From managing employees’ payroll to promoting brand awareness, managing various business functions can definitely be exhausting—especially for small businesses with limited resources.
That’s when business process outsourcing (BPO) comes into play. By handing over certain business processes to third-party providers, small business owners are able to enjoy access to a bigger talent pool, focus on primary business functions, and save costs.
And it’s apparent that more U.S. businesses have started to realize the many benefits of BPO. Over the past 2 years, LegalTemplates has seen a staggering total increase of 116% in the average monthly sales of our outsourcing contracts.
With unique data from our ever-increasing users of these outsourcing contracts, we have outlined data-driven insights on how BPO became a business trend in the first place, and how it may develop in the future.
COVID-19 and the Rise of Outsourcing
Monthly sales of outsourcing contracts started to increase significantly after U.S. cases of COVID-19 spiked in October 2020; in less than 18 months since the pandemic outbreak, the sales quickly doubled in number.
The pandemic contributed to the growth of outsourcing trends in many ways. As skilled talents adapted to preventive measures such as remote working and lockdowns, they realized that they could work anywhere with a laptop and stable Wi-Fi.
At the same time, companies were seeing rising operational costs due to the negative impact COVID imposed on the national economy. The U.S. Census found that most businesses around that time cut personnel due to continuing uncertainty, lost profits, or simply no work for some divisions. This made them seek ways to save on overhead—one of them being outsourcing.
“As a small business owner, outsourcing can be a valuable tool for managing costs and increasing efficiency.” says Alex Mastin, CEO and Founder of the small business Home Grounds based in New York.
In short, the social and economic impact of COVID-19 played a significant role in the increasing popularity of BPO. Even though these impacts ceased to exist during the recovery, many freelancers have completely adapted to the new workstyle, and companies have found new advantages in working with contract help.
Top States Embracing BPOs
In 2022, the following top 5 states made up almost 50% of LegalTemplates’ annual sales in outsourcing contracts:
- California: 15.6%
- Texas: 9.7%
- Florida: 8.2%
- New York: 6.7%
- Georgia: 4.0%
Interestingly, the five states that topped this list are identical to the top five states that have the highest numbers of small businesses across the nation in the same year. States with big cities like California and New York may be the base of many grand, successful enterprises, but 99.8% of businesses in these states are in fact small businesses with less than 500 employees.
As we took a closer look at state-specific figures in the 2022 Small Business Profiles, we found something more intriguing.
Of all small businesses in the U.S., the national average percentage of small businesses with no employees is 81.7%. However, state-specific data showed that percentages of small businesses with no employees are significantly higher in Florida (84.3%), Georgia (84.6%), and Texas (85.5%). California’s number (81.5%) did not exceed but came close.
On the other hand, states that did not contribute much to the outsourcing contract sales were found to have lower ratios of small businesses with no employees. This indirectly proves that small businesses with fewer employees are more likely to outsource business functions.
“Small businesses sometimes struggle with meeting the demands of new and existing customers, especially when dealing with goods.” Chad Price, the Founder of an Inc. 5000 company Kettlebell Kings states. “In that case, it is better to outsource to another company to obtain parts of or the entire batch of goods you need.”
Since the pandemic, a growing number of talented entrepreneurs took on the quest of owning and managing their own businesses alone. As the number of these small businesses is expected to increase in 2023, the outsourcing market is sure to follow.
Outsourcing for Creativity
Our findings indicate that the following business functions were the most popular for small businesses to outsource in 2022:
- Design: 10.6%
- Content creation / Writing: 9.6%
- Web-related services (i.e. web development): 8.1%
- Social media management: 7.5%
- Marketing: 7.5%
It is worth noting that all of the functions above require a certain level of creative and social intelligence—abilities so unique to humans that modern technology has yet to successfully recreate.
This finding echoed that in the Global Outsourcing Survey 2022, which states that the primary driver for companies to outsource complex and long-term business processes is “to gain access to new capabilities” rather than to save costs. Instead of looking for creative or technical people only locally, companies can now bring in top talent from anywhere around the globe.
Rajan Ad, General Manager of a small software engineering firm, speaks on this from his own experience. “By outsourcing certain projects to a team overseas, our firm was able to access a larger pool of software engineers with specialized skills in areas such as artificial intelligence and machine learning. This allowed us to take on more complex projects and increase our revenue by 20%.”
As the global freelance market is expected to grow even more in the next few years, small business owners are likely to enjoy more access to global talent in 2023.
BPOs and Data Security
Small business outsourcing presents advantages for companies that want to stay nimble while cutting costs, but still tap into great talent from around the world. But there are potential challenges that should be addressed before moving forward.
Out of all businesses that chose to outsource business functions in 2022, we found that almost 60% of businesses disclosed some confidential data—such as sales figures and customer profiles—to freelancers and contractors. While providing access to such data may be inevitable in certain business processes, allowing non-employees access to confidential information could raise several issues related to legal compliance and security.
But perhaps the greatest concern all small businesses share is competition. After all, many skilled contractors work for multiple companies within the same industry.
To address such concerns, small companies often include a non-compete provision in their outsourcing contracts. As a matter of fact, every 1 in 4 businesses that used LegalTemplates’ outsourcing contracts chose to include such a provision in 2022.
While non-compete clauses may offer protection for small businesses, studies have shown that they may result in long-term negative consequences, such as higher costs, harm to productivity, and even limits on innovation. In order to prevent this, the Federal Trade Commission has proposed a rule that would “ban employers from imposing noncompetes on their workers,” which includes independent contractors and employees.
It is yet unannounced when exactly the rule will become effective; however, small businesses should be prepared to adapt. Instead of using noncompete provisions as a cure-all, business managers need to put in more effort in protecting confidential information and only share what is necessary.
Other Findings
Beyond those four primary trends, here are some more interesting findings from our research:
- 40% of employers pay contractors a fixed wage, 20% a set fee, and 10% contingent on certain milestones. The other 30% requested customized options.
- 45% of businesses that outsource business processes have chosen mediation then arbitration as their dispute resolution method.
- There were more male than female freelancers in 2021 (62:38). But in 2022, this ratio saw a slight shift to 61:39.
- Half of the businesses that outsource are willing to reimburse freelancers for some expenses.
- About 40% of employers want the ability to end a contract at will, and of these, 30% aren’t required to give notice.
- As many as 65% of employers require freelancers to have their own insurance.
- Around 30% of businesses chose to include a non-solicit clause in their outsourcing contracts.
The Future of the BPO Market
Despite the ongoing economic recession, Grand View Research predicted that the BPO market size could reach as much as $525.2 billion by 2030. Considering that more than 80% of small businesses plan to maintain or increase spending in outsourcing services in 2023, such prediction surely won’t be too far-off.
And it isn’t hard to understand why such significant growth is expected. More small businesses have started to catch up with the outsourcing trend as they realize the various benefits outsourcing could bring. The increasing popularity of working remotely, the blooming number of small businesses, and the rising operation costs are also reasons for the market’s rapid development.
However, it is important to keep in mind that BPO isn’t the solution to all business issues. Small-scale companies should carefully evaluate the need for outsourcing and perform due diligence when screening for potential outsourcing options.
With a new year just beginning, it helps to learn more about business process outsourcing options. LegalTemplates can help you along the way by simplifying the legal process with easy business contracts.
