What Is the Definition of Outsourcing? - The Balance Small ...

Outsourcing (sometimes referred to as "contracting out") shifts tasks, operations, jobs, or processes to an external workforce, ... Operations&Technology Glossary TheAdvantagesandDisadvantagesofOutsourcinginBusiness ••• KlausVedfelt/Iconica/GettyImages By JamesBucki FullBio LinkedIn Twitter JamesBuckiisaformerwriterforTheBalanceSmallBusinessandthedirectorofcomputingtechnologyatGeneseeCommunityCollege. Learnaboutour editorialpolicies UpdatedonSeptember27,2018 Outsourcing(sometimesreferredtoas"contractingout")shiftstasks,operations,jobs,orprocessestoanexternalworkforce,bycontractingwithathirdpartyforasignificantperiodoftime.Businessestypicallydothistoreducecostsorimproveefficiency.Outsourcedfunctionscanbeperformedbythethirdpartyeitheronsiteoroffsiteofthebusiness. WhyOutsource? Sometimesacompanyexperiencesgrowthataratethatitcannotsupportwithitsown,internalstaff.Tokeepupthepace,thefirmcanchoosetohireapre-trainedworkforcefromathird-partyfirm,todeployasneededandwhereneededinitsoperationswithoutinterruptingitsbusinessflow. Additionally,acompanymighthaveprocessesthatonlytakeplaceforashorttime,makingitmuchmoreefficienttohireatemporary,outsourcedteamofworkersforcompletion.Ifthecompanyimplementsanewprocessitcanoutsourcetheworktotrainedworkers,insteadofinvestingthetime,moneyandefforttotrainandmaintaininternalworkers. Additionally,outsourcingfirmsoftenprovidemanagement-levelemployeesalongwiththeirworkteams,whichfreesupinternalemployeestotakeonotherwork. SomeExamples Asacost-savingmeasure,outsourcingcanhavesignificantimpactsinsectorslikemanufacturing.IntheU.S.,forexample,manufacturershaveoutsourcedjobstoworkersincountrieslikeChinaandBangladesh. Thispracticeisalsoknownas"offshoring,"whichinvolvesoutsourcingtoathirdpartyinacountryotherthantheonewheretheoutsourcingcompanyisbasedinordertosaveonlaborcosts. Outsourcingisnotlimitedtomanufacturingjobs.Customerservicejobs,suchasthoseincallcenters,andcomputerprogrammingjobsalsoareoutsourcedbycompaniesseekingwaystoreducecosts.Alargenumberofcompaniesoutsourceatleastsomefunctionsofhumanresourcestasks,suchasemployeebenefitsmanagementandpayroll. Outsourcingalsocaninvolvethepurchasingofcomponentsfromanothersource,suchascomponentsforcomputerequipment.Componentssometimescanbepurchasedforlessthanitwouldcostforcompaniestomanufacturethosecomponentsthemselves,andthecomponentsmaybeofhigherquality. Appleisagoodexampleofthis.WhileitsproductsaredesignedintheU.S.,manyofthecomponentsusedinthoseproductsarepurchasedfromthird-partyvendors. Informationtechnology(IT)servicesalsocanbeoutsourced.Forexample,cloudcomputingandsoftware-as-a-service(SaaS)offercompaniesaccesstocomputerservicesandtoolsthatonceweremanagedin-housebycompanies'ITdepartments. AdvantagesandDisadvantagesofOutsourcing ©TheBalance2018 Advantages Outsourcingcanfreeupcash,personnel,facilitiesandtimeresources.Itcanresultincostsavingsfromlowerlaborcosts,taxes,energycosts,andreductionsinthecostofproduction. Inadditiontocostsavings,companiesmayalsoemployoutsourcingstrategiesinordertofocusoncorebusinesscompetencies.Thisallowscompaniestodevotemoreresourcestowhattheydowell,whichcanimproveefficiencyandincreasecompetitiveness.Productioncanbestreamlinedandproductiontimesshortenedwhilereducingoperationalcosts.Thenoncorefunctionsthatafirmoutsourceswillusuallygotooutsideorganizationsforwhomthosefunctionsareacorebusinesscompetency,furtherbenefitingthebusinessthroughtheimprovedmanagementofthosefunctions.Acompanyalsomaybenefitfromoutsourcingbyavoidinggovernmentregulationsormandates,suchasenvironmentalregulationsorsafetyregulationsandrequirements. Disadvantages Whileoutsourcinghasmanyadvantages,italsopresentssomedisadvantages. Therelationshipwiththethirdpartythattakesontheoutsourcedfunctionsmustbemanaged.Thisincludesnegotiatingandsigningcontracts,whichrequirestimeandtheinvolvementofacompany'slegalcounsel,aswellastheday-to-daycommunicationwithandoversightoftheoutsourcedwork.Securityalsoisanimportantfactorinoutsourcing.Manyoutsourcingrelationshipsinevitablywillinvolvethethirdpartyorganization'saccesstosensitivebusinessdata,tradesecrets,andotherconfidentialinformationthatisnecessarytoperformcontractedfunctions. Theremaybesomenegativepublicrelationsimpactsforcompanieswhenoutsourcingresultsinthelossofalargenumberofjobsforworkersintheirlocalcommunities. 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