What is Outsourcing and How Does it Work? (2022)

Outsourcing is a business practice in which a company hires a third-party to perform tasks, handle operations or provide services for the company.

The outside company, which is known as the service provider or athird-party provider, arranges for its own workers or computer systems to perform the tasks or services either on site at the hiring company's own facilities or at external locations.

Companies today can outsource a number of tasks or services. They often outsource information technology services, including programming and application development, as well as technical support. They frequently outsource customer service and call service functions. They can outsource other types of work as well, including manufacturing processes, human resources tasks and financial functions such as bookkeeping and payroll processing. Companies can outsource entire divisions, such as its entireIT department, or just parts of a particular department.

Outsourcing business functions is sometimes called contracting out or business process outsourcing.

Outsourcing can involve using a large third-party provider, such as a company likeIBMto manage IT services or FedEx Supply Chain for third-party logistics services, but it can also involve hiring individual independent contractors, temporary office workers and freelancers.

How outsourcing works

For a company to effectively outsource responsibilities, it is important to focus on the business partnership as much the logistics. Outsourcing is about managing relationship more than service-level agreements, and is a partnership, not a purchasing project. Maintaining and securing a trusted relationship is essential in outsourcing efforts and is more complex than establishing service levels and relationships.

Some experts recommend placing extra emphasis on the exit clause of a service contract. It is important for companies to know when the contractual agreement inevitably times out and ensure that the involved parties fulfill their obligations and stick around until the contract is up.

Reasons for outsourcing

Companies often outsource as a way to lower costs, improve efficiencies and gain speed. Companies that decide to outsource rely on the third-party providers' expertise in performing the outsourced tasks to gain such benefits. The underlying principle is that because the third-party provider focuses on that particular task, it is able to do it better, faster and cheaper than the hiring company could.

(Video) What is Outsourcing | Explained in 2 min

Given such benefits, companies often decide to outsource supporting functions within their businesses so they can focus their resources more specifically on their core competencies, thereby helping them gaincompetitive advantagesin the market.

However, some companies decide to outsource for other reasons.

For example, they outsource because they're unable to hire in-house, full-time employees with the specialized skills and experience needed to perform certain jobs.

Companies sometimes opt to outsource as a way to shift meeting regulatory requirements or obligations to the third-party provider.

Furthermore, more companies are looking to outsourcing providers as innovation centers. According to Deloitte's 2016 outsourcing survey, 35% of respondents said they are focused on measuring innovation value in their outsourcing partnerships.

Types of outsourcing

There are several ways to outsource a business process, and depending on the process, one may be preferable over another. Broadly there are a few different types based on the distance between the two members of the relationship. These types are:

  • Onshoring. Relocating work or services to lower-cost location in the company's own country.
  • Offshoring. Relocating work or services to third-party providers overseas.
  • Nearshoring. Relocating work or services to people in nearby, often bordering regions and countries.

Outsourcing agreements can also vary widely in scope. For certain processes, like programming or content creation, hiring freelancers on job to job basis might be appropriate. A company outsourcing their entire IT department will require a long-term partnership with clearly stated requirements.

(Video) Outsourcing: Is it good or bad?

Examples

The increasing use of virtual assistants is one trend where outsourcing will play a significant role. More and more, enterprises are using business-level virtual assistants to automate certain processes. This means an increased need for specialized voice assistant applications. Many companies may choose to outsource that development project for cost and skill reasons.

If the company was American, and chooses to "offshore" that work, they may hire a development firm in India or England, for example. If they chose to "nearshore" the work, they may develop a relationship with a Canadian or Mexican third party. If they "onshore" the project, they would likely communicate with a business close by or hire independent contractors.

The closer the third party is to the client company, the less time and cultural differences will make a difference. Because application development is often an asynchronous process, being tightly scheduled isn't the top priority, and clients seeking that work may prefer offshoring to onshoring.

Outsourcing pros and cons

In addition to delivering lower costs and increased efficiencies, companies that outsource could see other benefits.

By outsourcing, companies could free up resources (i.e., cash, personnel, facilities) that can be redirected to existing tasks or new projects that deliver higher yields for the company than the functions that had been outsourced.

Companies might find, too, that they can streamline production and/or shorten production times because the third-party providers can more quickly execute the outsourced tasks.

Outsourcing, however, can produce challenges and drawbacks for companies.

(Video) How Does Outsourcing Work?

Companies engaged in outsourcing must adequately manage their contracts and their ongoing relationships with third-party providers to ensure success. Some might find that the resources devoted to managing those relationships rivals the resources devoted to the tasks that were outsourced, thereby possibly negating many, if not all, of the benefits sought by outsourcing.

Companies also could realize that they lose control over aspects of the outsourced tasks or services. For instance, a company could lose control over the quality of customer service provided when it outsources itscall centerfunction; even if the company's contract with the provider stipulates certain quality measures, the company might find it's more difficult to correct an outsourced provider than it would be to correct an in-house team.

Companies that outsource could also face heightened security risks, as they exchange with their third-party providers the company's proprietary information or sensitive data that could be misused, mishandled or inadvertently exposed by the outsource provider.

Additionally, companies might encounter difficulties in getting their own employees to communicate and collaborate effectively with those working for third-party providers -- a scenario that's more common if the third-party operates overseas.

Ethics

Outsourcing has raised some ethical issues for companies as well.

Most notably, some have criticized the practice for its impact on workers. Employees at companies that decide to outsource frequently see the decision to outsource as a threat to their job security; in many cases, that fear is justified as they lose their jobs to workers who may be paid less and receive fewer benefits.

This scenario has also drawn criticism from the public, as well as from politicians and labor leaders.

(Video) Why is outsourcing a big deal? BBC News

Companies could also face negative publicity as a result of their decisions to outsource, with customers and the public in general viewing the move as a way to cut workers' wages and benefits or as a way to skirt environmental, financial or safety regulations.

Insourcing vs. outsourcing

Companies may decide against outsourcing and instead turn toinsourcing.

As the name implies, insourcing refers to the practice of having in-house teams perform functions that could be handled by outside companies or contactors. Thus, insourcing can be viewed as the opposite of outsourcing.

Sometimes insourcing involves hiring new employees, either on a permanent or temporary basis, to execute the tasks being insourced. Companies might need to invest in new equipment, hardware and software when insourcing, and they might need toreengineer business processesas well.

Outsourcing trends and future directions

Although outsourcing had been viewed as a way to lower costs and gain efficiencies, it is increasingly becoming a strategic tool for companies.

Leading companies understand that outsourcing some functions can help them gain a competitive advantage by allowing them to access expertise or innovative technologies they don't have in-house; or by helping them deliver products or services more quickly; or enabling them to shift resources to the areas of the business that are most critical. Outsourcing offers both cost-efficiency and increased workload flexibility.

FAQs

What is outsourcing and how does it work? ›

Outsourcing is the business practice of hiring a party outside a company to perform services or create goods that were traditionally performed in-house by the company's own employees and staff. Outsourcing is a practice usually undertaken by companies as a cost-cutting measure.

What is outsourcing in simple words? ›

Outsourcing is a business practice in which a company hires a third-party to perform tasks, handle operations or provide services for the company.

What is outsourcing select the best answer? ›

Outsourcing is a business practice in which services or job functions are farmed out to a third party.

What is outsourcing and why would a company use it? ›

Key Takeaways

Outsourcing involves contracting a business process to another organization. The organization that receives the work may be in the same country or in another one. Outsourcing can help save money and give an organization access to skills that it doesn't have.

What is the best example of outsourcing? ›

Advertising, office and warehouse cleaning, and website development are the best examples of outsourcing. Most business owners delegate authority to outsourced specialists when it comes to bookkeeping, maintenance, recruitment. This helps enterprises to focus most of their resources on the main activity.

What is outsourcing provide an example? ›

Outsourcing is where a company hires an external firm to conduct certain aspects of its business. In other words, one business hires another to operate part of its operations. For example, Apple outsources the majority of its production to Foxconn which assembles many of its products such as the iPhone.

What is another word for outsourcing? ›

Outsourcing Synonyms - WordHippo Thesaurus.
...
What is another word for outsourcing?
sourcingdeploying
redistributingsubcontracting
utilisingUKutilizingUS
1 more row

Why is outsourcing good? ›

It improves efficiency, cuts costs, speeds up product development, and allows companies to focus on their “ core competencies”.

What is outsourcing and its advantages and disadvantages? ›

Outsourcing allows a company to focus on its core aspects by delegating less critical functions to the third-party outside organization. Insourcing brings new employees into the company rather than farming out tasks to third-party companies.

Which of the following best describes outsourcing? ›

Q: Which of the following best describes outsourcing? A: It involves contracting with another company in a low-cost country to have it perform a work activity the organization previously performed itself.

What is e outsourcing answer in one sentence? ›

Ans : Outsourcing is the process of contracting a business function or any specific business activity to specialized agencies mostly the non-core areas such as sanitation, security, household pantry, etc. are outsourced by the company. The company makes a formal agreement with the agency.

What are the benefits and risks of outsourcing? ›

The Pros And Cons Of Outsourcing
  • You Don't Have To Hire More Employees. When you outsource, you can pay your help as a contractor. ...
  • Access To A Larger Talent Pool. When hiring an employee, you may only have access to a small, local talent pool. ...
  • Lower Labor Cost. ...
  • Lack Of Control. ...
  • Communication Issues. ...
  • Problems With Quality.
17 Jul 2017

How does outsourcing help a business grow? ›

By converting fixed (and often sizeable) outgoings into variable or smaller costs, outsourcing frees up cash to be used elsewhere. It's equally beneficial if you're looking for funding. Those investing are far more likely to be attracted to a company that has the cash to plow back into revenue-generating activities.

What are the four main reasons to outsource? ›

Top 10 Reasons to Outsource
  • 10.) Flexibility. With uncertainty surrounding today's global economy, companies need the ability to expand or downsize quickly. ...
  • 9.) Efficiency. ...
  • 8.) Peace of Mind. ...
  • 7.) Freeing Up Internal Resources. ...
  • 6.) Risk Management. ...
  • 5.) Improved Service. ...
  • 4.) Tax Breaks. ...
  • 3.) Lower Regulatory Costs.
17 May 2020

How do you use outsourcing in a sentence? ›

1. The management guaranteed that outsourcing wouldn't mean job losses. 2. The difficulties of outsourcing have been compounded by the increasing resistance of trade unions.

What is the most common type of outsourcing? ›

Business process outsourcing is the most common type of outsourcing. It refers to contracting any business process to a third-party service provider. This type usually deals with repetitive tasks such as customer support and administrative roles.

When did outsourcing begin? ›

Actually, the term dates to the 1970s, when manufacturing companies seeking efficiency began hiring outside firms to manage less-than-essential processes. Outsourcing worked. Today many manufacturers outsource 70% to 80% of the content of their finished products.

What includes in 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.

What are the two 2 types of outsourcing? ›

IT Staff Augmentation and Dedicated Teams are the two types of outsourcing that have revolutionized software development. Through them, businesses from all around the world have been able to quickly develop high-quality software solutions designed specifically to match their needs.

How does outsourcing affect the economy? ›

Job outsourcing helps U.S. companies be more competitive in the global marketplace. It allows them to sell to foreign markets with overseas branches. They keep labor costs low by hiring in emerging markets with lower standards of living. That lowers prices on the goods they ship back to the United States.

What is outsourcing and types of outsourcing? ›

Professional outsourcing includes accounting, legal, purchasing, information technology (IT), and IT or administrative support amongst other specialized services. This is one of the most popular types of outsourcing as there is potential for high cost savings.

What is the opposite of outsourcing? ›

Insourcing is the assignment of a project to a person or department within a company rather than to a third party. Insourcing is the opposite of outsourcing.

When should you outsource? ›

A Company Should Outsource When You Need to Focus on Your Business-Critical. Adding people to your team to do skills not part of your core business can be daunting, time-consuming and expensive, not to mention limiting to your business growth.

Is outsourcing a good or bad thing? ›

So by outsourcing some tasks and services, organizations can cut costs and increase their profits and the quality of products at the same time. However, many employees in outsourcing companies complain about poor working conditions. Often, they receive low salaries and work more than eight hours a day.

What are outsourcing risks? ›

(1) Outsourcing risk is the risk posed to an insurer's business by non-performance, or poor performance, by a service provider of a function transferred to the service provider under a material outsourcing arrangement (within the meaning of CTRL).

What is strategic outsourcing? ›

What Is Strategic Outsourcing? Strategic outsourced services represent a set of operations that are delegated by a company for management to a third-party service provider. Most commonly, this process is associated with small companies that do not have enough resources to manage all tasks themselves.

What is global outsourcing? ›

Global outsourcing allows companies to find partners in various regions of the world to execute some (or even all) of its work for either financial or operational reasons, or both.

How can outsourcing increase the quality of work performed? ›

Outsourcing improves business focus and allows management to direct staff energies strategically. It reduces “fire-fighting” behaviour and employees can be more efficient when they are not bogged down in day-to-day processing and administration. Their skills, role and function are not watered down.

What is the sentence of answer? ›

Verb She answered all my questions. He answered only three of the test questions correctly. When the police asked him his name, he refused to answer.

Why are some people against outsourcing? ›

Many people are against outsourcing because it creates many jobs in other places, which causes less jobs in the United States. With unemployment rising already, outsourcing just increases unemployment even more. On the other hand there are people who who support outsourcing.

How does outsourcing save money? ›

Outsourcing saves you money on staff

Outsourcing tasks to trained professionals allow you to stick to smaller budgets and only pay for what you need. This is usually far more cost-effective than hiring a full-time employee– which can be a pricey business here in the UAE.

How does outsourcing add value? ›

By taking inventory, developing a framework, and optimizing reporting, outsource service providers and their customers can add value by reducing redundant activities, improving efficiency, increasing cost effectiveness, and ensuring appropriate governance.

Will outsourcing importance grow in the future? ›

Will outsourcing survive in years to come? The answer is a definite yes. Outsourcing will continue to survive in the future, as it provides companies the access to specialized skills and save on time and effort, which can be channeled into the other core business ventures.

Did you know facts about outsourcing? ›

Facts and Statistics
  • In 2019, the worldwide outsourcing market was worth $92.5 billion.
  • The top reason for outsourcing (59%) is to save money and cut costs.
  • 14.3 million is the number of workers US overseas affiliates hired back in 2015.
  • In 2017, a whopping 84.2% of outsourcing deals came from the States.
18 Jan 2021

What is the definition of outsourcing in sociology? ›

Outsourcing refers to the fundamental decision to contract out specific activities that previously were undertaken internally. In other words, outsourcing involves the decision to reject the internalization of an activity and can be viewed as vertical disintegration.

How do you use free trade in a sentence? ›

Free trade in a Sentence

An agreement was enacted by the Philippines' government for free trade so that their citizens could export products without worrying about paying tariffs. 2. Two countries must join together if they want to lessen the taxes placed on imported and exported goods based on free trade.

What is the benefit of outsourcing? ›

Outsourcing can help you leverage knowledge and skills along with your complete supply chain. Outsourcing can also help to make your business more flexible and agile, able to adapt to changing market conditions and challenges while providing cost savings and service level improvements.

What is another word for outsourcing? ›

Outsourcing Synonyms - WordHippo Thesaurus.
...
What is another word for outsourcing?
sourcingdeploying
redistributingsubcontracting
utilisingUKutilizingUS
1 more row

What are the negative effects of outsourcing? ›

But as with most things, outsourcing isn't all good; it does cause some unintended negative consequences.
  • Outsourcing Lowers Barriers to Entry and Increases Competition.
  • Outsourcing Erodes Company Loyalty.
  • Outsourcing Can Eliminate Jobs From the Domestic Workforce.
  • Outsourcing Affects Insourced Countries.
  • The Bottom Line.

What is outsourcing and its advantages and disadvantages? ›

Outsourcing allows a company to focus on its core aspects by delegating less critical functions to the third-party outside organization. Insourcing brings new employees into the company rather than farming out tasks to third-party companies.

How does outsourcing help a business grow? ›

By converting fixed (and often sizeable) outgoings into variable or smaller costs, outsourcing frees up cash to be used elsewhere. It's equally beneficial if you're looking for funding. Those investing are far more likely to be attracted to a company that has the cash to plow back into revenue-generating activities.

When should you outsource? ›

A Company Should Outsource When You Need to Focus on Your Business-Critical. Adding people to your team to do skills not part of your core business can be daunting, time-consuming and expensive, not to mention limiting to your business growth.

What are the benefits and risks of outsourcing? ›

The Pros And Cons Of Outsourcing
  • You Don't Have To Hire More Employees. When you outsource, you can pay your help as a contractor. ...
  • Access To A Larger Talent Pool. When hiring an employee, you may only have access to a small, local talent pool. ...
  • Lower Labor Cost. ...
  • Lack Of Control. ...
  • Communication Issues. ...
  • Problems With Quality.
17 Jul 2017

How do you use outsourcing in a sentence? ›

1. The management guaranteed that outsourcing wouldn't mean job losses. 2. The difficulties of outsourcing have been compounded by the increasing resistance of trade unions.

What outsourced activities? ›

So, if you need a definition of outsourcing, it can be considered to be where an organisation uses an external company to handle work normally performed by employees within that company.

What is outsourcing and types of outsourcing? ›

Professional outsourcing includes accounting, legal, purchasing, information technology (IT), and IT or administrative support amongst other specialized services. This is one of the most popular types of outsourcing as there is potential for high cost savings.

Is outsourcing good or bad? ›

Outsourcing has economic effects, good and bad. It has the greatest impact on jobs and prices. In general, it leads to less employment and lower prices in the business's home country, but not always.

Is outsourcing good for the economy? ›

outsourcing is truly a mutually beneficial trade. Global trade like outsourcing allows America to thrive in its most efficient areas, thus creating more productivity and wealth. According to the Social Security Administration, 51% of American workers are now making less than $30,000 a year.

Is outsourcing good for employees? ›

Outsourcing can harm employee morale and company culture. While managers may see outsourcing as a cost-effective option, employees may feel like they are being replaced. They could also be confused as to why some company services need to be outsourced.

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