Outsourcing
Outsourcing is a business activity of transferring some of a company’s inner tasks to be performed by a third-party entity. An important notion is that tasks being outsourced might be actually done in-house, but due to several reasons, it was decided to be passed to a separate company. It’s usually aimed at gaining benefits, which come from a fact that a specialized organization not affiliated with an outsourcing company provides performance of the same tasks at a lower cost, or in a shorter period of time, or of better quality, or with a combination of these factors. The most common reason to outsource is reducing of cost, although other cases also frequently occur.
A wide spectrum of tasks and process might be outsourced, with work of whole departments sometimes being passed to be done by separate organizations.
Outsourcing as a practice was first implemented in the 1940s, although its broad recognition and wide use actually came at the end of the 20th century, when it was accepted as a part of business strategies. Nowadays, it’s an extremely popular and common practice, with most companies outsourcing at least some part of their activities.
Outsourcing key features
When a company decides to outsource, a third-party organization (sometimes called a third-party service provider) is engaged to perform some of its activities, which might include various types of jobs, from manufacturing goods to providing services.
The following kinds of jobs are often outsourced:
- production of goods;
- customer support and call centers;
- payroll managing and accounting;
- programming, data analytics and other types of IT-related activities;
- human resource management, and some others.
In some cases, a job is outsourced only by a limited degree. For instance, for a manufacturer, it might be more convenient to obtain specific parts of equipment from another entity, but the rest of production of goods is performed in-house.
The reasons to outsource specific areas of work might be different, but in general, it allows meeting a company’s needs in a more efficient way. A third-party company (especially in another country) usually has a different wage policy, or is specialized, experienced and highly proficient in an outsourced sphere as opposed to an outsourcing company. This allows the former to get more revenue, and provides the latter with a possibility of getting the same products cheaper, or faster, or of enhanced quality, thus giving the outsourcing organization an advantage in the market.
Other crucial issues of outsourcing are partnership and logistics. To maintain efficiency and a highly productive relationship with a third-party provider, an outsourcing company should manage the interactions as a partnership, and not a simple purchasing of goods or services. It’s also highly useful to thoroughly consider the logistics questions, especially if an outsourced activity is manufacturing, and is performed from a remote facility. These issues become particularly important when an outsourcing company is situated abroad or oversees, with long distances and cultural differences involved.
Before starting outsourcing, it’s also highly recommended to ensure that a contract with a third-party supplier provides full and detailed information on exiting the deal, in which the fulfillment of all obligations is guaranteed.
Outsourcing main types
Depending on a location of a third-party company providing its services for other organizations, there are several types of outsourcing:
- Outsourcing in a company’s own country (also called onshoring), often performed by changing the production site to a lower-cost one.
- Outsourcing in a bordering region or a country (also called nearshoring), often with a generally lower cost of production and labor.
- Outsourcing overseas (also called offshoring), which involves engaging organizations from distant countries.
Pros and cons of Outsourcing
As any business practice, outsourcing does have advantages and some significant disadvantages as well.
Besides the abovementioned positive sides such as costs reducing and a possibility to improve quality and production speed, outsourcing some non-core business activities might allow a company to focus on those tasks which are essential and produce higher returns. By doing so, a company can get profits from earning more than it spends on outsourcing management.
At the same time, many aspects of outsourcing draw criticism towards the concept. One of the main points of criticism is that outsourcing might derange labor markets, especially in case of nearshoring and offshoring. It also raises ethic issues due to that companies exploit cheap labor and legislative flaws of developing countries to gain more profits with no actual caring for possible consequences.
Other disadvantages concern the questions of security and management. When a company gives access to its data and sensitive information to a third-party provider, there are always risks involved. The data might be misused, and informational leaks are possible. This is especially true for cases of outsourcing IT and accounting. Adequate management might also become a challenge, particularly with offshoring outsourcing of big projects.
