup business does not need to worry about everything since BPOs offer services like marketing. The owner keeps the business running smoothly while the BPO does its job.

Most companies are able to establish themselves through outsourcing. Startup businesses are still learning and experiencing almost everything. The learning and application of management principles takes time, so startups are still learning how to control costs, especially how to reach their breakeven point in the first months of operation.

The goal of a startup business is to continue operating as a going concern. Outsourcing companies can assist these companies in making better decisions, improving processes, and securing a future for their products. Using the client experience and business knowledge of third-party experts, startup management can be guided. Advisors and consultants can help a startup business become self-sufficient.

The most important thing for startup businesses is to maintain strong internal controls and finances. As a startup business, employees who steal money from the company are not good. Having strong and firm internal control procedures can help startup companies protect their financial resources from theft or fraud. Hiring accountants from accounting firms can help design an accounting system that is fraud-resistant.

12th MYTH: IT outsourcing is too complicated for small businesses

72 percent of respondents to Deloitte's 2016 survey said that they currently outsource IT. This shows that IT is evolving and that there is a need.

Business can access data from any location in the world thanks to the internet. Data can be transferred from A to B in less than an hour thanks to this kind of technology.

When it comes to IT applications, small businesses are often ignored. Every business has its own data needs, whether it's big or small. Small businesses are still growing and need careful monitoring. It is possible to simplify complex business processes with IT applications.

Using spreadsheets and bookkeeping software is an excellent way to start for small businesses. In addition, they can create their own software specifically designed for the business. This is why IT outsourcing is also important for small businesses. There is no difference in size here. Small, medium, or large businesses all need IT outsourcing.

By knowing a company's needs and building an IT infrastructure around those needs, IT outsourcing companies can increase work efficiency and effectiveness. They can also guarantee accuracy and security for information.

Software development, web hosting, technical support desks, database management, telecommunications, and infrastructure are some of the most commonly outsourced IT services.

As an example, small businesses can save money on fixed salaries if they hire an IT outsourcing company to provide technical support. On-line technical support or on-call tech support means that companies only pay for what they use. In comparison to having an IT specialist on staff, businesses may end up paying $90,000 and not receiving the results they need.

In addition, businesses can take advantage of employee benefits afforded to in-house IT specialists. They do not have to worry about the availability of the employee in times of need. Tech support is usually available 24/7, and outsourcing guarantees full-time assistance.

An in-house IT team that works on a TPS is expensive. Outsourced IT specialists can also develop a transaction processing system (TPS) to reduce manual intervention. It is better to outsource them from outsourcing companies that have been proven to help other businesses improve their processes.

Consulting IT firms and choosing the right IT firm can help small businesses build their road to growth. IT solutions are one way to mitigate costs.

13th MYTH: Healthcare BPOs can increase expenses

Providing medical and health services is one of the main functions of the healthcare sector, which is one of society's most important sectors. Medical facilities and hospitals deal with many patients on a daily basis. Hospitals and medical facilities provide healthcare and hospitalization services as their primary functions.

However, there are numerous other hospital functions in reality. Revenue cycle management (RCM) is one of these critical functions. Hospitals must provide healthcare services immediately to individuals in need of medical help. Hospitals have a difficult time keeping track of these patients when this system is in place.

While doctors and nurses take care of patients' health, the RCM makes sure all services or products used are accounted for and billed to them.

Using a medical billing software, an RCM system keeps track of patient bills and usage of hospital facilities. It is no joke that hospitals grow at a faster rate than other service businesses. Hospitals might lose control of management functions as they grow, which could lead to a decline in cash flow. However, a competent RCM should help improve things.

Healthcare providers should consider outsourcing RCM for the following reasons:

• Regulations are constantly changing

To access the patient's healthcare benefits, RCMs communicate with insurance companies. In-house management of RCM will feel the full impact of changes to insurance policies. Employees will have more workloads on their desks as a result. Hospitals will have to train staff in-house to stay abreast of recent developments.

In contrast, if RCMs are outsourced, outsourcing companies can keep up with these changes. This eliminates the need for internal training and assures hospitals that their revenue is handled properly.

As of January 1, 2018, a new accounting standard for revenue recognition became effective. This new standard is IFRS 15 Revenue Recognition. IFRS 15 Revenue Recognition changes the way revenue is recognized. In-house staff would undergo training and seminars to learn about this new standard. This would result in increased training costs, but outsourcing companies can ensure their employees are up to date ahead of time.

• Revenue recognition errors can be reduced by reducing clerical errors

A hospital that has an in-house RCM team can cause employees to commit more errors. Since in-house RCM is costly, most hospitals hire only a few people to handle the tasks.

Outsourcing RCM can reduce revenue recognition errors and ensure revenue is accurate.

• It is inevitable that costs will be cut

Whether the hospital opts to slash operational costs or make staff redundant, poor revenue measurement and collection will still affect the firm's profitability. Enhancing RCM can assist in tracking revenues when they're earned. With enhanced collection of revenue, income figures should be better representative of the business' real performance. It may be that a low-income figure is the byproduct of inadequate revenue measurement. By entrusting professional RCM managers with the job, this could help to reduce expenses as well as boost accuracy in relation to revenues.

14th MYTH: The in-house sales force is cheaper than outsourcing

The truth is that an in-house sales force isn't cheap at all. It is much more than simply being cheaper than outsourcing a sales force. The company would hire full-time employees to work on its marketing plan if it established an internal sales force.

In spite of sounding great, the company will pay an average salary of $70,000 per year, and that's just the basic salary. Employee benefits will also be included, as well as vacations, holidays, and sick leave. The cost of having an internal sales force would reach about $90,000 per year, and that's a lot of money.

In this regard, entry-level marketing graduates are cheap to hire, but inexperienced. In contrast, professional marketers are expensive, but experienced.

Since the people employed in the sales force are competent and experts, the benefits of insourcing versus outsourcing are relatively the same. However, the price difference is what makes the difference.

The company can access a wide range of marketing solutions by outsourcing labor, such as sales forces. Marketing assistance companies offer experience and knowledge in preparing marketing plans and implementing them. Furthermore, an outsourced sales force can work faster since the company has a competitive knowledge base that can help it make better solutions, while an in-house sales force might have trouble gathering information.

15th MYTH: Outsourcing sales forces destroys company branding

Although a product is irrefutably marketable, having a sales force create the product's brand can sustain the product's marketability.

Branding is dependent on a marketing mix. An outsourced sales force can assist in developing a better product in the market. Product, Place, Price, and Promotion are the four Ps of a marketing mix. Outsourcing companies have a powerful advantage in their knowledge base.

In order to create a well-crafted marketing plan, outsourcing companies need to have customer survey data from the past. This plan starts with the selling proposition. Using this knowledge, companies can create better marketing solutions for their clients. Understanding competitors and customers requires a great deal of data. Marketing teams working in-house would spend more time conducting surveys, interviews, and research.

Outsourcing companies make available to service providers their acquired knowledge and experience. Outsourced personnel can consult experts within their company. It takes years for an organization to build up a knowledge base in marketing and sales. This knowledge cannot be easily acquired internally.

It is the responsibility of the sales force to solve marketing problems. In order for a product or service to remain competitive, outsourcing companies can implement short-term and long-term solutions based on their experience. Competition is the number one hindrance to similar products or services.

In branding, an outsourced sales force is present to translate the message that the client wants to convey through its products and services to the customer.

The bottom line is choosing the best outsourcing business. Companies should choose an outsourcing company that has been a leader in marketing and promotion. However, an in-house sales force isn't discouraged either. Sales and marketing outsourcing services are encouraged for startups in order to be guided properly.

Companies with established brands can also hire sales and marketing outsourcing companies. Outsourcing can be beneficial for every company, not just the established ones.

There have been myths and misconceptions surrounding outsourcing, but outsourcing has become a major player in the growth and development of most companies worldwide. Outsourcing has its strengths and weaknesses. However, companies that wish to outsource should make the best use of outsourcing services.

One thing that companies should remember is that outsourcing is a choice. It is not inevitable. Companies should make a cost-benefit analysis before engaging in outsourcing or hiring a third-party advisory. But one challenge remains. Companies that outsource should offer their clients better services through innovation.

We will tell you the success stories of some of the most popular entrepreneurs and companies who used outsourcing as a stepping stone.