Before taking the leap into the world of startup outsourcing, you should consider what’s necessary to make it a successful venture. Hiring an outsourcing company for specific business tasks is not an outlandish idea nowadays, with its shift from being a value-protecting approach to one that creates business value. In 2019, business process outsourcing generated a global revenue of $26 billion, with companies underscoring cost reduction as one of the main decision-making factors.
Cost cutting shouldn’t be the main reason for tipping the scale, however, because strategic outsourcing is so much more than giving your hard-earned money to the first outsourcing company you talk to that’s willing to take on the tasks or processes you assign them. There are several factors to consider before signing a contract with an outsourcing company. Doing your due diligence is mandatory because this partnership will cost you, and seemingly small mistakes can significantly disrupt business operations in such a way that you spend more than you save.
How Traditional Outsourcing Companies Work
Working with an outsourcing company means inviting someone into your business; they will be involved in the organization’s processes and they will affect some of your business decisions. Also, there are outsourcing costs that you might not have considered at the onset. These costs won’t only cut through your budget but also your other resources, including your time and manpower.
The Contract
An outsourcing contract doesn’t just indicate the work expectations. It should involve every aspect of the outsourcing partnership, including timelines, quality parameters, sanctions and rewards, pricing models, and the like. There are also legal considerations involving intellectual property, non-compete agreements, non-disclosure agreements, and the like.
Traditional BPO outsourcing companies typically also have a specific “lock-in period” wherein getting out of the contract outside of that period would constitute a breach. The length of this lock-in period will vary, but 24 months is standard for many outsourcing companies. It may not be a bad thing in itself, but it’s something to consider before choosing a startup outsourcing partner.
The Deposit
This might come as a surprise to some startup companies because most organizations look at startup outsourcing as a cost-cutting measure. However, you should include the advanced deposit as part of the initial cost of hiring an outsourcing company. This deposit covers any expenses that may be incurred when an outsourcing company starts working for you. The typical advanced deposit covers the first six months, complementing the lock-in period by encouraging clients to get their money’s worth before even thinking of switching providers.
The Headcount
Although some outsourcing companies are prepared to work for an organization regardless of business size, there are some that look for a specific headcount requirement before they start work. While this is understandable when you think about ROI, it limits the options for smaller businesses and startups.
Headcount concerns are easily resolved by setting and discussing specific parameters early on, but it can be a source of frustration if one of the parties isn’t forthcoming.
The Service Fees
Contrary to what some believe, startup outsourcing costs aren’t a one-off expense, and often, they aren’t fixed amounts. This is something you have to prepare for if you’re a startup that’s looking to build quickly without burning a hole in your pocket. Traditional BPO outsourcing companies charge service fees both to client and talent payroll, which can be a big cost, especially if it isn’t part of your original budget.
During the creation of the contract or discussion of service level agreements (SLA’s), feel free to ask about upfront expenses and other costs that may not have been mentioned during the initial meetings.
The Pull-out Cost
This is one of the reasons BPO outsourcing leaves a bitter taste in the mouths of startups. It’s one thing to make clients pay when they want to conclude a partnership early, but it’s another thing to not be explicit about the fact that they need to pay. This is typically a part of the contract when working with an outsourcing company. If it isn’t, you should clarify the cost and what else needs to be done in case circumstances change and there’s a need to pull out from the agreement.
Choosing the Ideal Outsourcing Company
Choosing the right outsourcing company for your business is part of strategic outsourcing because it determines how you will work together moving forward. Before signing any agreement, you should check the contract carefully to ensure that you get what you pay for and the outsourcing company provides what expected of them.
Although outsourcing contracts vary, they fall under three main categories.
- Time and material outsourcing. This is a common outsourcing contract that’s typically used for long-term engagements when an exact amount can’t be specified for the service provided. The overall cost is dependent on the products or facilities required and the time taken to complete them. Although the cost isn’t fixed, this outsourcing contract allows for more flexibility throughout the project or engagement, allowing for modifications deemed necessary as the engagement progresses. This contract concludes only when the client’s requirements are fulfilled.
- Fixed Price outsourcing. In this outsourcing contract, the client’s requirements and estimated costs are explicitly indicated before the engagement. The client sends a request for proposal (RFP) to the preferred outsourcing company and that company then places a bid for the job. Commonly used for IT outsourcing, it’s preferred due to the fixed cost but is less flexible and minimizes client involvement in the scope of the engagement.
- Dedicated team outsourcing. As the name suggests, this outsourcing contract provides you a dedicated team with specific tasks and goals that are specified at the beginning of the engagement. This team will act as an extension of your in-house team and can be tasked to work on any project you wish to outsource. As a long-term engagement, you can hire specialists or highly skilled workers that you can trust to work on new projects down the line.
Strategic Outsourcing Before Outsourcing
The best option when it comes to outsourcing contracts is to have it reviewed by a legal expert. This ensures that discrepancies are identified early on to avoid a legal mess later. Your legal counsel will know the essential points and what to look for in the contract so that you get a fair deal. You can also ask any legal, contract-, or business-related questions so you’re in a position to make the best decisions for your startup and strategic outsourcing venture.
If you want to outsource strategically, it begins with finding a new partner and agreeing on a contract that serves the interest of both parties. Review proposals and contracts carefully and read between the lines to understand both explicit and implicit stipulations. Ask questions and clarify points when necessary, regardless of how minute the point may be.
Talk with us today to see what options you have to expand your team and scale your business. We’ll help you with the heavy lifting so you can focus on strategy and the next steps you can take to grow your startup.