Outsourcing Definition: Everything You Need to Know
The outsourcing definition is the practice of contracting with a third party to do certain business tasks, jobs, or processes to an external group of workers.3 min read
The outsourcing definition is the practice of contracting with a third party to fulfill certain business tasks, operations, jobs, or processes to an external group of workers. Also known as “contracting out,” this practice grew immensely in the 1990s when companies were looking for ways to increase revenue by reducing internal costs.
Outsourcing doesn't mean companies are sending their business services outside the United States. Some companies outsource their business services:
- Within the country where they are based (onshore).
- Within a nearby country (nearshore).
- To a distant country (offshore).
Companies have many reasons to consider outsourcing their work. Some examples include:
- The company lacks sufficient internal staff to meet the needs of the business. Contracting with an outside, pre-trained workforce enables a company to fill in any gaps in its operations without interrupting the flow of business.
- The company needs an outsourced team of workers to complete a short-term project.
- The company is implementing a new process. Contracting with a group of trained workers saves a company from the time, money, and effort needed to train internal workers on the new process.
Advantages of Outsourcing
Benefits of outsourcing include:
- Lower internal business costs.
- Lower labor rates.
- Availability of skills or resources not available within the company.
- Flexibility that enables a company to meet changing business conditions.
- Reduced investment in internal infrastructure.
Disadvantages of Outsourcing
Disadvantages of outsourcing include:
- A reduced turnaround time on services.
- Lack of business knowledge.
- Possible language or cultural differences.
- Possible time zone barriers.
- Reduced internal control mechanisms.
Commonly Outsourced Services
Examples of commonly outsourced business services include:
- Marketing services, such as public relations or advertising.
- Industrial services, such as delivery or manufacturing.
- Business process services, such as billing, payroll, or purchasing.
- Front-office business process services, such as customer service or technical support.
- Information technology services, such as software development, network services, application support, testing, database development, and infrastructure support.
Outsourcing vs. Offshoring
Outsourcing is sometimes incorrectly used interchangeably with offshoring. Offshore outsourcing, or offshoring, is a type of outsourcing in which the contracted third party is based in a different country than the client company. One reason a company might do this is to reduce costs by taking advantage of lower labor costs in another country. This is often a sensitive subject because employees worry that offshoring might result in layoffs.
While there have been studies on how jobs are affected due to offshoring, the results vary. For example, according to one resource, global outsourcing amounted to an estimated $88.9 billion in 2015, down considerably from the estimated $104.6 billion spent in 2014.
The top three countries where companies contract with offshore resources to perform business functions are:
Choosing an Outsourcing Service Provider
Selecting a third-party service provider can be challenging. You might have difficulty finding someone that meets your company's exact needs, so you may have to make some concessions.
Some examples of questions you need to consider when negotiating with outsourcing providers include:
- Which of the following is more important: the total amount of savings the third party can provide your company or how fast they can cut your costs?
- Are you looking for an outsourcer with broad skills or expertise in a specific field?
- What type of pricing options do you need in an outsourcing agreement: fixed costs or variable price options?
Working With an Outsourcing Adviser
When selecting an outsourcing service provider, some organizations work with an outside sourcing adviser to help them determine their requirements. However, be aware that selecting the right adviser might be as difficult as selecting a service provider.
Some advisers have a vested interest in convincing you to opt for outsourcing rather than helping you determine if outsourcing is a good fit for your business.
A good adviser that you've researched thoroughly can help you throughout the selection process. This individual can help you:
- Determine whether your company will benefit from outsourcing.
- Conduct due diligence.
- Manage requests for proposals from providers.
- Negotiate contracts.
- Make a final decision.
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