Author : Akmal Razman
Understanding the outsourcing meaning is crucial for businesses looking to optimize their operations. Many companies in Malaysia implement outsourcing methods for their non-operational activities. Outsourcing is a strategy employed to maintain balanced Human Resource (HR) management. Thanks to outsourcing companies, work considered administrative can still be completed so that employees within the company can focus on core business tasks.
Although already commonly applied in large companies in Malaysia, many are still unfamiliar with the term outsourcing. Additionally, companies need to consider the risks that occur if they want to implement this method. Let’s read this article so you can better understand the complete outsourcing meaning and its application in business.
Understanding Outsourcing in Business
What is meant by outsourcing? Why is outsourcing so important in business? All these questions will be explained in this section.
Meaning of Outsourcing (Definition)
Outsourcing is an HR management strategy carried out by transferring part or all of its business processes to a third party usually called a vendor or service provider. This transfer is done so the company can focus more on its core tasks and competencies. In practice, there are several company functions that can be handled through outsourcing, such as financial administration, customer service, IT, or production.
The Importance of Outsourcing in Business
Outsourcing is very important because its purpose is to achieve operational efficiency. This efficiency can be generated by reducing costs and internal resources needed to carry out these functions. By transferring responsibility to outsourcing parties who have special expertise, the company can focus more on core activities that provide added value and gain competitive advantages in the market.
Outsourcing Work System
The procedures for work implementation in outsourcing service provider companies are generally regulated based on labor laws and regulations applicable in a country. Provisions regarding outsourcing and types of contracts can differ depending on the laws applicable in each country. For example, in Malaysia, outsourcing work is regulated by the Employment Act 1955 and the Industrial Relations Act 1967, which govern employment relationships and working conditions.
One form of agreement often applied in the outsourcing work system is an outsourcing work contract. This type of contract is an agreement between the company providing work and the outsourcing work service provider that supplies labor for that company. In this contract, various aspects can be regulated, such as job descriptions, compensation, employee rights and responsibilities, and work duration. In the contract work system between outsourcing companies and outsourced workers, employment contracts in Malaysia are typically categorized as Fixed-Term Contracts (for specific duration employment) and Indefinite-Term Contracts (for permanent employment).
Outsourcing Regulations
Outsourcing work in Malaysia is primarily regulated under the Employment Act 1955, which sets out the minimum terms and conditions of employment, and the Industrial Relations Act 1967, which governs employment disputes and trade union matters. As of January 2023, the Employment Act 1955 has been amended to cover all employees regardless of their salary, though certain provisions (such as overtime pay) do not apply to employees earning above RM4,000 per month.
According to Section 10(1) of the Employment Act 1955, any employment lasting longer than one month requires a formal written employment contract between the employer and employee. Additionally, it is important to note that under amendments introduced by the Private Employment Agencies (Amendment) Act 2017, the outsourcing of foreign workers is no longer permitted in Malaysia, as “outsourcing” is expressly stated as a prohibited activity under licensing guidelines.
In practice, Malaysian labor law regulates the requirements and limitations on the use of employment contracts for certain work involving contracted workers. The goal is to protect the rights of workers who work under such employment arrangements, ensuring they receive fair wages, working conditions, and statutory benefits as mandated by law.
Benefits of Outsourcing Services for Business
After understanding the definition, next are the benefits of using outsourcing. The benefits are:
1. Saving Costs and Resources
Outsourcing can help companies cut high operational costs, such as labor costs, infrastructure, and technology. By transferring certain functions to service providers who are already experts in their field, companies no longer need to invest large resources in developing and maintaining these functions.
2. Access to Experts and Latest Technology
Outsourcing provides direct access to the latest expertise and technology possessed by service providers. In industries that continue to develop and change, companies must keep updating themselves with the latest developments to remain competitive. With an outsourcing strategy, companies can leverage the tested knowledge and experience of experts without needing to spend more time and resources developing that expertise in internal employees.
3. Focus on Core Company Competencies
Companies can focus more on core activities that provide high added value by outsourcing certain functions. Companies can allocate resources efficiently, increase innovation, and enhance competitiveness. Additionally, companies can direct their energy and resources toward developing products or services that are their strengths in the market.
4. Increased Operational Efficiency
With outsourcing, companies can experience increased efficiency in their operations. By delegating non-core or routine tasks to external parties who have special expertise in that field, companies can focus more on more strategic core activities. This can reduce internal workload such as reducing recruitment burden and allow more effective allocation of internal resources to achieve larger strategic goals.
5. Flexibility and Scalability
Outsourcing practices provide companies with flexibility to adjust their operational size according to market demand or seasonal fluctuations. With this capability, companies can easily increase or decrease capacity without having to face challenges in recruiting or training new employees. This flexibility plays a role in helping businesses face market changes more effectively.
Risks and Challenges in Conducting Outsourcing
Apart from the benefits above, there are risks and challenges that need to be faced when employing outsourcing workers. What are the risks?
1. Control and Work Quality
When implementing an outsourcing strategy, you give control over that work to a third party. Therefore, you must ensure that the vendor has a strong control system and provides work quality that meets expected standards.
2. Security Risks and Data Protection
Outsourcing involves the exchange of sensitive information between the company and vendor, thus creating data security risks. You must ensure that the outsourcing vendor has strict security policies and procedures to protect company data.
3. Emergence of Dependency Issues on Outsourcing Service Providers
Outsourcing that is not well planned can cause excessive dependency on vendors. If the vendor experiences financial or operational problems, this can negatively impact your company’s operations.
4. Uncertainty in Operational Cost Control
Although using outsourcing employees is often seen as a cost-saving method, the reality is that costs associated with outsourcing can become difficult to estimate. Unanticipated additional costs, such as training costs, equipment adjustments, or changes in scope of tasks, can emerge and affect the company budget.
5. Ineffective Communication
Outsourcing can present challenges in terms of communication between the company and service provider, especially if there are cultural differences, time zones, or different languages. Difficulties in communication can disrupt understanding of project goals, cause misalignment of expectations, and slow down project progress.
Ways to Mitigate Risks in Outsourcing
The challenges and risks mentioned above should not be barriers for those who want to implement an outsourcing strategy. Instead, take the following prevention or mitigation steps for outsourcing:
1. Drafting Clear Contracts and Agreements
Ensure contracts and agreements with vendors cover all important aspects, including scope of services, expected quality, contract duration, and the rights and responsibilities of each party. By having a clear contract, you will have strong guidance to resolve disputes or problems that may arise in the future.
2. Evaluation and Selection of the Right Vendor
Conduct a thorough evaluation of potential vendors. Review the track record, reputation, and ability of vendors to meet your business needs. Involve teams that are directly related to the functions that will be handled through outsourcing so you can choose the appropriate vendor.
3. Implementation of Effective Management and Monitoring Systems
Finally, ensure you have an effective management and monitoring system to oversee vendor performance. Conduct regular audits to ensure that the services provided meet expected standards. Implement open and regular communication with vendors to maintain good relationships with them, especially throughout the outsourcing contract period.
Types of Outsourcing Work
According to Malaysian labor law under the Employment Act 1955, there are several types of work that can be performed by contract workers or outsourced employees, namely:
- Work performed outside of main activities
- Performed with direct or indirect orders from the employer
- Supporting activities for the company as a whole
- Does not directly hinder the production process
The points above indicate that outsourcing employees can only be recruited if the type of work is not related to the production process except for supporting activities.
Following are examples of work that can be performed by outsourcing workers. Examples include:
- Cleaning Service
- Call Center Officers
- Security Officers
- Labor or Worker Services
- Courier or Driver
- Catering Officers
- Facility Management Officers
Conclusion
Outsourcing is a strategy used so that administrative work in your company continues to be carried out. One department that can be handled with outsourcing workers is payroll or employee compensation. To meet this need, SunFish by DataOn provides Payroll Outsourcing services ready to help your company in HR management.
About SunFish HR By Dataon
SunFish HR is a leading provider of Human Resource and Business Management solutions in Southeast Asia. With over two decades of innovation, SunFish empowers organizations with scalable, data-driven HRMS technology to enhance productivity, ensure compliance, and drive sustainable growth. SunFish MY operates from Menara Suezcap in Kuala Lumpur, Malaysia, serving clients across the region.
Media Contact: Akmal Razman, Marketing Executive | sunfish.malaysia@dataon.com
FAQs
- What is the difference between outsourcing and offshoring?
Outsourcing means giving work to an outside company, which can be local or overseas. Offshoring means moving work to another country, but it can still be done by your own company’s branch there. Outsourcing is about who does the work, offshoring is about where it is done.
- How much does outsourcing usually cost?
Cost depends on the type of work, the vendor, and the scope of the contract. Common pricing models include a fixed monthly fee, pay per task, or pay per employee managed. Businesses should compare a few vendors to get a fair price.
- What should a company look for when choosing an outsourcing vendor?
Key things to check include the vendor’s experience, past client reviews, pricing, data security practices, and how well they communicate. A good vendor should also understand local labor laws if the work involves managing employees.
- Can small businesses use outsourcing too?
Yes. Outsourcing is not only for large companies. Small businesses often use it for tasks like payroll, accounting, or customer support since they may not have the budget to hire full time staff for these roles.
- What happens if an outsourcing vendor fails to deliver good service?
Most outsourcing contracts include a service level agreement, or SLA. This sets out the expected quality and timeline for the work. If the vendor does not meet these standards, the company can raise the issue, ask for corrections, or end the contract based on what was agreed.
