How outsourcing helps small businesses: a guide to external partnerships

A small business have a meeting with an outsourced freelancer.

In this article, we examine how outsourcing can be beneficial to small businesses and look at the kinds of services that can be contracted out today.

We’ll also investigate whether or not outsourcing affects your business insurance.

Outsourcing is an increasingly common phenomenon in the UK business landscape with a market size, measured by revenue, of £68.4 billion. The number of commercial organisations in the business process outsourcing (BPO) industry increased by 2.5% a year on average over the five years from 2018 – 2023 in the UK. And this trend shows no signs of abating, with revenue in this market segment expected to grow by 3.4% per year from 2024 - 2028.

What is outsourcing?

In a nutshell, outsourcing describes the practice of hiring a third party to carry out certain tasks or handle non-core business functions that would otherwise have to be managed by your employees.

You might hire external service providers on a short-term contract or you may use them on an ongoing basis.

Outsourcing can be done locally, nationally or globally. Companies might use third parties located within the same country; this is known as onshore outsourcing. Alternatively, they may partner with service providers in neighbouring or faraway countries. This is referred to as nearshore and offshore outsourcing respectively.

What are external service providers?

The term ‘external service provider’ refers to any third-party entity that provides services for a business. For example, they may provide IT support, handle payroll or assist with recruitment. External service providers can come in many forms; they could be a freelancer, a contractor, a small to medium sized business or a large organisation.

How can outsourcing help small businesses?

There are many ways in which outsourcing can be advantageous to small businesses. For instance, outsourcing can:

  • Save money
    Outsourcing is often cheaper than employing staff. This makes it an attractive option for start-ups and small businesses, which are often working with tight budgets. As well as saving businesses from having to pay expensive salaries, benefits and training costs, outsourcing can remove the need to fork out for pricey equipment, software and other infrastructure.

  • Provide access to specialist skills and expertise
    If you lack the necessary skills to perform certain business functions, such as accountancy, web development or customer service, partnering with specialist service providers can help. The right external providers will have the expertise to deliver quality work and add value to your business, helping to enhance your reputation in your industry.

  • Improves efficiency
    Because you have access to specialist skills and knowledge, processes are likely to run more efficiently. Training an employee up to perform a task can take a significant amount of time. If you rely on outsourcing partners, you can expect to see results faster.

  • Allow businesses to focus on core functions
    Whether you’re a freelance copywriter, a self-employed interior designer or you run your own gardening business, it’s important that you have the time you need to focus on doing what you do best. By outsourcing non-core business operations, you can increase the time and energy you spend on activities that have a direct impact on the growth and success of your business.

  • Ensure agility and scalability
    External service providers can give organisations the resources they need when they need them, meaning that small businesses can scale quickly and react to fluctuating market conditions and changing consumer needs with ease. For example, a small business owner may decide to partner with an external customer service provider during a busy season or to work with a third-party graphic designer as part of a short-term marketing campaign.

  • Reduces risk
    Relying on third parties with specialist skills and knowledge to take care of a certain aspect of your business can help to reduce the risk of something going wrong. For example, hiring an accountant can help you to remain compliant with national tax laws. Similarly, using an external payroll service can help to ensure that you comply with changing legislation and improve the experience of your employees.

What can a small business outsource?

If you run a small business, it can be tempting to try to manage every aspect of your business. However, if you do this, you can run the risk of spreading yourself too thin and diluting the impact you could have on the areas of your business that matter most. It’s also important to recognise that you may not have the skills necessary to perform every function of your business.

Nowadays, you’ll be glad to know that you can outsource a wide range of services to trustworthy third parties. The tasks you choose to contract out will depend on the skills gaps in your business and your unique requirements.

Here are some of the most common services for small businesses to outsource:

  • Accountancy
  • Payroll
  • IT management
  • Printing
  • Software development
  • HR
  • Recruitment
  • PR
  • Marketing
  • Social media management
  • Distribution
  • Staff benefits
  • Customer service

Does outsourcing affect your business insurance?

Outsourcing may have an impact on your business insurance, depending on the terms of your policy, so it’s a good idea to let your provider know if you outsource any part of your work.

It’s worth remembering that your business can be held legally responsible for any negligence your clients or other parties experience as a result of outsourcing. This makes professional indemnity insurance an important consideration for your business.

You should also check that any external service providers you work with have suitable professional indemnity insurance and public liability insurance in place before you decide to partner with them to protect yourself from risk. This is because your insurers may look to maintain their subrogation rights if a claim is made against you due to a negligent act committed by your external service provider.

Finally, if a freelancer or subcontractor could hold you responsible for an illness or injury they suffer due to the work they do for you - for example, if they attend your place of work or use your equipment - you should have an employers’ liability insurance policy.

Cover starting from £8 a month