Enabling small businesses to grow by outsourcing

For small businesses who want to grow and increase productivity, hiring new staff is not the only option—entrepreneurs and small business owners can also consider outsourcing. At the start of any business, the owner and the firm are often the same. However, as businesses grow, the boundary between the owner and the firm widens. At this stage, owners need to decide which business activities they will continue to take on themselves, which they will hire new staff to do, and which they will outsource. Outsourcing enables small businesses to strengthen and execute specific elements of their operations while keeping infrastructure, software, and/or personnel costs low, increasing productivity, and improving overall efficiency.

Outsourcing has multiple functions. On the one hand, a small business can hire a specialist firm or professional to execute a specific activity on its behalf, such as marketing or accounting. On the other hand, a small business can seek advisory or consulting services, where a firm or professional provides recommendations and improvements without executing these changes, such as strategic planning or legal advice. 

Digitalization plays an important role in outsourcing various activities for small businesses. In the wake of COVID-19, as many small businesses embraced digitalization and e-commerce, digital outsourcing platforms and services have become even more valuable. Digital platforms enable small businesses to seek out providers and experts from across the globe with specialized skills and knowledge they normally could not access. Additionally, these same platforms enable small businesses to offer their services to others as digital vendors on a much wider scale, though this insight brief does not address this aspect. 

This insight brief outlines the evidence on the impact of outsourcing on small businesses and identifies some considerations for supporting small businesses to outsource business activities to foster growth and efficiency.

While specific evidence on the impact of digital outsourcing and freelancing activities on micro and small businesses is scant, recent evidence regarding the impact of outsourcing more broadly is positive. Through a randomized experiment in Nigeria, researchers found that small businesses that used outsourcing and consulting showed statistically significant improvements in many business practices, with effects that persisted more than a year after the intervention ended. Further, two years after the intervention, outsourcing resulted in statistically significant increases in profits and sales. Similarly, a survey of Nigerian small and medium-sized businesses found that 75% of respondents either agreed or strongly agreed that outsourcing activities, such as back-office or support tasks, led to increased profitability. 

Evidence further suggests that tailored consulting and advisory services have a positive impact on small business growth, though they are generally more expensive than other interventions. For example, a randomized trial in Mexico found that four hours of management consulting weekly for a year had a positive short-term impact on small business productivity, as well as a positive long-term impact on employment. In Colombia, researchers found that both individual and group-based consulting for small and medium auto-parts firms improved management practices by as much as 10 percentage points, but with the group-based approach doing so at one-third the cost of individual consulting. 

While this evidence is promising, small businesses are heterogenous, and positive outsourcing impacts are not certain in all contexts. For instance, research on microenterprise tailors in Ghana found that consulting changed business practices and behavior in the short term, but these effects diminished over time, and tailors reverted to their previous business practices. Researchers also suggest that improved financial performance may not be the main motive for small firms to outsource, adding that future research should explore the other motives for outsourcing, such as work satisfaction or stress. More evidence is needed to fully capture the impact of outsourcing on micro and small businesses. Future research should also explore how access to and use of digital outsourcing platforms impacts small businesses. 

Digital outsourcing can enable small businesses to increase productivity and improve overall efficiency, while keeping infrastructure, software, and/or personnel costs low. Below, we identify some considerations for providers and organizations that support small businesses on ways digital outsourcing can better enable small businesses to grow. 

Digital freelancing platforms—such as Fiverr, Upwork, and Freelancer, among many others—are a mainstay for outsourcing. While these and others tend to focus on offering specialized enterprise solutions for larger firms, some are beginning to provide tailored support for small businesses.

To better understand the availability of outsourcing and consulting platforms that small businesses could leverage, Strive Community partnered with Briter Bridges to undertake a global landscape analysis. The analysis identified almost 500 digital outsourcing platforms, the majority of which enable users to outsource a variety of business tasks. Approximately 20% were specialized platforms for outsourcing specific tasks, such as design, financial services, or web development. Less than half state that they offer dedicated support to small businesses by offering specific pricing schemes or services. For example, Upwork and Fiverr have launched specific outsourcing solutions and tools for small businesses, including on-demand support, dedicated dashboards, and tailored payment options. For the majority who may target larger firms, we see an opportunity to expand reach by targeting small businesses.

Outsourcing frictions for small businesses

Despite the availability of digital outsourcing platforms for small businesses, challenges remain in incentivizing small businesses to seek outsourcing opportunities. Research has identified a few points of friction, including:

• Informational frictions: Small businesses may not know which services would be beneficial to be outsourced, may not have knowledge of providers in the market that can offer these services, or may find it hard to distinguish between low-quality and high-quality providers. A recent experiment in Nigeria found that less than 10% of surveyed small firms could recognize the majority of local business support providers, suggesting that most firms were not aware of most providers in the market.
• Cost-benefit frictions: Small businesses may have concerns about the financing of these services and uncertainty about whether expected returns will outweigh costs. Further, small businesses may face difficulties accessing credit, or lenders may be reluctant to finance consulting activities that cannot be collateralized.
• Non-economic frictions: Small businesses may place a higher value on socio-emotional values (compared with wealth-maximizing goals). For family-run small businesses, there may be pressure to hire relatives instead of going to the market. Similarly, trust is critical for small businesses to effectively leverage digital outsourcing platforms. Conversations with digital outsourcing platforms have identified user trust in service providers as a key barrier for small businesses—it’s often a big leap for a small business to outsource business tasks to someone they’ve never met. Further, for those who only recently digitized their businesses, establishing trust may be two-fold: with digital technologies and services more broadly, and with digital outsourcing platforms more specifically. 

Addressing these frictions will help organizations better support small businesses to seek out outsourcing and consulting opportunities. Evidence suggests that a thoughtful and comprehensive approach will better enable small businesses to engage successfully with digital outsourcing. A successful outsourcing approach includes detailed expectations, requirements, and expected short-term and long-term benefits for outsourcing activities.

As we learn more about digital outsourcing for small businesses through our programs and uncover good practices through our partners and the wider industry, we will continue to share these insights and findings.

Further, our freely accessible database and maps of outsourcing providers contain information on hundreds of outsourcing platforms and companies, the types of services they offer and their specialties, and how long they’ve been in operation. If you would like access to the database, please email us at: hello@strivecommunity.org