Managed services vs traditional outsourcing: understanding the difference

It has long been said that an organization’s people are its greatest asset but many business leaders will tell you that staffing issues are one of the greatest challenges in the modern workplace. Labor shortages are rife across many industries, with the U.S. Chamber of Commerce saying 1.7 million Americans are missing from the workforce compared to pre-pandemic levels¹. The rise of remote work is causing frustration among many employers², while Microsoft has created a new term – ‘productivity paranoia’ – to describe a growing lack of confidence about employee productivity³.

Given such pressures, it is no surprise that more businesses than ever are looking to third-party providers for workplace support. One study has found 83% of small businesses are planning to keep or increase their BPO budgets⁴, while Gartner says 85% of logistics leaders expect to spend more on outsourcing⁵.

When looking for external assistance, it is imperative to know exactly what one is signing up for. For example, outsourcing and managed services are often used interchangeably but there are key differences between the two. This article is designed to clear up any confusion and help businesses decide which is the best option for them.

What is traditional outsourcing?

Traditional outsourcing involves planned or existing business activities being delegated to an outside organization or individual. Such tasks often have limited scope and duration, which can be beneficial for start-ups or businesses on limited budgets but the flipside is they have little control over when and how the provider or freelancer completes the work. Another option is BPO – aka business process outsourcing – where an overseas company handles everything related to one’s offshore processes. While a hands-off approach for businesses, it is more expensive than other models, creates a lack of control and offshore teams do not properly integrate into businesses.

What are managed services?

Managed services offer a more holistic approach to supporting businesses by blending the benefits of partnering with an offshore provider and the peace of mind that comes with maintaining a sense of ownership and control. A popular model involves a partner in a cost-effective location using its infrastructure and systems to set up an overseas division of one’s business including recruitment, payroll, HR, IT support and facilities management.

Crucially, the onshore business maintains control of quality, productivity and key deliverables. For many organizations, managed services providesr (MSPs) offer the best of both worlds as they provide flexibility that traditional BPOs cannot match.

^{Source: What Do Small Business Managed IT Services Cover? (xcitium.com)}

What are the pros and cons of traditional outsourcing?

Pros

• Reduced labor costs: partnering with outsourcing providers in countries with lower costs of living can help reduce labor costs by up to 70%, while there are other savings to be made by avoiding expenses associated with office space and equipment.
• Infrastructure savings: the cost of buying and maintaining hardware and software tools can be significant for small businesses, particularly start-ups. Outsourcing puts this burden on offshore providers and also sees their experts responsible for handling the tech.
• Focus on core activities: assigning time-consuming and repetitive administrative tasks to an external provider allows in-house staff to dedicate more time and attention to more valuable and rewarding work.

Cons

• Loss of oversight: traditional outsourcing can result in businesses relying on the goodwill of offshore providers or freelancers to deliver on their promises. This is especially so for short-term projects where relationships can be difficult to build or are even non-existent.
• Security threats: outsourcing to offshore destinations typically requires key information to be shared via the cloud. Entrusting this process to unknown individuals is an obvious risk, particularly on one-off jobs, which is why it pays to partner with established providers that have key security certificates.
• Communication challenges: the very nature of offshoring means communication can emerge as a disadvantage of outsourcing if not treated with the care it requires. This includes insisting on quality internet infrastructure, agreed communication methods and factoring in time zone differences.

What are the pros and cons of managed services?

Managed service providers are an ideal fit for many organizations but, like any business decision, it pays to weigh up the pros and cons.

Pros

• Access to expertise: many smaller businesses can only dream of employing experts in areas that are not their key focus. Managed services changes this by allowing them to tap into the knowledge and experience of professionals who are trained in specific fields.
• Robust processes: MSPs are not freelancers or small operations. As multi-faceted organizations, they offer established robust processes and systems that typically mean tasks are completed on time and to quality standards.
• Scalability: one of the toughest decisions for a smaller or fledgling business is knowing when to recruit more employees. Managed service providers remove this pressure by allowing them to grow their teams without significant capital investment and scale back down to meet reduced demands.

Cons

• Less internal knowledge: partnering with a managed service provider can result in certain skills or knowledge being honed by offshore team members as opposed to their in-house colleagues. This may be jarring for some managers but the benefit is the latter subsequently has more time to develop skills in their own specialties.
• Lack of physical presence: managed services typically operate from remote locations, with some of the best and most cost-effective based offshore. Distance need not be a barrier to success though, with modern technology facilitating seamless communication and savvy business leaders making regular trips overseas to visit and strengthen relationships with their MSPs. 
• Risk of closure: like any business, there is always a chance that an MSP can go out of service and force their customers to make new arrangements. For this reason, it pays to partner with providers that are well-established and boast a proven track record of success.

^{Source: Managed Services Market Size, Share & Growth Report 2030 (grandviewresearch.com)}

What industries benefit from a managed services model?

There is no shortage of industries that can benefit from partnering with MSPs but specific sectors include:

• Healthcare: patient care will always lie at the heart of healthcare but today’s hospitals and health services need to focus equally on administration, revenue collection and patient data. This is where managed service providers shine as they can help ensure faster response times, increased accuracy and business continuity.
• Finance: amid economic uncertainty and increased regulation, financial services companies are looking for strategic ways to safeguard their operations and MSPs are an ideal option. From data collection and customer service to accounting, the likes of the Philippines are home to thousands of tertiary-educated graduates that can benefit finance companies.

How to find the right managed service provider

Businesses need to tick multiple boxes before choosing a managed service provider including:

• Assess your needs: every business has unique requirements when engaging a managed service provider so take the time to decide what tasks are best suited for external support. One size does not fit all so have a clear vision of your goals and challenges.
• Do your research:  seasoned managed service providers have the experience and know-how to help your organization shine. Study the credentials of MSPs to find one that is well-versed in your field, has a proven track record and can provide quality testimonials.
• Confirm security practices: data protection cannot be compromised in the digital age, which is why your MSP should be able to demonstrate ironclad security measures. Seek evidence that your data, along with that of your customers, will be safeguarded against data breaches and cyber threats.

Conclusion

Be it outsourcing or managed services, working with a quality external provider can help drive your business to new heights faster and more efficiently than going it alone. The key is to tap into the resourcing model that best suits your needs and commit to finding the partner that cannot only make life easier in the short-term but also deliver the long-term benefits needed to drive sustainable growth.

Digital transformation is essential in the modern world but many organizations are struggling to find the resources to do it properly. Discover how offshoring is empowering businesses to ease workloads and dedicate more time to the pursuit of digital change.