A precise definition of outsourcing has yet to be agreed upon. Thus, the term is used inconsistently. However, outsourcing is often viewed as involving the contracting out of a business function to an external provider. In this sense, two organizations may enter a contractual agreement involving an exchange of services and payments. Of recent concern is the ability of businesses to outsource to suppliers outside the nation, sometimes referred to as offshoring or offshore outsourcing (which are odd terms because doing business with another country does not mean you have to go offshore In addition, several related terms have emerged to grasp various aspects of the complex relationship between economic organizations or networks, such as near shoring, multi sourcing and strategic outsourcing. Almost any conceivable business practice can be outsourced for any number of stated reasons. The implications of outsourcing objectively and subjectively vary across time and space.
Organizations that outsource are seeking to realize benefits or address the following issues:
Cost savings - The lowering of the overall cost of the service to the business. This will involve reducing the scope, defining quality levels, re-pricing, re-negotiation, cost re-structuring. Access to lower cost economies through offshoring called “labor arbitrage” generated by the wage gap between industrialized and developing nations.
Focus on Core Business - Resources (for example investment, people, and infrastructure) are focused on developing the core business. For example often organizations outsource their IT support to specialized IT services companies.
Cost restructuring - Operating leverage is a measure that compares fixed costs to variable costs. Outsourcing changes the balance of this ratio by offering a move from fixed to variable cost and also by making variable costs more predictable.
Improve quality - achieve a steep change in quality through contracting out the service with a new service level agreement.
Knowledge - Access to intellectual property and wider experience and knowledge.
Contract - Services will be provided to a legally binding contract with financial penalties and legal redress. This is not the case with internal services.
Operational expertise - Access to operational best practice that would be too difficult or time consuming to develop in-house.
Access to talent - Access to a larger talent pool and a sustainable source of skills, in particular in science and engineering.
Capacity management - An improved method of capacity management of services and technology where the risk in providing the excess capacity is borne by the supplier.
Catalyst for change - An organization can use an outsourcing agreement as a catalyst for major step change that cannot be achieved alone. The outsourcer becomes a Change agent in the process.
Enhance capacity for innovation - Companies increasingly use external knowledge service providers to supplement limited in-house capacity for product innovation.
Reduce time to market - The acceleration of the development or production of a product through the additional capability brought by the supplier.
Commodification - The trend of standardizing business processes, IT Services, and application services which enable to buy at the right price, allows businesses access to services which were only available to large corporations.
Risk management - An approach to risk management for some types of risks is to partner with an outsourcer who is better able to provide the mitigation.
Venture Capital - Some countries match government funds venture capital with private venture capital for start-ups that start businesses in their country.
Tax Benefit - Countries offer tax incentives to move manufacturing operations to counter high corporate taxes within another country.
Scalability - The outsourced company will usually be prepared to manage a temporary or permanent increase or decrease in production.
Creating leisure time - Individuals may wish to outsource their work in order to optimize their work-leisure balance.
Specific examples of corporate outsourcing
There are situations when a firm may consider outsourcing some of its R&D work to a contract research organizations or universities. In this context, the two most populous countries in the world, China and India , provide huge pools from which to find talent. Both countries produce over 200,000 engineers and science graduates each year. Moreover both countries are low cost sourcing countries. Outsourcing in the information technology field has two meanings. One is to commission the development of an application to another organization, usually a company that specializes in the development of this type of application. The other is to hire the services of another company to manage all or parts of the services that otherwise would be rendered by an IT unit of the organization. The latter concept might not include development of new applications.