An post on this dates back 4 years ago but it only has one explanation and I still don’t quite get it.
I will be needing more analogies on this because I can’t seem to fully grasp the topic 🙁 Thank you so much!
In: Economics
Every company will have certain functions that must happen for it to run successfully.
As a company gets bigger, it begins to require more staff to manage these functions, however staff also add a significant amount of costs to the general running of the business. The company owner must therefore run a cost analysis to decide whether it is worth paying an employee or paying another company to manage the function.
Let’s use payroll as an example.
If I only have one employee, it might make sense for me to run the payroll on my own where the only ‘cost’ is my personal time. This obviously takes away my attention from other important aspects of my business but it is likely the most cost effective way.
Now let’s say I have 20 employees. Hiring a payroll manager would maybe cost me £25,000 per year, whereas a payroll company might be able to operate my payroll for £500 per month which is therefore much cheaper than employing a staff member. This would be considered outsourcing a business process because I am paying another company to operate part of my business for me.
If my company grows to 200 people, it might be more cost effective to pay an employee £25,000 per year to manage the payroll themselves rather than paying a company £5000 per month.
Latest Answers