What is Outsourcing and How Does it Work? - TechTarget

Outsourcing is a business practice in which a company hires a third-party to perform tasks, handle operations or provide services for the company. Home Apps,infrastructureandoperations ITmanagement outsourcing Sharethisitemwithyournetwork: By BenLutkevich, TechnicalWriter Outsourcingisabusinesspracticeinwhichacompanyhiresathird-partytoperformtasks,handleoperationsorprovideservicesforthecompany. Theoutsidecompany,whichisknownastheserviceproviderora third-partyprovider,arrangesforitsownworkersorcomputersystemstoperformthetasksorserviceseitheronsiteatthehiringcompany'sownfacilitiesoratexternallocations. Companiestodaycanoutsourceanumberoftasksorservices.Theyoftenoutsourceinformationtechnologyservices,includingprogrammingandapplicationdevelopment,aswellastechnicalsupport.Theyfrequentlyoutsourcecustomerserviceandcallservicefunctions.Theycanoutsourceothertypesofworkaswell,includingmanufacturingprocesses,humanresourcestasksandfinancialfunctionssuchasbookkeepingandpayrollprocessing.Companiescanoutsourceentiredivisions,suchasitsentire ITdepartment,orjustpartsofaparticulardepartment. Outsourcingbusinessfunctionsissometimescalledcontractingoutorbusinessprocessoutsourcing. Outsourcingcaninvolveusingalargethird-partyprovider,suchasacompanylike IBM tomanageITservicesorFedExSupplyChainforthird-partylogisticsservices,butitcanalsoinvolvehiringindividualindependentcontractors,temporaryofficeworkersandfreelancers. Howoutsourcingworks Foracompanytoeffectivelyoutsourceresponsibilities,itisimportanttofocusonthebusinesspartnershipasmuchthelogistics.Outsourcingisaboutmanagingrelationshipmorethanservice-levelagreements,andisapartnership,notapurchasingproject.Maintainingandsecuringatrustedrelationshipisessentialinoutsourcingeffortsandismorecomplexthanestablishingservicelevelsandrelationships. Someexpertsrecommendplacingextraemphasisontheexitclauseofaservicecontract.Itisimportantforcompaniestoknowwhenthecontractualagreementinevitablytimesoutandensurethattheinvolvedpartiesfulfilltheirobligationsandstickarounduntilthecontractisup. Reasonsforoutsourcing Companiesoftenoutsourceasawaytolowercosts,improveefficienciesandgainspeed.Companiesthatdecidetooutsourcerelyonthethird-partyproviders'expertiseinperformingtheoutsourcedtaskstogainsuchbenefits.Theunderlyingprincipleisthatbecausethethird-partyproviderfocusesonthatparticulartask,itisabletodoitbetter,fasterandcheaperthanthehiringcompanycould. Givensuchbenefits,companiesoftendecidetooutsourcesupportingfunctionswithintheirbusinessessotheycanfocustheirresourcesmorespecificallyontheircorecompetencies,therebyhelpingthemgain competitiveadvantages inthemarket. However,somecompaniesdecidetooutsourceforotherreasons. Forexample,theyoutsourcebecausethey'reunabletohirein-house,full-timeemployeeswiththespecializedskillsandexperienceneededtoperformcertainjobs. Companiessometimesopttooutsourceasawaytoshiftmeetingregulatoryrequirementsorobligationstothethird-partyprovider. Furthermore,morecompaniesarelookingtooutsourcingprovidersasinnovationcenters.AccordingtoDeloitte's2016outsourcingsurvey,35%ofrespondentssaidtheyarefocusedonmeasuringinnovationvalueintheiroutsourcingpartnerships. Typesofoutsourcing Thereareseveralwaystooutsourceabusinessprocess,anddependingontheprocess,onemaybepreferableoveranother.Broadlythereareafewdifferenttypesbasedonthedistancebetweenthetwomembersoftherelationship.Thesetypesare: Onshoring.Relocatingworkorservicestolower-costlocationinthecompany'sowncountry. Offshoring.Relocatingworkorservicestothird-partyprovidersoverseas. Nearshoring.Relocatingworkorservicestopeopleinnearby,oftenborderingregionsandcountries. Outsourcingagreementscanalsovarywidelyinscope.Forcertainprocesses,likeprogrammingorcontentcreation,hiringfreelancersonjobtojobbasismightbeappropriate.AcompanyoutsourcingtheirentireITdepartmentwillrequirealong-termpartnershipwithclearlystatedrequirements. Examples Theincreasinguseofvirtualassistantsisonetrendwhereoutsourcingwillplayasignificantrole.Moreandmore,enterprisesareusingbusiness-levelvirtualassistantstoautomatecertainprocesses.Thismeansanincreasedneedforspecializedvoiceassistantapplications.Manycompaniesmaychoosetooutsourcethatdevelopmentprojectforcostandskillreasons. IfthecompanywasAmerican,andchoosesto"offshore"thatwork,theymayhireadevelopmentfirminIndiaorEngland,forexample.Iftheychoseto"nearshore"thework,theymaydeveloparelationshipwithaCanadianorMexicanthirdparty.Ifthey"onshore"theproject,theywouldlikelycommunicatewithabusinessclosebyorhireindependentcontractors. Thecloserthethirdpartyistotheclientcompany,thelesstimeandculturaldifferenceswillmakeadifference.Becauseapplicationdevelopmentisoftenanasynchronousprocess,beingtightlyscheduledisn'tthetoppriority,andclientsseekingthatworkmaypreferoffshoringtoonshoring. Outsourcingprosandcons Inadditiontodeliveringlowercostsandincreasedefficiencies,companiesthatoutsourcecouldseeotherbenefits. Byoutsourcing,companiescouldfreeupresources(i.e.,cash,personnel,facilities)thatcanberedirectedtoexistingtasksornewprojectsthatdeliverhigheryieldsforthecompanythanthefunctionsthathadbeenoutsourced. Companiesmightfind,too,thattheycanstreamlineproductionand/orshortenproductiontimesbecausethethird-partyproviderscanmorequicklyexecutetheoutsourcedtasks. Outsourcing,however,canproducechallengesanddrawbacksforcompanies. Companiesengagedinoutsourcingmustadequatelymanagetheircontractsandtheirongoingrelationshipswiththird-partyproviderstoensuresuccess.Somemightfindthattheresourcesdevotedtomanagingthoserelationshipsrivalstheresourcesdevotedtothetasksthatwereoutsourced,therebypossiblynegatingmany,ifnotall,ofthebenefitssoughtbyoutsourcing. Companiesalsocouldrealizethattheylosecontroloveraspectsoftheoutsourcedtasksorservices.Forinstance,acompanycouldlosecontroloverthequalityofcustomerserviceprovidedwhenitoutsourcesits callcenter function;evenifthecompany'scontractwiththeproviderstipulatescertainqualitymeasures,thecompanymightfindit'smoredifficulttocorrectanoutsourcedproviderthanitwouldbetocorrectanin-houseteam. Companiesthatoutsourcecouldalsofaceheightenedsecurityrisks,astheyexchangewiththeirthird-partyprovidersthecompany'sproprietaryinformationorsensitivedatathatcouldbemisused,mishandledorinadvertentlyexposedbytheoutsourceprovider. Additionally,companiesmightencounterdifficultiesingettingtheirownemployeestocommunicateandcollaborateeffectivelywiththoseworkingforthird-partyproviders--ascenariothat'smorecommonifthethird-partyoperatesoverseas. Ethics Outsourcinghasraisedsomeethicalissuesforcompaniesaswell. Mostnotably,somehavecriticizedthepracticeforitsimpactonworkers.Employeesatcompaniesthatdecidetooutsourcefrequentlyseethedecisiontooutsourceasathreattotheirjobsecurity;inmanycases,thatfearisjustifiedastheylosetheirjobstoworkerswhomaybepaidlessandreceivefewerbenefits. Thisscenariohasalsodrawncriticismfromthepublic,aswellasfrompoliticiansandlaborleaders. Companiescouldalsofacenegativepublicityasaresultoftheirdecisionstooutsource,withcustomersandthepublicingeneralviewingthemoveasawaytocutworkers'wagesandbenefitsorasawaytoskirtenvironmental,financialorsafetyregulations. Insourcingvs.outsourcing Companiesmaydecideagainstoutsourcingandinsteadturnto insourcing. Asthenameimplies,insourcingreferstothepracticeofhavingin-houseteamsperformfunctionsthatcouldbehandledbyoutsidecompaniesorcontactors.Thus,insourcingcanbeviewedastheoppositeofoutsourcing. Sometimesinsourcinginvolveshiringnewemployees,eitheronapermanentortemporarybasis,toexecutethetasksbeinginsourced.Companiesmightneedtoinvestinnewequipment,hardwareandsoftwarewheninsourcing,andtheymightneedto reengineerbusinessprocesses aswell. Outsourcingtrendsandfuturedirections Althoughoutsourcinghadbeenviewedasawaytolowercostsandgainefficiencies,itisincreasinglybecomingastrategictoolforcompanies. Leadingcompaniesunderstandthatoutsourcingsomefunctionscanhelpthemgainacompetitiveadvantagebyallowingthemtoaccessexpertiseorinnovativetechnologiestheydon'thavein-house;orbyhelpingthemdeliverproductsorservicesmorequickly;orenablingthemtoshiftresourcestotheareasofthebusinessthataremostcritical.Outsourcingoffersbothcost-efficiencyandincreasedworkloadflexibility. 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