Getting top talent for your startup or small business will have a significant impact on its future direction. That’s why startup companies looking to expand their teams have turned to outsourcing strategies. Yet they remain involved in the screening and hiring process to ensure that the people they hire complement the business and fit the company culture.
Coming up with an effective outsourcing strategy should be a priority for every business that’s looking to hire people offshore. Although outsourcing is a common term used by businesses, its definition can be ambiguous because of its flexibility as a solution. Depending on a startup company’s needs, an outsourcing strategy may include services like recruitment, team management, and back office services.
Larger outsourcing companies often have fixed solutions that leave little to no room for customization, leaving clients with limited options. The ideal outsourcing company should make an effort to understand the business model of its clients and craft solutions that work toward their business goals.
Options for Building a Team Offshore
The term outsourcing is typically used as an umbrella term for the process of partnering with a third-party to provide people or processes that help move a business forward. Put simply, outsourcing means employing someone outside of a company to perform tasks and processes assigned to them, acting as an extension of an internal team.
For companies new to outsourcing, there are three main categories that you should be aware of so you can choose which one works for you.
Direct Outsourcing: Pros and Cons
Direct outsourcing is an outsourcing strategy wherein a company forgoes employing a third party and uses or creates its own talent pool from which to hire new people. The people they hire may not be full-time employees, which makes this outsourcing strategy similar to partnering with an outsourcing company. The main difference is that screening and hiring is done internally.
Done right, this can help save on recruitment costs and even help fill open roles quicker. However, you’ll need someone with expertise or, at the very least, a solid background in recruitment and sourcing candidates.
Pro 1: Complete control on hiring and other processes
Since everything is in-house, you’re guaranteed complete control over all aspects of screening and hiring. On one hand, this means quality control is on a high level; on the other, it means that you’ll have to dedicate time to complete the process or build a team to do so.
Pro 2: No time commitment
Not working with a third party provider means you can hire at your own pace—and you also need not worry about an outsourcing budget. This is ideal if you aren’t in a rush to fill open roles or are expecting a longer process. You should have a plan or timelines in place, though. Otherwise, you might find that you’re lacking people with the necessary skills at very inopportune moments.
Pro 3: No service fees
Outsourcing companies reasonably charge fees on top of the headcount to compensate the time and effort spent in sourcing candidates. Since you’re doing all the outsourcing work, there are no service fees to consider, which can sometimes affect your decision making.
Con 1: Slow turnaround times
Sourcing candidates can be a short or long process depending on what type of talent you’re seeking and whether or not you have an idea of the process. Screening and hiring candidates isn’t as simple as looking at resumés and picking the ones you think fit the job requirements. You also have to consider employee onboarding and retention and providing the necessary support to keep employees motivated and productive.
Con 2: Challenges in diversification
Familiarity can sometimes work against you when hiring talent. Because you know the company culture by heart, it can be hard to put aside your bias and you may lean toward people that are similar to the people already working with you. Finding culture fit doesn’t mean you hire like-minded individuals. If you do, you’ll find that you haven’t filled the talent gaps you were trying to address in the first place.
Con 3: Time-consuming
Building a business form the ground up is hard work, and it becomes harder if you have to worry about how to find the right talent. During the early days, you may find that you have time to spare for the recruitment process. As your business grows, however, you’ll realize that it becomes a chore that takes time away from your larger goals like strategizing and finding ways to increase revenue.
Outsourcing Companies: Pros and Cons
Outsourcing companies are built to provide the outsourcing strategy that fits a client’s needs. It’s a cost-effective solution that helps take repetitive and administrative tasks and leaves them in the hands of capable personnel so you can focus on more important aspects of the business.
Startup companies, however, often fall victim to the mistaken notion that outsourcing is a simple plug-and-play solution. Unfortunately, it’s not as simple as delegating tasks to an outsourcing company without intervention and expecting them to be done effectively and at a lower cost. A collaborative outsourcing strategy is ideal to ensure the efficiency of processes and help make business expansion possible.
Pro 1: Fills talent gaps
Coming up with an outsourcing strategy is significantly less expensive than hiring full-time employees, especially if you’re looking for highly skilled professionals. This makes outsourcing a viable alternative when looking for specific expertise or trying to fill specialized roles.
Pro 2: Focus on core competencies
With the help of an outsourcing company, you can delegate day-to-day and back-office tasks and focus on your core competencies. This allows you to gain a competitive advantage while also giving yourself—and your employees—time to take much needed breaks. In the long run, this will save you time and money so you can focus your energy on the core aspects of your business.
Pro 3: Reduced operational risk
While some believe that you increase the risk of your offshore business expansion by working with an outsourcing company, the opposite is actually true. Outsourcing tasks and processes means you’re also sharing some of the risk with your chosen outsourcing company. If you want an office offshore for your outsourced employees, the outsourcing company will handle the requirements and compliances so you won’t have to worry about logistics. Employee training and monitoring is also usually part of the service.
Pro 4: Less Legal Hoops
As a foreign investor business owner, you are bound by the business rules mandated by your chosen country’s laws. In the Philippines, foreigners may own up to 100% of a domestic market enterprise unless it’s part of the Foreign Investment Negative List under Section 8 of Republic Act (RA) 7042 or the Foreign Investment Act of 1991. Outsourcing is not part of this negative list.
Con 1: Less quality control
Despite delegating tasks to an outsourcing company, the quality of work done remains your responsibility. It can be hard to control quality when the one doing the job isn’t with you in the office. It can be time-consuming to control the quality of outsourced work, but it’s a necessity. If sub-par work reaches your customers, your reputation will take the hit. As such, choosing the right outsourcing partner is crucial.
Con 2: Confidentiality risk
If your business guards trade secrets or client confidentiality, this must be expressed clearly to the outsourcing company. They should meet the same standards when it comes to privacy and security. Non-disclosure agreements are well and good, but you should also make the effort to learn how the outsourcing company’s employees are trained. Data and IT security is also a major consideration because you may have to store files offsite.
Local Business Entity: Pros and Cons
By law, foreign companies can only set up a local entity offshore through one of two methods—through investing in domestic stock or operating through a local subsidiary. The former limits the liability of the parent company to its capital contribution, with the domestic company being a separate entity distinct from the shareholders. The latter, on the other hand, is wholly or majority-owned by the parent company and is considered both domestic and foreign by virtue of its local incorporation and its acting in the interests of the parent company or foreign entity.
Pro 1: Lower operational costs
One of the main reasons companies set up local entities in another country is the extra savings they can get on overhead costs. Because a subsidiary is separate and distinct from the parent company, the parent company benefits from reduced tax liability through deductions allowed by the state or municipality in which it resides. Having multiple subsidiaries also means income liability from gains in one can be offset by losses in another.
Con 1: It’s a long-term arrangement
If you’re not planning a long-term investment in a certain location or you’re still trying out which ones will work for your business, setting up a subsidiary isn’t ideal. Opening a subsidiary and then closing it down when things don’t work out isn’t a sustainable approach, and it will cost more than what you initially save.
Con 2: Limited visibility but full liability
Depending on how a subsidiary is structured, the parent company may not have access to the subsidiary’s cash flow. However, the parent company’s reputation is linked to that of the subsidiary, which means they’re equally exposed to liability and both subject to legal action in case either breaks any laws.
Con 3: High Upfront Costs
Although operational costs are lower, you should also consider the upfront costs before building a local entity offshore. The implementing rules and regulations of RA 7042 specify that foreigners can’t own “small and medium-sized domestic market enterprise with paid-up capital less than the equivalent of two hundred thousand US dollars (US$200,000).” This goes down to half or US$100,000 provided that the business entity involves advanced technology as determined by the Dept. Of Science and Technology (DOST) or they employ at least 50 employees from the Philippines.
Your Startup, Your Choice
Ultimately, the outsourcing strategy you choose is up to you; identify your business needs for the short- and long-term and determine the best strategy according to them. The digital business landscape has transformed the way business is dome and has made outsourcing strategies easier to implement—especially if you choose the right outsourcing partner.
Schedule a quick call with us today and let us help you discover what outsourcing strategy will help take your business to the next level.