Outsourcing – Definition

Cite this article as:"Outsourcing – Definition," in The Business Professor, updated November 26, 2019, last accessed October 29, 2020, https://thebusinessprofessor.com/lesson/outsourcing-definition/.


Outsourcing Definition

Outsourcing refers to a business process that involves hiring someone else or an outsider to carry out a task or project that is traditionally performed in person, in-house, or by employees of a firm and staff. Outsourcing is basically carried out to reduce the cost of completing business-related projects, and this system has been beneficial to firms which a whole load of tasks to complete. Due to the cost-cutting effect of outsourcing, this method of completing projects has become popular in different sectors and spaces, ranging from customer service to paperwork creation, manufacturing, and even accounting.

Outsourcing became popular in 1989 as a business strategy of cutting down cost, but wasn’t recognized in formal economics until the 1990s. The act of outsourcing seems to have different effects on different regions, and the way people view this business strategy differs per nation, place or demography. Outsourcing has a number of proponents and opponents, with the former stating that it serves as a way of increasing the economic development of a nation and help with the maintenance of free market economies on the global space. The latter however suggests that outsourcing does more harm than good as it leads to loss of jobs in a nation, especially in the manufacturing sector.

A Little More on What is Outsourcing

The labor market is greatly affected by outsourcing. In this market, outsourcing helps to reduce the cost of labor considerably, and this can have different effects depending on the side that an individual falls in (the employing side or the working side). Companies that employ outsourcing as a business strategy generally hire external organizations or entities that they’re not affiliated with to carry out tasks. Cost is reduced as the organization that the task is being outsourced to claims lesser money for completing such tasks than what an in-house employee would demand. The fee structure demanded by the outsourcing organization is much lower than what the outsourcing firms would normally pay, and this leads to excess returns on the part of the later. This way, the outsourcing company gets to lower its labor cost –which is a fixed cost– and thus maximize production. Also, firms have the opportunity of avoiding overhead, equipment, and technology costs (which are all capital costs) when they use outsourcing services.

In some cases, outsourcing is done not only to reduce cost, but also to increase the business’s focus on important aspects of the company’s operations. Assigning outsourcing organizations with non-core activities of a business can help firms increase their productivity and working efficiency. In most cases, the outsourcing organization would perform the task better than the employees in the outsourcing company, since they are trained to be professionals in handling such tasks. This would eventually lead to faster completion time of projects on the part of firms, increased industry competitiveness, and the reduction of overall cost of operating a business.

Rather than just cutting off the cost of labor, companies can also focus solely on the freedom that outsourcing provides them with, and use the free time to their advantage.

Some Relatable Examples of Outsourcing

Outsourcing can work in different forms. For example, a producer who is looking to design clothes for the general public can decide to buy fabrics from companies that specialize in creating and designing raw fabrics. Instead of owning a mill that processes cotton and wool, the manufacturer can decide to stick to just buying from another firm. This way, he gets to save the extra time he would have used in creating cotton fabrics before turning them into finished wears. Also, an institution will decide to save money in the bank instead of creating their own banking system to calculate and deposit revenue and other financial assets. This way, the institution is protected from the cost of running a bank safe, as it just has to open an account with a financial institution that specializes in saving revenue and profits on behalf of its clients. From both examples given above, we can clearly see that outsourcing saves not only cost, but also time and creates more focus on important areas as in the case of the manufacturer.

Going further into examples of outsourcing, a business firm can decide to hire an external accountant to carry out auditing tasks and bookkeeping instead of sticking to an in-house employee all year round. Rather than paying someone hourly to carry out a weekly task, a firm can just decide to hire an outsourcing organization or entity to carry out these tasks at the point in which they are needed. Also, an auto-manufacturer wouldn’t see the need of hiring a marketer as an in-house employee when he or she can seek the services of marketers to work on a commission basis. All the examples given above shows the advantages of outsourcing, and this business strategy can be an awesome tool when applied correctly to business activities. Outsourcing can also make a business more competitive than its rivals as the firm will get to offer a faster turnaround to clients than its competitors.

Disadvantages of Outsourcing

Just like every business strategy with an advantage, outsourcing does have it cons. In some cases, signing legal documents with outsourcing organizations can be stressful and take a lot of time. It also requires efforts on the part of the outsourcing company’s legal team. In other cases, there is a possibility of security threats and cases of unpermitted disclosures are not rare in such settings. When an outsourcing organization has access to its employer’s confidential details, it might affect their working relationship, as the employer might always have suspicions, which in turn would slow down the turnaround time of a project. In most cases, communication is a problem that can affect projects.

Important Things You Need to Know About Outsourcing

In an international setting, outsourcing can help businesses increase their profit maximization scheme by taking advantage of reduced labor costs in developing countries. Sometimes, the difference in prices of products in several nations can make firms relocate to other countries in a bid to stay competitive and maximize productivity. There are also a number of famous companies that have eliminated the use of in-house customer call service. These corporations prefer to outsource this task to persons in different regions, thus making it possible for callers to connect with someone who speaks their language.

Key Points

  • Most firms engage in outsourcing in a bid to reduce their cost of labor, as well as the payouts for in-house employees, technology and other expenses vital to the continued operation of a business.
  •  Outsourcing has become a way for business organizations to focus solely on the most important and core aspects of businesses, by giving out smaller tasks to persons who specialize in them.

Although outsourcing has a lot of benefits, communications and security threats are two major problems associated with this business strategy.

References for “Outsourcing

https://www.investopedia.com › Investing › Financial Analysis




https://www.thebalancesmb.com › … › Operations & Technology › Glossary

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