Outsourcing (sometimes known as “contracting out”) shifts the tasks, operations as well as processes, to an outside workforce by contracting with an outside entity for a substantial duration of time. Companies typically use this method to cut costs or increase efficiency. Outsourced functions are performed by a third party at the location or offsite of the company.

Why Outsource?

Sometimes, a business grows at a rate it can’t manage with its own internal personnel. To maintain the growth, the company could consider hiring an experienced workforce from a third-party company, to be deployed as and whenever needed without interrupting its flow of business.

Furthermore, some companies have processes that will only run for a brief duration, which makes it efficient to use an outsourced, temporary group of workers to complete. If a company is implementing an innovative process, it could outsource the task to qualified workers instead of investing energy, time and money to train and sustain internal employees.

Furthermore, outsourcing companies typically offer management-level employees in addition to their teams this frees employees from internal work to focus on different tasks.

Some Examples

To save money outsourcing can have a huge impact on industries like manufacturing. Within the U.S., for example, manufacturing companies have outsourced their jobs to workers from countries such as China or Bangladesh.

It is also referred to by the term “offshoring,” which involves outsourcing to a third party in another country than the one in which the outsourcing company is located to reduce the cost of labor.

Outsourcing isn’t restricted just to the manufacturing sector. Jobs in customer service like those found in call centers, as well as jobs in computer programming are also outsourced by companies looking for ways to cut expenses. A majority of businesses outsource at least a few aspects of human resource tasks, like managing employee benefits and payroll.

Outsourcing may also mean buying of components from an alternative source, like components for computers. Components can sometimes be purchased at a lower cost than what it would cost companies to make the components, and the components could be of better quality.

Apple is an excellent illustration of this. While the company’s products are manufactured within the U.S., many of the components that are used in these products are bought from third-party suppliers.

IT (IT) services can also be outsourced. For example, cloud computing and software-as-a-service (SaaS) offer companies access to computer services and tools that once were managed in-house by companies’ IT departments.

Advantages and Disadvantages of Outsourcing

Advantages

Outsourcing can help free the cash, staff facilities, as well as time and energy resources. It can lead to savings on costs due to reduced labor costs, tax savings as well as energy expenses, and decreases in the costs of production.

• Alongside cost savings Companies can also use outsourcing strategies to concentrate on their the core competencies of their business. This allows businesses to allocate more resources on what they excel at and improve efficiency and improve competitiveness. Production processes can be simplified and the time to produce reduced, while also reducing operational expenses.
• The non-core activities that firms outsource will typically be outsourced to outside companies who consider these functions to be the core business competencies which will further benefit the business by better control of these functions.
• The company may also benefit from outsourcing by avoiding the imposed regulations of government agencies like environmental regulations or safety rules and other requirements.

Disadvantages

While outsourcing can have many benefits, however, it does have some negatives.

• A relationship that is established with the third party who is responsible for the outsourcing of tasks should be handled. This involves negotiating and executing contracts, which takes the participation of an attorney for the company in addition to daily contact with and supervision of the work that is outsourced.
• Security is also an important aspect of outsourcing. A majority of outsourcing agreements will require the third party’s access to sensitive business information as well as trade secrets and other sensitive data required to carry out contracted duties.

There could be negative effects on public relations for firms when outsourcing causes losing a significant amount of jobs for employees in their communities.