Outsourcing

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DEFINITION of 'Outsourcing'

A practice used by different companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally.

BREAKING DOWN 'Outsourcing'

Outsourcing is an effective cost-saving strategy when used properly. It is sometimes more affordable to purchase a good from companies with comparative advantages than it is to produce the good internally. An example of a manufacturing company outsourcing would be Dell buying some of its computer components from another manufacturer in order to save on production costs. Alternatively, businesses may decide to outsource book-keeping duties to independent accounting firms, as it may be cheaper than retaining an in-house accountant.

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RELATED FAQS
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    Outsourcing is a bad alternative to vertical integration when there are capacity balancing issues. For example, if a business ... Read Full Answer >>
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    Business leaders often blur the lines between outsourcing and subcontracting, but both practices are distinct, and each is ... Read Full Answer >>
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