What is outsourcing?

Outsourcing can be defined as “the strategic use of outside resources to perform activities traditionally handled by internal staff and resources”. Sometimes known also as “facilities management”, outsourcing is a strategy by which an organization contracts out major functions to specialized and efficient service providers, who become valued business partners. Outsourcing means subcontracting a process, be it in manufacturing or product design, to a third-party company. It involves the transfer of the entire execution of a function to an external service provider be it in the same country or abroad. The client organization and the supplier enter into a contractual agreement that defines the transferred services. Under the agreement the supplier acquires the means of production in the form of a transfer of people, assets and other resources from the client. The client agrees to procure the services from the supplier for the term of the contract.

Outsourcing: A Brief History

Outsourcing was not formally identified as a business strategy until 1989. However, most organizations were not totally self-sufficient; they outsourced those functions for which they had no competency internally. The use of external suppliers for these essential but ancillary services might be termed the baseline stage in the evolution of outsourcing. In the 1990s, as organizations began to focus more on cost-saving measures, they started to outsource those functions necessary to run a company but not related specifically to the core business. To increase their flexibility and creativity, many large companies developed a new strategy of focusing on their core business, which required identifying critical processes and deciding which could be outsourced. The current stage in the evolution of outsourcing is the development of strategic partnerships. Towards the end of modern day history of outsourcing, the trend has moved into the world of information technology, data transcription and call center operations. Studies on the history of outsourcing conclude that outsourcing is clearly not just about payrolls and call centers. It is very likely that the research and development of your daily medicine was outsourced to companies in India. Your insurance company which covers the costs of your medications may have their claim processing to offshore transcription providers. And your medical clinic may easily be outsourcing the administration of your confidential medical records to India, Russia or the Philippines.

Reasons For Outsourcing

Outsourcing in the world today is seen as a strategic management option rather than just a cost cutting operation. It aids companies to achieve their business objectives through operational excellence and a better market position. In order for companies to focus on their core competencies, all companies today outsource one or more of their operations.

Here are some reasons for outsourcing:
Ability to focus resources and attention on core business processes.
Improve Cost management and capital funds.
Better management, contracting, and outsourcing integration skills.
Access to world-class capabilities.
Accelerate business transformation.
Refinement of risk management and service delivery abilities.

From the different articles and forums I've read, it seems that many companies are outsourcing because the labor is cheaper in other countries. Thus, gaining more income.

I hope that after reading this article you'll have better understanding of outsourcing is and knew the reasons on why companies outsource. I hope that this will serve as a guide if ever you'll venture into outsourcing in the future.