What is Outsourcing?

September 12th, 2010 Posted in Entrepreneurship|Ideas

What is Outsourcing Outsourcing 101

The word outsourcing is often a bad word in North America. When people hear it they think of people losing their jobs to someone oversees. However, how much does everyone really know about outsourcing?

Outsourcing is essentially contracting someone out of the business to do something that had previously been done within the business. So, two organizations enter into an agreement that involves the exchange of services and payments. Companies these days can outsource to contractors within the same country, or to other businesses in another nation in an effort to save money. This is called offshore outsourcing and it is very popular among larger companies.

So, why does a company choose to use outsourcing?

  1. The first reason is that it is cheaper. The overall cost for the service to a company is much lower because they can either pay less, or not have to pay benefits. By using off-shore outsourcing, companies can pay the workers there a fraction what they pay workers in the developed world.
  2. The company may want to focus on its core business and therefore leave everything else to outsourcing. For example, the company may want to focus on making paper, so it outsources its customer service to another customer service company.
  3. A company may want to restructure its cost structure. They may want to balance the ratio of fixed and variable costs by moving things outside the company.
  4. Sometimes outsourcing is done in an effort to improve the quality of the service or product of the company. If the company makes computer chips and does not have good customer service, they may outsource the customer service to a company that has better customer service.
  5. The company may want to get access to another talent pool, which can help the company in the long run.
  6. The company may use outsourcing as a way to enhance the capacity for innovation within the company. The company will use external knowledge service providers to help the company.
  7. The company may want to use outsourcing as a way to deal with risk management for some risks, and an outsourced company may be able to handle those risks better.
  8. Some companies will use venture capital as a way to outsource because some countries match government funds in venture capital with private venture capital for new businesses starting up.
  9. There is a tax benefit for companies who outsource sometimes. Countries offer tax incentives to companies who move their manufacturing operations to another country.
  10. An outsourced company is often better able to manage the increase or decrease in production, making it easier for a company to make money.
  11. Some companies, especially for small businesses, there is the desire to outsource work so that work-leisure time can be maximized and balanced. By having someone else deal with computer issues, the business owner does not have to deal with it themselves.

In some cases outsourcing can be bad, but in other ways it can be very beneficial for a country and a company.

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