Outsourcing (also sometimes referred to as "contracting out") is a business practice used by companies to reduce costs or improve efficiency by shifting tasks, operations, jobs or processes to an external contracted third party for a significant period of time. The functions that are contracted out can be performed by the third party either onsite or offsite of the business. The third party then has to deliver all the contracted services to a strict service level agreement.
Example of Outsourcing
Outsourcing is both a cost-saving measure and a capability solution, and the practice can have significant impacts in many industries.
In the U.K., for example, service providers such as Banks, Insurance Company’s, Energy Suppliers, Airlines, and Public Bodies have outsourced jobs, process’s and whole operations overseas to countries like Poland, Romania, Hungary, South Africa and India.
Outsourcing is not limited to manufacturing jobs. Customer service jobs, such as those in a call center, and computer programming jobs are also outsourced by companies seeking ways to reduce costs. A large number of companies outsource at least some functions of human resources tasks, such as employee benefits management and payroll.
Outsourcing is not limited to whole process’s and departments Customer service jobs, such as those in a call centres, and computer programming jobs are also outsourced by companies seeking ways to reduce costs and take advantage of any benefits from scale. A large number of companies outsource at least some functions of human resources tasks, such as employee benefits management and payroll.
Outsourcing can also involve the purchasing of components from another source, such as components for computer equipment. The component can be purchased for a lower cost than it would be for the company to manufacture that component themselves, and the component may be of higher quality.
IT services can also be outsourced. For example, cloud computing and software-as-a-service (SaaS) offer companies access to computer services and tools that were once managed in-house by a company's IT department.
Benefits of Outsourcing
Outsourcing normally frees up cash, personnel, facilities and time resources for a company.
In addition to cost savings, a company may also employ an outsourcing strategy in order to focus on its core business competencies. This allows the company to devote more resources to what it does well, which can improve efficiency and increase its competitiveness. Service delivery can be streamlined while reducing operational costs.
Those non-core functions that are outsourced will usually go to outside organizations for whom that function is a core business competency, further benefiting the business through the improved management of those functions.
Disadvantages of Outsourcing
While outsourcing has many advantages, it also presents some disadvantages. The relationship with the third party that takes on the outsourced functions must be managed. This includes the negotiating and signing of contracts, which requires time and the involvement of a company's legal counsel, as well as the day-to-day communication with and oversight of the outsourced work.
Security is an important factor in outsourcing. The relationship will inevitably involve the third party organization's access to sensitive business data, trade secrets and other confidential information that is necessary for it to perform its contracted function.
There may also be some negative public relations impacts for a company when outsourcing results in the loss of local jobs.