Loading the player...

What is 'Outsourcing'

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. Usually done as a cost-cutting measure, it can affect jobs ranging from customer support to manufacturing to the back office.

Outsourcing was first recognized as a business strategy in 1989 and became an integral part of business economics throughout the 1990s. The practice of outsourcing is subject to considerable controversy in many countries. Those opposed argue 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.

 

BREAKING DOWN 'Outsourcing'

Outsourcing can help businesses reduce labor costs significantly by outsourcing certain tasks. Businesses can also avoid expenses associated with overhead, equipment and technology.

In addition to cost savings, companies can employ an outsourcing strategy to better focus on 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 Examples

Outsourcing's biggest advantages are time and cost savings. A manufacturer of personal computers might buy internal components for its machines from other companies to save on production costs. A law firm might store and back up its files using a cloud-computing service provider, thus giving it access to digital technology without investing large amounts of money to actually own the technology.

A small company may decide to outsource bookkeeping duties to an accounting firm, as doing so may be cheaper than retaining an in-house accountant. Other companies find outsourcing the functions of human resource departments, such as payroll and health insurance, as beneficial. When used properly, outsourcing is an effective strategy to reduce expenses, and can even provide a business with a competitive advantage over rivals.

Outsourcing Internationally

Outsourcing internationally can help companies benefit from the differences in labor and production costs among countries. Price dispersion in another country may entice a business to relocate some or all of its operations to the cheaper country in order to increase profitability and stay competitive within an industry. Many large corporations have eliminated their entire in-house customer service call centers, outsourcing that function to third-party outfits located in lower-cost locations.

Outsourcing Drawbacks

Outsourcing does have disadvantages. Signing contracts with other companies may take time and extra effort from a firm's legal team. Security threats occur if another party has access to a company's confidential information and then that party suffers a data breach. A lack of communication between the company and the outsourced provider may occur, which could delay the completion of projects.

RELATED TERMS
  1. Knowledge Process Outsourcing - ...

    Knowledge Process Outsourcing (KPO) is a form of outsourcing ...
  2. Human Resources (HR)

    Human resources (HR) is the company department charged with finding, ...
  3. Third Party

    A third party is an individual or entity that is involved in ...
  4. Payroll

    Payroll is the sum total of all compensation a business must ...
  5. Trade War

    A trade war is a side effect of protectionism that occurs when ...
  6. Newly Industrialized Country - ...

    A newly industrialized country is one whose level of economic ...
Related Articles
  1. Small Business

    Times When Outsourcing Is A Good Fit For Your Company

    More and more companies are choosing to outsource. Here's a look at the costs and when it may be appropriate.
  2. Small Business

    How to Outsource Work: 2 Tips for Business Owners

    Small business owner can increase efficiency and profits by outsourcing routine functions such as bookkeeping and payroll.
  3. Insights

    4 Ways Outsourcing Damages Industry

    While outsourcing has preserved capital for many companies, it could be damaging to American industry.
  4. Insights

    Globalization: Progress Or Profiteering?

    Proponents of globalization argue that it helps the economies of developing nations and makes goods cheaper, while critics say that globalization reduces domestic jobs and exploits foreign workers. ...
  5. Financial Advisor

    What to Know About the SEC's Third-Party Exam Rule

    The SEC has given a proposal to board members that calls to outsource the advisor exam process to a third party, but the issue currently has no timeline.
  6. Insights

    Economic Trends We Can All Profit From In 2013

    The National Small Business Association may not be optimistic about 2013, but we'll show you a few trends that suggest the economy can grow this year.
  7. Investing

    The “Healthy” Play In Contract Research Organizations

    The pharmaceutical industry is under pressure to do more with less. That means it will be farming out many of is mundane clinical trial and lab work. This outsourcing will be a big win for the ...
  8. Investing

    Carnival IT Operations Being Outsourced

    The news of cost cutting can be mixed depending on if you are an investor or customer.
  9. Tech

    Technology Is Destroying Jobs in China Too

    The rise of technology as a threat to labor is not reserved to the developed world: It is global.
  10. Insights

    How Productivity And Globalization Affect The Economy

    The systems designed to track the national economy is flawed. Discover the impacts of globalization.
RELATED FAQS
  1. When is outsourcing preferable to vertical integration?

    Deciding between outsourcing and vertical integration can be challenging. Understand the benefits of each to make the most ... Read Answer >>
  2. Globalization and International Investment

    Learn how globalization impacts international investment and transforms economies around the world. Understand the implications ... Read Answer >>
  3. How do companies measure labor supply in human resources planning?

    Find out how and why a company's human resources department would measure labor supply, and what policies would address a ... Read Answer >>
  4. What is the key difference between the participation rate and the unemployment rate?

    Learn the key differences between the participation rate and unemployment rate, and how they can provide a clearer picture ... Read Answer >>
Trading Center