Outsourcing is the business practice of hiring a party outside a company to perform services and create goods that traditionally were performed in-house by the company’s own employees and staff. Outsourcing is a practice usually undertaken by companies as a cost-cutting measure. As such, it can affect a wide range of jobs, ranging from customer support to manufacturing to the back office.
Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity that is or could be done internally, and sometimes involves transferring employees and assets from one firm to another.
The term outsourcing, which came from the phrase outside resourcing, originated no later than 1981. The concept, which The Economist says “made its presence felt since the time of the Second World War”, often involves the contracting of a business process (e.g., payroll processing, claims processing), operational, and/or non-core functions, such as manufacturing, facility management, call center/call centre support).
The practice of handing over control of public services to private enterprises, even if on a short-term limited basis, may also be described as “outsourcing”.
Outsourcing includes both foreign and domestic contracting, and sometimes includes offshoring (relocating a business function to a distant country) or nearshoring (transferring a business process to a nearby country).
Offshoring and outsourcing are not mutually inclusive: there can be one without the other. They can be intertwined (Offshore outsourcing), and can be individually or jointly, partially or completely reversed, involving terms such as reshoring, inshoring, and insourcing.
The practice of outsourcing is subject to considerable controversy in many countries. Those opposed argue that it has caused the loss of domestic jobs, particularly in the manufacturing sector. Supporters say it creates an incentive for businesses and companies to allocate resources where they are most effective, and that outsourcing helps maintain the nature of free-market economies on a global scale.
Why Do Companies Outsource?
There are many reasons why a company may choose to outsource certain business functions. Some of the most common reasons include:
- Reducing and controlling operating costs (the largest driver)
- Improving company focus
- Gaining access to world-class capabilities
- Freeing internal resources for other purposes
- Streamlining or increasing efficiency for time-consuming functions
- Maximizing use of external resources
- Sharing risks with a partner company
Requirements for Successful Outsourcing
In the early days, cost and headcount reduction were the most common reasons to outsource. Today, the drivers are often more strategic and focus on carrying out value-adding activities in-house where an organization can best utilize its core competencies. The critical areas for a successful outsourcing program include:
- Clarity concerning company goals and objectives
- A strategic vision and plan
- Vendor selection
- Relationship management
- Properly structured subcontract and vendor agreements
- Open communication with stakeholders
- Senior leadership support and involvement
- Careful attention to personnel issues
- Short-term financial justification
Benefits of Outsourcing
Outsourcing can help businesses reduce labour costs significantly. When a company uses outsourcing, it enlists the help of outside organizations not affiliated with the company to complete certain tasks. The outside organizations typically set up different compensation structures with their employees than the outsourcing company, enabling them to complete the work for less money. This ultimately enables the company that chose to outsource to lower its labour costs. Businesses can also avoid expenses associated with overhead, equipment, and technology.
Outsourcing strategy helps to better focus on the core aspects of the business. Outsourcing non-core activities can improve efficiency and productivity because another entity performs these smaller tasks better than the firm itself. This strategy may also lead to faster turnaround times, increased competitiveness within an industry and the cutting of overall operational costs.
Outsourcing can help you get access to skilled expertise. One of the primary reasons why a business may want to outsource a task is when it requires skilled expertise. To allow you to focus on your core mission in providing a high quality product and service to your customer offshoring the task to people who can perform it better makes sense.
It helps to improve service and delight the customer. Your outsourcing partner with their skilled expertise will produce quality deliverables faster, increasing your turn around time to the customer. With on-time deliveries and high-quality services your customers will be delighted. Outsourcing can help you benefit from increased customer satisfaction and thus creating a stream of loyal customers.
It gives your business a competitive edge. The ultimate benefit of outsourcing is that it helps your organization gain a competitive edge in the market. Through strategic outsourcing to an outsourcing partner, you are not only providing your customers with best-of breed services, but increasing your productivity while managing your in-house resources intelligently. Outsourcing can help you surpass competitors who have not yet realized the benefits of outsourcing.
Like any other business venture proper planning and research is necessary before choosing an outsourcing partner whether it is on shore or offshore. But by outsourcing to a third party, your business can focus on what it does best and gain a competitive edge in the marketplace.
