outsourcing definition essay

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What Is Outsourcing?

Understanding outsourcing, special considerations.

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Outsourcing: How It Works in Business, With Examples

Pete Rathburn is a copy editor and fact-checker with expertise in economics and personal finance and over twenty years of experience in the classroom.

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Outsourcing is the business practice of hiring a party outside a company to perform services or create goods that were traditionally performed in-house by the company's own employees and staff. Outsourcing is a practice usually undertaken by companies as a cost-cutting measure. As such, it can affect a wide range of jobs, ranging from customer support to manufacturing to the back office.

Outsourcing was first recognized as a business strategy in 1989 and became an integral part of business economics throughout the 1990s. The practice of outsourcing is subject to considerable controversy in many countries. Those opposed argue that it has caused the loss of domestic jobs, particularly in the manufacturing sector. Supporters say it creates an incentive for businesses and companies to allocate resources where they are most effective, and that outsourcing helps maintain the nature of  free-market economies on a global scale.

Key Takeaways

• Companies use outsourcing to cut labor costs, including salaries for their personnel, overhead, equipment, and technology.
• Outsourcing is also used by companies to dial down and focus on the core aspects of the business, spinning off the less critical operations to outside organizations.
• On the downside , communication between the company and outside providers can be hard, and security threats can amp up when multiple parties can access sensitive data.
• Some companies will outsource as a way to move things around on the balance sheet.
• Outsourcing employees, such as with 1099 contract workers, can benefit the company when it comes to paying taxes.

Investopedia / Mira Norian

Outsourcing can help businesses reduce labor costs significantly. When a company uses outsourcing, it enlists the help of outside organizations not affiliated with the company to complete certain tasks. The outside organizations typically set up different compensation structures with their employees than the outsourcing company, enabling them to complete the work for less money. This ultimately enables the company that chose to outsource to lower its labor costs.

Businesses can also avoid expenses associated with overhead , equipment, and technology.

In addition to cost savings, companies can employ an outsourcing strategy to better focus on the core aspects of the business. Outsourcing non-core activities can improve efficiency and productivity because another entity performs these smaller tasks better than the firm itself. This strategy may also lead to faster turnaround times, increased competitiveness within an industry, and the cutting of overall operational costs.

Companies use outsourcing to cut labor costs and business expenses, but also to enable them to focus on the core aspects of the business.

Examples of Outsourcing

Outsourcing's biggest advantages are time and cost savings. A manufacturer of personal computers might buy internal components for its machines from other companies to save on production costs . A law firm might store and back up its files using a cloud-computing service provider, thus giving it access to digital technology without investing large amounts of money to actually own the technology.

A small company may decide to outsource bookkeeping duties to an accounting firm, as doing so may be cheaper than retaining an in-house accountant. Other companies find outsourcing the functions of human resource departments, such as payroll and health insurance, as beneficial. When used properly, outsourcing is an effective strategy to reduce expenses, and can even provide a business with a competitive advantage over rivals.

Criticism of Outsourcing

Outsourcing does have disadvantages. Signing contracts with other companies may take time and extra effort from a firm's legal team. Security threats occur if another party has access to a company's confidential information and then that party suffers a data breach. A lack of communication between the company and the outsourced provider may occur, which could delay the completion of projects.

Outsourcing internationally can help companies benefit from the differences in labor and production costs among countries. Price dispersion in another country may entice a business to relocate some or all of its operations to the cheaper country in order to increase profitability and stay competitive within an industry. Many large corporations have eliminated their entire in-house customer service call centers, outsourcing that function to third-party outfits located in lower-cost locations.

First seen as a formal business strategy in 1989, outsourcing is the process of hiring third parties to conduct services that were typically performed by the company. Often, outsourcing is used so that a company can focus on its core operations. It is also used to cut costs on labor, among others. While privacy has been a recent area of controversy for outsourcing contractors, it has also drawn criticism for its impact on the labor market in domestic economies.

What Is an Example of Outsourcing?

Consider a bank that outsources its customer service operations. Here, all customer-facing inquiries or complaints with concern to its online banking service would be handled by a third party. While choosing to outsource some business operations is often a complex decision, the bank determined that it would prove to be the most effective allocation of capital, given both consumer demand, the specialty of the third-party, and cost-saving attributes. 

What Are the Disadvantages of Outsourcing?

The disadvantages of outsourcing include communication difficulties, security threats where sensitive data is increasingly at stake, and additional legal duties. On a broader level, outsourcing may have the potential to disrupt a labor force. One example that often comes to mind is the manufacturing industry in America, where now a large extent of production has moved internationally. In turn, higher-skilled manufacturing jobs, such as robotics or precision machines, have emerged at a greater scale.

While outsourcing can be advantageous to an organization that values time over money, some downsides can materialize if the organization needs to retain control. Outsourcing manufacturing of a simple item like clothing will carry much less risk than outsourcing something complex like rocket fuel or financial modeling. Businesses looking to outsource need to adequately compare the benefits and risks before moving forward.

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What is outsourcing? Definitions, benefits, challenges, processes, advice

Outsourcing can bring big benefits, but risks and challenges abound when negotiating and managing outsourcing relationships. here’s what you need to know to ensure your it outsourcing initiatives succeed..

Outsourcing definition

Outsourcing is a business practice in which services or job functions are hired out to a third party on a contract or ongoing basis. In IT, an outsourcing initiative with a technology provider can involve a range of operations, from the entirety of the IT function to discrete, easily defined components, such as disaster recovery, network services, software development, or QA testing.

Companies may choose to outsource services onshore (within their own country), nearshore (to a neighboring country or one in the same time zone), or offshore (to a more distant country). Nearshore and offshore outsourcing have traditionally been pursued to save costs.

Outsourcing services

Business process outsourcing (BPO) is an overarching term for the outsourcing of a specific business process task, such as payroll. BPO is often divided into two categories: back-office BPO, which includes internal business functions such as billing or purchasing, and front-office BPO, which includes customer-related services such as marketing or tech support.

IT outsourcing is a subset of business process outsourcing, and it falls traditionally into one of two categories: infrastructure outsourcing and application outsourcing. Infrastructure outsourcing can include service desk capabilities, data center outsourcing, network services, managed security operations, or overall infrastructure management. Application outsourcing may include new application development, legacy system maintenance, testing and QA services, and packaged software implementation and management.

Today, however, IT outsourcing can also include relationships with providers of software-, infrastructure-, and platforms-as-a-service. These cloud services are increasingly offered not only by traditional outsourcing providers but by global and niche software vendors or even industrial companies offering technology-enabled services.

For more on the latest trends in outsourcing, see “ 7 hot IT outsourcing trends — and 7 going cold .”

Outsourcing pros and cons

The business case for outsourcing varies by situation, but the benefits and risks of outsourcing often include the following:

IT outsourcing models and pricing

The appropriate model for an IT service is determined by the service provided. Most outsourcing contracts have been billed on a time and materials or fixed price basis. But as outsourcing services have matured to include strategic transformation and innovation initiatives , contractual approaches have evolved to include managed services and outcome-based arrangements.

The most common ways to structure an outsourcing engagement include:

Outsourcing vs. offshoring

The term outsourcing is often used interchangeably — and incorrectly — with offshoring, usually by those in a heated debate. But offshoring is a subset of outsourcing wherein a company outsources services to a third party in a country other than the one in which the client company is based, typically to take advantage of lower labor costs. This subject continues to be charged politically because offshore outsourcing is more likely to result in layoffs.

Outsourcing of jobs

Estimates of jobs displaced or jobs created due to offshoring tend to vary widely due to lack of reliable data. In some cases, global companies set up their own captive offshore IT service centers to reduce costs or access skills. Some roles typically offshored include software development, application support and management, maintenance, testing, help desk/technical support, database development or management, and infrastructure support.

In recent years, IT service providers increased investments in IT delivery centers in the US, according to a report from Everest Group. Offshore outsourcing providers have also increased their hiring of US IT professionals to gird against potential increased restrictions on the H-1B visas they use to bring offshore workers to the US to work on client sites.

Some industry experts point out that increased automation and robotic capabilities may actually eliminate more IT jobs than offshore outsourcing.

Outsourcing risks and challenges

The failure rate of outsourcing relationships remains high, ranging from 40% to 70%. At the heart of the problem is the inherent conflict of interest in any outsourcing arrangement. The client seeks better service, often at lower costs, than it would get doing the work itself. The vendor, however, wants to make a profit. That tension must be managed closely to ensure a successful outcome for both client and vendor. A service level agreement (SLA) is one lever for navigating this conflict — when implemented correctly . An SLA is a contract between an IT services provider and a customer that specifies, usually in measurable terms, what services the vendor will furnish. Service levels are determined at the beginning of any outsourcing relationship and are used to measure and monitor a supplier’s performance.

For more on outsourcing contracts, see “ 11 keys to a successful outsourcing relationship ” and “ 7 tips for managing an IT outsourcing contract .”

Another cause of outsourcing failure is the rush to outsource as a “quick fix” cost-cutting maneuver rather than an investment designed to enhance capabilities, expand globally, increase agility and profitability, or bolster competitive advantage.

Generally speaking, risks increase as the boundaries between client and vendor responsibilities blur and the scope of responsibilities expands. Whatever the type of outsourcing, the relationship will succeed only if both the vendor and the client achieve expected benefits.

See also: “ 9 IT outsourcing mistakes to avoid ” and “ 10 early warning signs of IT outsourcing disaster .”

Types of outsourcing

Many years ago, the multi-billion-dollar megadeal for one vendor hit an all-time high, but wholesale outsourcing proved difficult to manage for many companies. These days, CIOs have embraced the multi-vendor approach , incorporating services from several best-of-breed vendors.

Multisourcing, however, is not without challenges. The customer must have mature governance and vendor management practices in place. In contract negotiations, CIOs need to spell out that vendors must cooperate or else risk losing the job. CIOs need to find qualified staff with financial as well as technical skills to help run a project management office or some other body that can manage the outsourcing portfolio.

The rise of digital transformation has initiated a shift away from siloed IT services. As companies embrace new development methodologies and infrastructure choices, many standalone IT service areas no longer make sense. Some IT service providers seek to become one-stop shops for clients through brokerage services or partnership agreements, offering clients a full spectrum of services from best-in-class providers.

How to select a service provider

Selecting a service provider is a difficult decision, and no one outsourcer will be an exact fit for your needs. Trade-offs will be necessary.

To make an informed decision, articulate what you want from the outsourcing relationship to extract the most important criteria you seek. It’s important to figure this out before soliciting outsourcers, as they will come in with their own ideas of what’s best for your organization, based largely on their own capabilities and strengths.

Some examples of the questions you’ll need to consider include:

• What’s more important to you: the total amount of savings an outsourcer can provide you or how quickly they can cut your costs?
• Do you want broad capabilities or expertise in a specific area?
• Do you want low, fixed costs or more variable price options?

Once you define and prioritize your needs, you’ll be better able to decide what trade-offs are worth making.

Outsourcing advisers

Many organizations bring in a sourcing consultant to help establish requirements and priorities. Third-party expertise can help, but it’s important to research the adviser well. Some consultants may have a vested interested in getting you to pursue outsourcing rather than helping you figure out if outsourcing is a good option for your business. A good adviser can help an inexperienced buyer through the vendor-selection process, aiding them in steps like conducting due diligence, choosing providers to participate in the RFP process, creating a model or scoring system for evaluating responses, and making the final decision.

For more advice, see “ Outsourcing advisors: 6 tips for selecting the right one .”

Negotiating the best outsourcing deal

Balancing the risks and benefits for both parties is the goal of the negotiation process , which can get emotional and even contentious. But smart buyers will take the lead in negotiations , prioritizing issues that are important to them, rather than being led around by the outsourcer.

Creating a timeline and completion date for negotiations will help rein in the process. Without one, discussions could go on forever. But if an issue needs time, don’t be a slave to the date.

Finally, don’t take any steps toward transitioning the work to the outsourcer while in negotiations. An outsourcing contract is never a done deal until you sign on the dotted line, and if you begin moving the work to the outsourcer, you will be handing over more power over the negotiating process to them as well.

Outsourcing’s hidden costs

Depending on what is outsourced and to whom, studies show that an organization will end up spending at least 10% percent above the agreed-upon figure to manage the deal over the long haul. Among the most significant additional expenses associated with outsourcing are:

• the cost of benchmarking and analysis to determine whether outsourcing is the right choice
• the cost of investigating and selecting a vendor
• the cost of transitioning work and knowledge to the outsourcer
• costs resulting from possible layoffs and their associated HR issues
• costs of ongoing staffing and management of the outsourcing relationship

It’s important to consider these hidden costs when making a business case for outsourcing.

The outsourcing transition

Vantage Partners once called the outsourcing transition period — during which the provider’s delivery team gets up to speed on your business, existing capabilities and processes, expectations and organizational culture — the “valley of despair.” During this period, the new team is trying to integrate transferred employees and assets, begin the process of driving out costs and inefficiencies, while still keeping the lights on. Throughout this period, which can range from several months to a couple of years, productivity very often takes a nosedive.

The problem is, this is also the time when executives on the client side look most avidly for the deal’s promised gains; business unit heads and line managers wonder why IT service levels aren’t improving; and IT workers wonder what their place is in this new mixed-source environment. The best advice is to anticipate that the transition period will be trying, attempt to manage the business side’s expectations, and set up management plans and governance tools to get the organization over the hump.

Outsourcing governance

A highly collaborative relationship based on effective contract management and trust can add value to an outsourcing relationship. An acrimonious relationship, however, can detract significantly from the value of the arrangement, the positives degraded by the greater need for monitoring and auditing. In that environment, conflicts frequently escalate and projects don’t get done.

Successful outsourcing is about relationships as much as it is actual IT services or transactions. As a result, outsourcing governance is the single most important factor in determining the success of an outsourcing deal. Without it, carefully negotiated and documented rights in an outsourcing contract run the risk of not being enforced, and the relationship that develops may look nothing like what you envisioned.

For more on outsourcing governance, see “ 7 tips for managing an IT outsourcing contract .”

Repatriating IT

Repatriating or backsourcing IT work (bringing an outsourced service back in-house ) when an outsourcing arrangement is not working — either because there was no good business case for it in the first place or because the business environment changed — is always an option. However, it is not always easy to extricate yourself from an outsourcing relationship, and for that reason many clients dissatisfied with outsourcing results renegotiate and reorganize their contracts and relationships rather than attempt to return to the pre-outsourced state. But, in some cases, bringing IT back in house is the best option, and in those cases it must be handled with care .

For more on repatriating IT, see “ How to bring outsourced services back in-house .”

More on outsourcing:

• 7 hot IT outsourcing trends — and 7 going cold
• Top 10 IT outsourcing providers
• 9 outsourcing myths debunked
• The hidden costs of outsourcing
• 11 keys to a successful outsourcing relationship
• 9 IT outsourcing mistakes to avoid
• 10 early warning signs of IT outsourcing disaster
• 12 signs your strategic partnership has gone wrong
• 7 keys to transformational outsourcing success
• SLA guide: Best practices for service-level agreements
• 10 dos and don’ts for crafting more effective SLAs
• How to contract for outsourcing agile development

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outsourcing

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What is outsourcing?

Outsourcing is a business practice in which a company hires a third party to perform tasks, handle operations or provide services for the company.

The outside company, which is known as the service provider or a third-party provider , arranges for its own workers or computer systems to perform the tasks or services either onsite at the hiring company's own facilities or at external locations.

Companies today can outsource a number of tasks or services. They often outsource information technology services, including programming and application development , as well as technical support. They frequently outsource customer service and call service functions. They can outsource other types of work as well, including manufacturing processes, human resources tasks and financial functions such as bookkeeping and payroll processing. Companies can outsource entire divisions, such as its entire IT department , or just parts of a particular department.

Outsourcing business functions is sometimes called contracting out or business process outsourcing .

Outsourcing can involve using a large third-party provider, such as a company like IBM  to manage IT services or FedEx Supply Chain for third-party logistics services. But it can also involve hiring individual independent contractors, temporary office workers and freelancers.

How outsourcing works

For a company to effectively outsource responsibilities, it is important to focus on the business partnership as much the logistics. Outsourcing is about managing relationships, more than service-level agreements, and is a partnership, not a purchasing project. Maintaining and securing a trusted relationship is essential in outsourcing efforts and is more complex than establishing service levels and relationships.

Some experts recommend placing extra emphasis on the exit clause of a service contract. It is important for companies to know when the contractual agreement inevitably times out and ensure that the involved parties fulfill their obligations and stick around until the contract is up.

Reasons for outsourcing

Companies often outsource as a way to lower costs, improve efficiencies and gain speed. Companies that decide to outsource rely on the third-party providers' expertise in performing the outsourced tasks to gain such benefits. The underlying principle is that because the third-party provider focuses on that particular task, it is able to do it better, faster and cheaper than the hiring company could.

Given such benefits, companies often decide to outsource supporting functions within their businesses so they can focus their resources more specifically on their core competencies, thereby helping them gain competitive advantages  in the market.

However, some companies decide to outsource for other reasons.

For example, they outsource because they're unable to hire in-house, full-time employees with the specialized skills and experience needed to perform certain jobs.

Companies sometimes opt to outsource as a way to shift meeting regulatory requirements or obligations to the third-party provider.

Furthermore, companies look to outsourcing providers as innovation centers.

Types of outsourcing

There are several ways to outsource a business process, and depending on the process, one may be preferable over another. Broadly there are a few different types based on the distance between the two members of the relationship. These types are:

• Onshoring . Relocating work or services to lower-cost location in the company's own country.
• Offshoring. Relocating work or services to third-party providers overseas.
• Nearshoring . Relocating work or services to people in nearby, often bordering regions and countries.

Outsourcing agreements can also vary widely in scope. For certain processes, like programming or content creation, hiring freelancers on a job-to-job basis might be appropriate. A company outsourcing their entire IT department will require a long-term partnership with clearly stated requirements.

Examples of outsourcing

The increasing use of virtual assistants is one trend where outsourcing will play a significant role. More and more, enterprises are using business-level virtual assistants to automate certain processes. This means an increased need for specialized voice assistant applications. Many companies may choose to outsource that development project for cost and skill reasons.

If the company was American, and chooses to "offshore" that work, they may hire a development firm in India or England, for example. If they chose to "nearshore" the work, they may develop a relationship with a Canadian or Mexican third party. If they "onshore" the project, they would likely communicate with a business close by or hire independent contractors.

The closer the third party is to the client company; the less time and cultural differences will make an impact. Because application development is often an asynchronous process, being tightly scheduled isn't the top priority, and clients seeking that work may prefer offshoring to onshoring.

Pros and cons of outsourcing

In addition to delivering lower costs and increased efficiencies, companies that outsource could see other benefits.

By outsourcing, companies could free up resources (i.e., cash, personnel, facilities) that can be redirected to existing tasks or new projects that deliver higher yields for the company than the functions that had been outsourced.

Companies might find, too, that they can streamline production and/or shorten production times because the third-party providers can more quickly execute the outsourced tasks.

Outsourcing, however, can produce challenges and drawbacks for companies.

Companies engaged in outsourcing must adequately manage their contracts and their ongoing relationships with third-party providers to ensure success. Some might find that the resources devoted to managing those relationships rivals the resources devoted to the tasks that were outsourced, thereby possibly negating many, if not all, of the benefits sought by outsourcing.

Companies also could realize that they lose control over aspects of the outsourced tasks or services. For instance, a company could lose control over the quality of customer service provided when it outsources its call center function; even if the company's contract with the provider stipulates certain quality measures, the company might find it's more difficult to correct an outsourced provider than it would be to correct an in-house team.

Companies that outsource could also face heightened security risks , as they exchange with their third-party providers the company's proprietary information or sensitive data that could be misused, mishandled or inadvertently exposed by the outsource provider.

Additionally, companies might encounter difficulties in getting their own employees to communicate and collaborate effectively with those working for third-party providers -- a scenario that's more common if the third party operates overseas.

Ethics of outsourcing

Outsourcing has raised some ethical issues for companies as well.

Most notably, some have criticized the practice for its impact on workers. Employees at companies that decide to outsource frequently see the decision to outsource as a threat to their job security; in many cases, that fear is justified as they lose their jobs to workers who may be paid less and receive fewer benefits.

This scenario has also drawn criticism from the public, as well as from politicians and labor leaders.

Companies could also face negative publicity as a result of their decisions to outsource, with customers and the public in general viewing the move as a way to cut workers' wages and benefits or as a way to skirt environmental, financial or safety regulations.

Insourcing vs. outsourcing

Companies may decide against outsourcing and instead turn to insourcing.

As the name implies, insourcing refers to the practice of having in-house teams perform functions that could be handled by outside companies or contactors. Thus, insourcing can be viewed as the opposite of outsourcing.

Sometimes insourcing involves hiring new employees, either on a permanent or temporary basis, to execute the tasks being insourced. Companies might need to invest in new equipment, hardware and software when insourcing, and they might need to reengineer business processes as well.

Outsourcing trends

Although outsourcing had been viewed as a way to lower costs and gain efficiencies, it is increasingly becoming a strategic tool for companies .

Leading companies understand that outsourcing some functions can help them gain a competitive advantage by allowing them to access expertise or innovative technologies they don't have in-house; or by helping them deliver products or services more quickly; or enabling them to shift resources to the areas of the business that are most critical. Outsourcing offers both cost-efficiency and increased workload flexibility.

Continue Reading About outsourcing

• A history of IT outsourcing
• The pros and cons of big data outsourcing
• 15 benefits of outsourcing your cybersecurity operations
• Tips for outsourcing business resilience services
• What is outsourcing? What does it mean for companies?

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126 Outsourcing Essay Topic Ideas & Examples

Inside This Article

Outsourcing has become an increasingly popular business practice in today's global economy. Companies often turn to outsourcing to reduce costs, increase efficiency, and focus on their core competencies. However, outsourcing is not without its controversies and challenges. In this article, we will explore 126 outsourcing essay topic ideas and provide examples to help you better understand this complex and evolving phenomenon.

• The impact of outsourcing on the economy
• The pros and cons of outsourcing
• Outsourcing vs. offshoring: what's the difference?
• The role of technology in outsourcing
• Outsourcing and job loss
• The ethics of outsourcing
• Outsourcing in the healthcare industry
• Outsourcing in the manufacturing industry
• Outsourcing in the IT industry
• The future of outsourcing
• Outsourcing and globalization
• Outsourcing and corporate social responsibility
• The outsourcing of customer service
• Outsourcing and small businesses
• Outsourcing and data security
• Outsourcing and the gig economy
• Outsourcing and the environment
• Outsourcing and legal implications
• The outsourcing of government services
• Outsourcing and cultural differences
• Outsourcing and supply chain management
• Outsourcing and human rights
• Outsourcing and innovation
• Outsourcing and risk management
• Outsourcing and the sharing economy
• Outsourcing and artificial intelligence
• Outsourcing and corporate governance
• Outsourcing and corporate strategy
• Outsourcing and corporate culture
• Outsourcing and corporate branding
• Outsourcing and corporate restructuring
• Outsourcing and corporate finance
• Outsourcing and corporate sustainability
• Outsourcing and corporate ethics
• Outsourcing and corporate compliance
• Outsourcing and corporate citizenship
• Outsourcing and corporate reputation

Outsourcing is a complex and multifaceted business practice that has both benefits and drawbacks. By exploring these 126 outsourcing essay topic ideas and examples, you can gain a better understanding of the various issues and challenges associated with outsourcing in today's global economy. Whether you are a student, a researcher, or a business professional, these topics can serve as a valuable resource for further study and analysis.

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What is Outsourcing? Definition, Advantages, and Examples

Many businesses have successfully adopted outsourcing processes into various aspects of their logistics and supply chain operations. Outsourcing (or out sourcing, as some refer to it) all or part of these functions can improve efficiency and in some cases, reduce costs.

This article describes the concept of outsourcing, as well as the pros, cons, and examples of outsourced functions. It will also explore the significance and benefits of outsourcing. This information is intended to prepare business logistics managers to make an informed decision regarding the potential benefits of outsourcing.

Definition of Outsourcing

The term “outsourcing” refers to:  the practice of a business contracting with a third-party supplier to provide products or services that are currently handled in-house by staff. 

Because of outsourcing, many businesses have been able to reduce expenses, gain access to specialized expertise, and improve overall performance. 

How Outsourcing Works 

Outsourcing involves transferring specific tasks or functions from within an organization to an outside contractor or third-party logistics provider . 

When businesses outsource logistics, their employees can focus on their strengths and the goals of the business while depending on external vendors for specialized assistance in areas including IT, customer service, labor management, finances, warehousing and fulfillment, and more. 

Outsourced activities can range from simple administrative tasks like data entry to complex projects like network design and order fulfillment.

Types of Outsourcing

There are several types of outsourcing. 

Because every business has its own requirements, expenses, and systems in place, the business must carefully assess the benefits of outsourcing, and the type of outsourcing most applicable to the company’s needs.

Here are the most common types of outsourcing and a quick explanation for each one: 

BPO (Business Process Outsourcing)

When people talk about outsourcing, BPO is the concept they often describe. 

Simply put, Business Process Outsourcing involves outsourcing a particular business process, such as HR, IT, accounting/payroll, customer service, and other tasks, to an external provider.

If a company is small, but planning to launch a new product and expects plenty of inquiries, the business may consider outsourcing the chat or voice calls to a third-party customer service representative. This representative can be a freelancer or an employee of a BPO call center.

LPO (Legal Process Outsourcing)

LPO is similar to BPO, except the processes involved in legal process outsourcing are exclusive to legal services. 

For example, a new company without an in-house lawyer could outsource legal research, contract management, document review, and other law-related tasks to a third-party law firm or lawyer.

KPO (Knowledge Process Outsourcing) 

KPO tackles knowledge-based processes, such as data analysis, R&D, or market research. 

Larger enterprises usually have their own research and development teams, but smaller companies may not. Outsourcing to R&D firms not only guarantees that the process will be done properly by experts but also saves the company money because they can select the level of assistance they need and purchase outsourced services based totally on their needs.

ITO (Information Technology Outsourcing)

This kind of outsourcing involves IT services, such as web development, application management, software or game development, networking maintenance, and more. 

Traditional companies may find it hard to stay current with the ever-evolving world of technology. If a widget company wants to build a webiste, it would make sense to outsource the job to someone (or a web dev company) who can build a website quickly and properly. 

Facilities Management Outsourcing

Companies often contract with third-party agencies or companies to handle security, housekeeping, or janitorial services, maintenance, landscaping, electrical work, and other similar tasks. When they do this, they’re outsourcing facilities management to another company. 

Creative Process Outsourcing

When a company hires a photographer to take professional images of its products to be featured on a website, the business is outsourcing the creative process to that photographer. 

Other types of creative process outsourcing involve content creation, graphic design, video production, and voice recording. 

Manufacturing Outsourcing

If you’re aware of drop shipping , the concept of manufacturing outsourcing will be easier to understand. 

In this kind of outsourcing, businesses hire other companies to build parts or the entire product or project. 

Let’s say someone is a cosplayer who is scheduled to attend an event next weekend. They hire another cosplayer to help with the play sword or another artist to sew the cape. This process is a simpler example of manufacturing outsourcing. 

Some technology companies contract other Asia-based companies to build parts of their smartphones; this is an example of outsourcing manufacturing.

Different types of outsourcing providers can benefit companies in specific ways, from simple data entry to complex projects like product manufacturing. However, it is important to carefully evaluate the risks and benefits of outsourcing before making the decision to outsource.

Advantages of Outsourcing

These examples illustrate the potential advantages of outsourcing:

Cost Savings 

If a particular task must be done, but the company would need to hire and train someone to do the job, the company is paying for work that is not being done while it gets an employee onboard.

However, by outsourcing this task to an expert, the job will be done quickly and properly. After all, they’re experts in that particular field. 

The BPO industry is a perfect example of how cost savings can be achieved by investing in offshore outsourcing. Companies in third-world countries can provide competitive rates for BPO services or manufacturing services because the cost of the business in their part of the world is usually lower. 

This is the reason many companies from the United States, Canada, Australia, Europe, and other countries prefer offshore outsourcing for a variety of industries, not just for BPO companies. Cost savings can be significant.

Increased Efficiency and Productivity

Why spend time training people how to process payroll if a third-party accounting firm or accountant can do it for your company in less time?

When companies streamline tasks and outsource non-essential activities, they can focus on core competencies and value-added work. If the company is a game development firm, the company can spend more time investing in its game designers instead of training the HR staff on how to locate and retain designers. 

If the company is a small bakery wanting to branch out, the company can now create franchising programs or develop new recipes instead of directing janitors in cleaning the storefronts. 

Key Takeaway: The goal of outsourcing services is to reduce expenses and optimize performance while still upholding quality requirements. Outsourcing gives smaller companies a way to compete with bigger companies that have already established their processes and may have more resources. In short, outsourcing is an ideal strategy for staying ahead of the competition in today’s evolving market. 

Drawbacks of Outsourcing

Outsourcing services also come with a few risks. The three main ones are:

Loss of Control 

One of the main disadvantages of outsourcing is the potential for loss of control over quality and processes. 

When a business delegates its operations, it provides control and authority over how tasks are carried out to a third-party provider. 

The possibility of inferior goods or services being provided can result from a lack of oversight, potentially leading to customer dissatisfaction and damaging the company’s reputation.

Lack of Data Security 

Data security is another major concern when it comes to outsourcing. 

Businesses may not feel fully assured that their outsourcing partners can properly guard sensitive data against any unauthorized use or access. 

Poorly secured systems could result in data breaches, leading to financial losses and reputational damage for the business involved in the arrangement.

Communication Issues 

Poor communication between parties involved in an outsourcing agreement can create issues if expectations are not properly communicated or understood by all sides at the beginning of a project or contract period. 

Without proper communication channels established beforehand, misunderstandings may arise,  which could affect delivery times and even impact quality standards agreed upon before the outsourced work begins.

Decisions about outsourcing should be considered carefully. Choosing the wrong partner or failing to establish clear goals may have a detrimental effect on quality and reputation.

Tips for Successful Outsourcing

There are a few general best practices to follow for successful outsourcing. 

• Work with reputable third party logistics companies . Do extensive research before signing any contracts and make sure the company of choice has plenty of reviews and experience. Trust is critical. Discuss core competencies with the company being considered for outsourcing to ensure alignment.
• Establish an outsourcing liaison. The person in this position will be in charge of communicating with and monitoring the company you choose as an outsourcing partner. Having someone specifically assigned to this task will limit communication issues and concerns. 
• Embrace cultural differences. While working with an international or offshore company, there may be unexpected conditions. This can include pay expectations, work ethic, employee benefits, and hours of work. Embrace these differences and don’t be afraid to ask respectful questions as needed while adapting to new business operations. 
• Encrypt your data. Encrypting the information you send back and forth with your outsourcing company will ensure all personal information and intellectual property stays between you and your service provider. 

Below are some of the most frequently asked questions about outsourcing. 

What is an example of outsourcing? 

IT management is one of many outsourcing provider examples. Companies may outsource their IT needs to a third-party provider, such as an IT consultant or managed service provider (MSP) that they may not have internally. 

By outsourcing, businesses can save not only in hiring IT teams but also by not purchasing expensive hardware and software. 

Examples of IT services that can be outsourced comprise cloud computing, data storage, system maintenance and backing, software development, network security administration, web formation, web configuration, application production, and amalgamation facilities. By relying on outsourcing, business processes can become more streamlined and organized. 

What is the main purpose of outsourcing? 

By transferring tasks that would otherwise require additional staff members or equipment, outsourcing can help companies lower costs significantly and minimize in-house business processes and costs. 

Final Thoughts 

Now that you know the pros and cons of outsourcing, some real-world examples of outsourcing, and the possibilities outsourcing can offer your business functions, you can determine if outsourcing is a good choice for the company.

For most companies, having the capacity to change rapidly to meet client needs and market patterns and the ability to scale up and scale down services based on business demands are valid reasons to find an external service provider. Outsourcing business processes is a great way to streamline business practices, lower labor costs, and develop a competitive business strategy. 

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• Outsourcing

About four out of five of the world’s 500 largest companies outsource their work to India. But what does this outsourcing mean? And how does it benefit the country and its workforce? In recent times outsourcing has also been in the news due to the ethical questions it raises. Let’s find out more about it.

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Introduction to outsourcing.

Outsourcing is the process of contracting a business function or any specific business activity to specialized agencies. Mostly, the non-core areas such as sanitation, security, household, pantry, etc are outsourced by the company. The company makes a formal agreement with the agency.

The agency then sends the manpower required to the company. The agency charges the company for their services and in turn pays wages to their employees. Global competition has given rise to outsourcing. With the help of outsourcing, companies can focus on their core areas which leads to better profits and increase the quality of their product.

Advantages of Outsourcing

• Overall Cost Advantage: It eludes the need to hire individuals in‐house; hence recruitment and operational costs can be minimized to a great extent. It reduces the cost and also saves time and efforting on training cost.
• Stimulates Entrepreneurship, Employment, and Exports: Outsourcing stimulates Entrepreneurship, Employment, and Exports in the country from where outsourcing is done. Look at the example of India. After the initial success of call centres, there was a sudden emergence of many small scales and medium scale BPo and KPO companies.
• Low Manpower Cost: The manpower cost is much lower than that of the host country. This is exactly the case with India. We have a very large educated workforce. And this causes the labour cost in our country to be much lower.
• Access to Professional, Expert and High‐quality Services: Mostly, the tasks are given to people who are skilled in that particular field. This provides us with a better level of service and fewer chances of errors or misjudgment.
• Emphasis on Core Process Rather than the Supporting Ones: With its help, companies can focus on their core areas which lead to better profits and increase the quality of their product. They simply outsource ancillary services.
• Investment Requirements are Reduced: The organization can save on investing in the latest technology, software, and infrastructure and let the outsourcing partner handle the entire infrastructure.
• Increased Efficiency and Productivity: There is an increased efficiency and productivity in the non – core areas of an organization.
• Knowledge Sharing:  Outsourcing enables the organizations to share knowledge and best practices with each other. It helps develop both the companies and also boosts goodwill in the industry.

Disadvantages of Outsourcing

• Lack of Customer Focus: An outsourced vendor may be catering to the needs of multiple organizations at a time. In such situations, vendors may lack complete focus on an individual organization’s tasks. And the reputation of the organization may suffer as a result
• A Threat to Security and Confidentiality: The inside news of the organization may be leaked to the third party, so there are security issues. The leak of sensitive information may result in losses to the company and also be an advantage to competitors.
• Dissatisfactory Services: Some of the common problem areas with outsourcing include stretched delivery time and sub‐standard quality.
• Ethical Issues:  The major ethical issue is taking away employment opportunities from one’s own country. Instead of creating employment and wealth in the origin country it gets outsourced to another country. In recent times this has been viewed by many as unethical and even unpatriotic.
• Other Disadvantages: Include misunderstanding of the contract, lack of communication, poor quality and delayed services amongst others.

Solved Examples For You

Q. Which one of the following is a category in which Business Process Outsourcing can be categorized?

• Back office
• Front office
• All of the above

Sol. The correct answer is the option ”D”. In this, kind party agencies perform your back office as well as front office data entry tasks effectively in quick turnaround times. In the 90s we used it to refer to big business sending jobs offshore.

Q. Outsourcing _______________.

• restricts only to the contracting out of Information Technology Enabled Services (ITES).
• restricts only to the contracting out of non-core business processes.
• includes contracting out of manufacturing and R & D, as well as service processes-both core and non-core-but, restricts only to the domestic territory
• includes off-shoring

Sol. The correct answer is the option ”D”. It is a practice of reducing cost by a company by transferring a part of the company to another company. It includes offshoring i.e. relocating a part of the business to another place for reducing costs.

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5 responses to “Benefits and Limitations of e-Business”

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oppnads.com, Thank you for the knowledgeable post which has helped me a lot. Keep it up for providing valuable information..

Any businessman is accurately tested when he or she decides to exploit the right opportunity at the right time. These businessmen not only decide, but also have the courage to put their decisions in execution as well. E-Businesses are one of them.

Its vey helpful i think there is a small mistake in advantages of e-business i.e cheaper than traditional business. but its written cost taken to setup a e-business is much higher than traditional business.

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Outsoursing Definition, Its Advantages and Disadvantages Research Paper

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Advantages of outsourcing

Disadvantages of outsourcing, works cited.

Outsourcing refers to an act of transferring an organization’s business activities carried out locally to an external source. The need to improve on efficiency and reduce the operation costs has forced many organizations to specialize in specific businesses. As a result, many organizations have been able to outsource some of their activities previously carried out locally (Miller 1).

Currently, the increasing prevalence of outsourcing among local and international companies has attracted attention from business stakeholders and academia. According to some business experts, outsourcing is one of the oldest business ideas. Since the 1950s, outsourcing has improved over time from peripheral business activities to more critical business activities (Miller 1).

More often, outsourcing has forced companies to dismantle their traditional structures of organizations. Employees have been transferred to external suppliers leading to change of their terms and conditions (Miller 1). Through these initiatives, outsourcing has not only become very useful, but also developed into a complex issue among several organizations.

In numerous organizations, outsourcing has opened new platforms for innovation changing on how tasks are done. For example, cloud computing is changing the manner in which developers test new applications (Fan 6). In the past, the process could take several weeks. Currently, the process takes a few minutes. This paper seeks to highlight the advantages and disadvantages of outsourcing to business organizations and government institutions.

In developed countries such as the US, UK, and Germany, organizations and government institutions have increasingly outsourced their service related activities to the developing countries (Fan 4).

As a result, outsourcing has attracted contrasting reactions from numerous organizations, business leaders, politicians, employees, and unions (Miller 1). For instance, business stakeholders consider outsourcing as a great tool to improve on business efficiency. On the contrary, unions consider outsourcing as a threat to employees’ terms and conditions.

Business analysts argue that if outsourcing is managed and evaluated appropriately, it will equally benefit the providers and clients. As such, outsourcing has enabled companies to focus on core functions, save on costs, improve on their quality services, and increase their flexibility (Fan 4).

Based on transaction theory, every organization seeks to economize on its transaction costs. In this regard, outsourcing reduces transaction costs, in turn, reducing the size of the firm making it more productive. According to the economic advantage theory, outsourcing enables its providers, regardless of their geographical locations, to function more productively than their client firms do.

Through this, the client firm will focus on what they do better than their competitors and their provider firm. Most of the outsourcing organizations have created networks of products and service providers specializing in their own distinct area of expertise. As a result, organizations have greater chances to improve their services through outsourcing since professionals will handle their services effectively (Fan 6).

Another advantage of outsourcing is that it enables organizations to access world-class technology at lower rates (Rosenthal 1). Currently, the world market is experiencing numerous innovations and technologies. Consequently, it is becoming hard and costly for several companies to keep up with these new technologies.

As a result, companies are opting to outsource most of their activities to external companies with adequate resources and expertise (Fan 4). Organizations save on operation time and cost through such practices. Similarly, outsourcing organizations can have access to skilled work forces at reasonable prices. It is estimated that organizations spend many resources to recruit, train, and maintain their staff members (Fan 7).

Organizations should adopt outsourcing as an alternative to reduce on these costs. According to economic experts, the initiative will not only reduce on their cost, but also improve on their productivity. For example, in the year 2003 Delta Airlines reduced its operating cost by 25 million by outsourcing more than 1000 jobs to Asian countries.

In the United States, outsourcing has become a trend in most organizations (Rosenthal 1). Many corporations have resorted to outsourcing their customer services, telemarketing, IT positions, and other sales services to companies in developing countries.

Through these, India and China have benefited greatly being the most preferred recipients. As a result, more jobs have been created in Indian and Chinese markets rather than in the American markets (Rosenthal 1). According to the current US business survey, most organizations in the US have greatly benefitted from outsourcing.

As a result, most business organizations interviewed during the survey were planning to outsource most of their services in the future. According to the research, 73% of the US based companies were planning to outsource some of their tasks while 22% were planning to outsource all their activities that do not fall under their core functions (Rosenthal 1). Most organizations interviewed, reported that they were able to focus their attention on core functions and save on operation costs through outsourcing.

The research study indicated that most of these companies are not after outsourcing their services to cheapest providers, but rather to the providers that provide quality service within the allotted time. According to Pegasus Capital Advisors Company, outsourcing their entire human resource processes to ADP enabled the company to save on its time, and focus on its strategic tasks (Rosenthal 1).

All business organizations operate in risks decision environments. This implies that all advantages stated in favor of outsourcing have probabilities of occurring. One major disadvantage of outsourcing to an organization is the loss of managerial control. When organizations outsource part of their task, they are allowing the outsourcing providers to take full control of these tasks (Rosenthal 1).

As a result, companies may incur additional costs because there is no way for their managers to asses and control costs. For instance, some outsourcing contracts allow providers to purchase items for their clients without approval. Consequently, the providers may leave their clients at risks of material cost escalations.

Another major disadvantage of outsourcing is its negative implications on an organization’s human resource (Fan 6). Those who are against outsourcing assert that when some tasks in an organization are outsourced, employee morale drops remarkably. When parts of the employees’ tasks are outsourced, employees believe that they will eventually lose their jobs to the outsourcing providers.

For this reason, employees will compromise on their productivity, loyalty, and trust, all of which are necessary for the growth of a healthy business. Equally, during the outsourcing procedures, organizational restructuring may result in dislocations and additional social costs for employees. In addition, an organization may earn a bad reputation when its employees lose their jobs to outsourcing providers.

Through outsourcing, threats to security and confidentiality are eminent. Every business has secret information that keeps it running. By outsourcing part of their duties, these organizations share part of their information with outsourcing providers compromising on their privacy.

For example, when organizations share their employees’ payroll, medical records, product formulas, and drawings there are higher chances of compromising on the organizations’ privacy. This implies that organizations must evaluate their outsourcing companies to ensure that their data is secure, and their contracts have penalty clauses in case privacy infringement occurs.

In the year 2009, the state of Indiana and IBM sued each other over a failed outsourcing contract. Ten years before, the state had a signed a $1.34 billion contract with the computer firm. According to the state officials, the outsourcing provider, IBM, mishandled their welfare claims.

Before the signing of the outsourcing contract, the state noted that its welfare claims were at 4.4 %. However, when the contract was awarded to IBM, the welfare claims climbed to 18.3%. Because of these unexpected results, the state sued IBM for non-performance. The states spokesperson claimed that IBM’s efforts were worthless. This example affirms that there are organizations that are disadvantaged by outsourcing.

In the US, government officials have been divided on the issues of outsourcing. Some of the government officials and politicians have heavily criticized organizations involved in outsourcing part of their services to foreign companies.

According to these critics, outsourcing has increased the number of unemployed individuals in the US. On the other hand, those who support outsourcing argue that through outsourcing American firms can manage to compete with other international firms. In this regard, it is upon organizations to evaluate and adopt the best outsourcing companies to maximize on their profits since outsourcing has advantages and disadvantages (Fan 8).

Fan, Liang. “Outsourcing In Business .” Outsourcing Center . Version 2. Routledge, 2010. Web.

Miller, Brandon . “The Effects of Outsourcing: Does it Hurt the American Workforce? Yahoo! Voices – voices.yahoo.com.” 2009. Web.

Rosenthal, Beth. “ How a Money Management Firm Benefited from Outsourcing Its HR to a PEO | Article | Outsourcing Center.” The Resource for Actionable Business Insight . Version 1. No Publisher. 2004. Web.

• Outsourcing’s Benefits in Management
• Is There Evidence to Support That the Benefits of Outsourcing and/or Off-Shore Outsourcing Outweigh the Disadvantages?
• General Motors and IBM as Successful Companies
• Contracts, Their Types, and Importance
• Surface Judgments and Employability
• Computing Industry Between Apple and Microsoft
• Economic impact of the Olympic Games
• The Mergers of Companies
• Chicago (A-D)
• Chicago (N-B)

IvyPanda. (2018, November 20). Outsoursing Definition, Its Advantages and Disadvantages. https://ivypanda.com/essays/outsourcing-3/

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IvyPanda . 2018. "Outsoursing Definition, Its Advantages and Disadvantages." November 20, 2018. https://ivypanda.com/essays/outsourcing-3/.

1. IvyPanda . "Outsoursing Definition, Its Advantages and Disadvantages." November 20, 2018. https://ivypanda.com/essays/outsourcing-3/.

Bibliography

IvyPanda . "Outsoursing Definition, Its Advantages and Disadvantages." November 20, 2018. https://ivypanda.com/essays/outsourcing-3/.

What Is Business Process Outsourcing (BPO)?

Updated: Jun 10, 2024, 9:47am

Table of Contents

What is business process outsourcing, how business process outsourcing works, 9 common benefits of business process outsourcing, 6 common disadvantages of business process outsourcing, examples of business process outsourcing, frequently asked questions (faqs).

Business process outsourcing (BPO) happens when a company outsources entire business functions to be handled by another company. For example, companies can outsource their marketing, payroll, human resources (HR), customer service and supply chain management functions. In this article, we discuss what business process outsourcing is, how it works, its benefits and disadvantages and examples of what it looks like in today’s businesses.

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Business process outsourcing involves the outsourcing of business functions to external companies. To clarify, many companies outsource tasks to external providers. An example may be hiring a freelancer to do video editing. BPO is different in that whole business functions, such as marketing or accounting, are outsourced. Traditionally, BPO was used by manufacturing companies but it has more recently spread to a variety of industries.

Business process outsourcing can include outsourcing back-office or front-office functions. Back office functions include those that are not customer-facing, such as accounting and human resources. Front-office BPO involves outsourcing customer-facing functions like sales or customer service.

Three types of BPO exist. “Offshore” BPO means hiring an overseas company to run a business function. For example, a company in the United States may hire a BPO company in the Philippines. “Nearshore” outsourcing means hiring a BPO company in a nearby country, such as a Canadian company outsourcing to a U.S. company. Finally, “domestic” or “onshore” BPO means hiring a company within the company’s own country.

Business process outsourcing begins when a company determines it can gain a benefit from outsourcing a business function, such as marketing, accounting or supply chain management, to an external company. The company then begins researching different companies that specialize in performing the needed business function. Often, the searching company will contact more than one BPO company to determine the best fit.

Once a company has reached out to a considered BPO company, a conversation begins. Many BPO companies determine the needs of the client company, then tailor a solution to those unique needs. In this way, often, no BPO-client relationship is exactly the same. The BPO company will then draw up a contract, often called a master service agreement (MSA) or a service-level agreement (SLA) that gives a broad overview of the terms of the agreement.

Once the client company receives these broad contracts from considered BPO companies, its decision-makers decide which BPO company offers the best value and hires one. A backup BPO company may also be selected in case the primary BPO company is not able to deliver as expected.

Once a BPO company is hired, more granular agreements may be drawn up to cover how each project will be handled by the BPO company. Such a granular contract is often called a statement of work (SOW). The relationship then continues based on the specifications in the MSA, SLA and/or SOW. In particular, the SOW may be revisited and revised when needed to ensure an optimal ongoing relationship between the client and BPO provider.

There are numerous potential advantages to hiring a BPO company. Among them are greater operational flexibility, access to innovative technologies and top talent, cost savings, access to advanced and quick reporting, reduced risk, a better ability to respond to change and, ultimately, a competitive advantage. Here is a closer look at each of these benefits.

Greater Operational Flexibility

By outsourcing noncore competency functions within your business, such as marketing and HR, your personnel are free to focus exclusively on core competencies. In turn, this gives them time to be innovative and adaptive in their work.

Access to Innovative Technologies

To compete for clients against other BPO companies, most BPO companies specialize in one business function and invest in the latest and best technologies in that specialization. This often means companies that outsource to them gain access to the most innovative and best technologies in the industry, technologies they may not otherwise have the budget to implement internally or may not even know exist.

Access To Top Talent

Many BPO companies hire talent with extensive backgrounds and credentials in the area in which they specialize, such as HR or payroll. Hiring top talent means they can compete for clients against other BPO companies. It also means the businesses that hire them gain access to the expertise within that top talent.

Cost Savings

Many BPO companies exist or hire within countries with lower corporate income tax and acceptable incomes. As funds are saved by hiring from other countries, those savings are often passed along to businesses that outsource through them. In addition, many other costs can be saved by hiring a BPO company, including office rental costs, employee-used software fees and other overhead costs.

Access to Advanced and Quick Reporting

Access to advanced technologies like artificial intelligence (AI), machine learning (ML)and automations via BPO companies allow businesses to gain access to more advanced and quick reporting, including financial and cash flow forecasting.

Better Change Responses

By accessing top talent, innovative technologies, cost savings, greater internal flexibility and advanced reporting, companies are better able to adapt when their industries quickly or customer demands change. They may even be able to adapt before the changes hit to stay ahead of demand. For example, access to advanced reporting can help outsourcing companies forecast coming changes so they can adapt before they are forced to.

Specialized Risk Management

Companies that outsource business functions can potentially reduce risks by putting those areas of their businesses in the hands of tried and true experts who know how to avoid relevant risks. For example, if a company outsources its information technology (IT) function, the hired IT experts may know ways to mitigate risks with greater attention to detail than the outsourcing company’s current employees.

A Greater Competitive Advantage

With access to innovative technologies, specialized expertise, cost savings, advanced and quick reporting, specialized risk management and opportunities for greater operational flexibility, companies are better able to develop competitive edges against competitors that may not have such access.

Despite the numerous and impressive benefits to BPO, the disadvantages can be equally impressive if not managed correctly. Common disadvantages include public backlash, loss of control, communication breakdowns and hidden costs. Here is a closer look at these disadvantages.

Public Backlash

Some outsourcing companies hire talent from across the globe (offshoring) or nearby countries (nearshoring). In doing so, public perception may negatively affect an outsourcing business as customers or community members perceive the business is sacrificing domestic jobs. In addition, customers sometimes perceive lower-quality services or products when those services or products are fulfilled via nondomestic talent.

A Learning Curve

A hired BPO company must learn about the client company, its customers and what needs are to be fulfilled. This learning curve can create a disruption in the client company’s product or quality services, creating concerns among customers, shareholders or directors. For this reason, it is important to start slow with the outsourcing process and ask any BPO companies you’re considering hiring how they plan to mitigate this risk.

Loss of Control

When functions are run internally, managers can be put in place to ensure consistency and quality control. When outsourced, companies lose control over this oversight. For this reason, it is important to hire a well-vetted BPO company you can trust with your company’s reputation. Interviewing past customers before hiring a BPO company can help you learn about the quality control process that’s typically offered by the BPO company.

Communication Breakdowns

If not managed carefully, BPO can create a more siloed company. It is more difficult, for example, for internal engineers to talk to marketing talent if marketing is outsourced. That communication may not take place as fluidly, creating breakdowns in information flow that could hinder marketing’s ability to deliver what audiences need. If you outsource, a communication plan should be used to ensure the most fluid communication possible.

Hidden Costs in Contractual Agreements

When hiring a BPO company, outsourcing companies are required to sign a lengthy contract with much fine print around contingencies that may occur. Some of that fine print will likely include fees should certain circumstances arise or expected actions be performed (or not performed). Those fees can add up quickly. It is imperative to look over contracts thoroughly and with a legal understanding to avoid hidden costs that could pose a problem later.

Shared Reputational Risks

If a hired BPO company becomes entangled in a public relations nightmare, the reputation of the companies that hire them may suffer by association. For example, if a BPO company relies on grossly underpaid labor, its clients’ reputations may suffer due to the benefits they received via immorally outsourced labor. Before hiring a BPO company, vet its business practices thoroughly and include a commitment to moral practices in mutually signed contracts.

The following section offers three examples of business process outsourcing, including payroll, call center customer service and supply chain management. However, business process outsourcing can be helpful with a long list of business functions, including HR, marketing, accounts payable (A/P), research and development and sales, among others.

Payroll involves calculating and disseminating wages and taxes to workers and government agencies. In a nutshell, it starts with a list of employees and their status as a contractor or employee. Wages are calculated based on employment status, tax withholdings, paid time off (PTO) and more. Wages are often paid via direct deposit and pay stubs are provided to employees. Records are kept, estimated taxes are paid quarterly and taxes are often filed yearly .

Clearly, a lot of time and process goes into processing payroll. It requires not just paying talent but hiring experienced payroll talent to execute the ongoing work and avoid financial risk. Companies can outsource this process to save time, money and resources that can then be dedicated to their core competencies. By putting this process in expert hands, companies can also reduce the risk of penalties for payroll errors.

Call Center Customer Service

Call centers often work with customers to ensure they have the best experience with company services or products. The process involves answering customer questions and helping to resolve issues related to the company’s products or services. For the best outcome, call center personnel should be professional (even with upset customers), knowledgeable, personable, clear and able to balance meeting customer needs against company interests.

Because we live in a 24/7-on world, the greatest customer satisfaction is often achieved with a constant presence to support them. Many small businesses do not have the time, resources or funds to support customers 24/7. In addition to the constant demand for customer support, many companies don’t have the talent to meet other customer needs, like multilingual support. Call centers are often equipped with talent and resources to meet such needs.

Supply Chain Management

Supply chain management controls the process and flow involved in making products. For example, to make shoes, raw materials are sourced, sometimes from multiple sources across the globe. Next, the raw materials are sent to the company that makes the shoes. Then, the shoes are sent to the companies that distribute them to customers. All the while, inventories are managed so resources arrive on time but don’t cost extra storage, labor or other costs.

Supply chain management is a complex process that, if not done precisely, can cost companies their profit margins. The chosen partners in the supply chain can make or break a company’s legal and moral standing. Its management involves legal counsel, payment processing, sourcing partners, quality control, accounting procedures, specialized software and more. An experienced BPO company can manage these complexities while reducing risk.

Bottom Line

Business process outsourcing is outsourcing business functions to an external company. In doing so, companies can enjoy benefits, such as lowering overhead costs, gaining access to advanced reporting and innovative technologies, reducing risk, accessing specialized talent and better adapting to changing customer demands. However, it must be managed carefully to avoid pitfalls like siloed company communication, hidden costs and reputational damage.

What does business process outsourcing do?

Business process outsourcing (BPO) occurs when a business hires an external company, called a BPO company, to handle a business function that is traditionally handled internally. The hired BPO company may manage hiring talent, paying vendors, sourcing resources, handling legal compliance issues, monitoring for quality control, serving customers, implementing technology or other such tasks involved in the everyday duties of the business function.

What's an example of business process outsourcing?

An example of business process outsourcing (BPO) is when a company hires an external company to run its customer service call center. The BPO company hires and manages customer service professionals who learn about the client company’s offerings, then answer questions and provide support to its customers. This frees the client company to focus on its core competency while offering 24/7 support and lowering overhead costs.

What are the types of business process outsourcing?

Front-office business process outsourcing (BPO) means outsourcing customer-facing functions, such as marketing. Back-office BPO means outsourcing noncustomer-facing functions, such as accounting or HR. Offshore BPO means outsourcing a business function to a distant country. Nearshore BPO means hiring a BPO company from a neighboring country. Finally, domestic or onshore BPO means hiring a BPO company from within one’s own country.

Is business process outsourcing known by any other names?

Although the process is the same, business process outsourcing is sometimes referred to as managed services.

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Meaning of outsourcing in English

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• They recently signed a five-year outsourcing contract with the company .
• The business has been cutting costs through increased outsourcing of labour .
• Offshore outsourcing has become a major economic and political issue .
• advertisement
• employment agency
• reinstatement
• relocation expenses

outsourcing | Business English

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microbusiness

a very small company, especially a family-owned company employing only a few people

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The Outsourcing Manifesto: The History, Rise, and Potential Fall of the Outsourcing Industry

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This chapter provides a historical perspective not often shown where we can see aspects of outsourcing found throughout modern economics long before it came to be an industry on its own. The evolutionary story of outsourcing will be told within three main sections.

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Mederos, L.A. (2021). The Outsourcing Manifesto: The History, Rise, and Potential Fall of the Outsourcing Industry. In: The Future of Outsourcing. Palgrave Studies in Accounting and Finance Practice. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-71407-9_1

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Definition of outsource

transitive + intransitive

Examples of outsource in a Sentence

These examples are programmatically compiled from various online sources to illustrate current usage of the word 'outsource.' Any opinions expressed in the examples do not represent those of Merriam-Webster or its editors. Send us feedback about these examples.

Word History

1979, in the meaning defined above

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“Outsource.” Merriam-Webster.com Dictionary , Merriam-Webster, https://www.merriam-webster.com/dictionary/outsource. Accessed 27 Jun. 2024.

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Definition of outsourcing noun from the Oxford Advanced Learner's Dictionary

• outsourcing
• the outsourcing of IT work to private contractors

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Nearby words.

Offshoring vs. Outsourcing

Outsourcing refers to an organization contracting work out to a 3rd party, while offshoring refers to getting work done in a different country, usually to leverage cost advantages. It's possible to outsource work but not offshore it; for example, hiring an outside law firm to review contracts instead of maintaining an in-house staff of lawyers. It is also possible to offshore work but not outsource it; for example, a Dell customer service center in India to serve American clients. Offshore outsourcing is the practice of hiring a vendor to do the work offshore, usually to lower costs and take advantage of the vendor's expertise, economies of scale, and large and scalable labor pool.

Comparison chart

Overview and History

Outsourcing refers to the contracting out of an entire business function, a project, or certain activities to an external provider. The term entered the business lexicon in the 1980s. In the second half of the 20th century, as companies tended to grow larger and skills were required to be more and more specialized, companies found that external providers were often able to get work done faster and more efficiently owing to skills they possessed. This led to more hiring of external providers to manage business functions and projects where specialized skills were required.

Towards the end of the twentieth century, with improvements in shipping technology and telecommunications infrastructure, it became increasingly efficient to get work done in other geographical locations, especially in developing countries where wages are lower. This practice came to be known as offshoring. Not all offshore work was outsourced, however. Captive offshore refers to multinational corporations (MNCs) establishing subsidiaries in several countries and getting different types of work done in different countries. Factors that MNCs consider when offshoring include costs of factors of production (wages, raw material, transportation costs, utilities such as electricity), taxes (many countries offer subsidies to entice MNCs to set up shop) and skills available among the work force.

There are several reasons for companies to both offshore and outsource.

Outsourcing Benefits

Why do companies outsource? There are several reasons why a company might outsource. While this can be a politically sensitive topic, management experts generally agree that outsourcing - when done right - increases competitive advantage with a natural division of labor that evolves in any society. Reasons for outsourcing include:

• Cost advantage : Costs are arguably the chief motivation behind outsourcing. Often companies find that contracting work out to a 3rd party is cheaper.
• Focus on core competency :There are a lot of business functions in a company. For example, human resources, information technology, manufacturing, sales, marketing , payroll, accounting, finance , security, transportation and logistics among others. Most of these are not "core" to the company. A "core" activity is one which offers the company competitive advantage over its competitors. It is an activity that the company does better than the competition, which is the main reason its customers do business with the company. Having to handle non-core functions is a distraction, so many companies outsource them.
• Quality and Capability :Often companies don't have in-house expertise for certain activities. In these cases, it is more efficient to outsource, and resulting products and services tend to be of higher quality when provided by outsourcing vendors.
• Labor flexibility : Outsourcing allows a company to ramping up and down quickly as needed. For example, a company may need a large number software programming experts for 6-8 months to develop an application. It would be infeasible to hire people for only 6 months. Outsourcing, however, can provide flexibility so the company does not have to worry about hiring and firing.

Benefits of offshoring

Offshoring provides many of the same benefits as outsourcing, including:

• Cost savings : Companies usually offshore manufacturing or services to developing countries where wages are low, thus resulting in cost savings. These savings are passed on to the customers, shareholders and managers of these companies.
• Skills : The competitive advantage of nations often means that some countries or regions develop a much better ecosystem for certain types of industries. This means there is better availability of skilled human resources in that region for specific types of tasks. For example, India and the Phillipines have a large pool of English-speaking, college educated youth; as well as a mature training infrastructure; that makes it ideal for business process outsourcing. Therefore, many companies choose to offshore certain business functions (e.g. call centers for customer support) to these locations. These can either be captive or outsourced.

Note that you do not need to outsource in order to offshore. Captive offshore units are set up to leverage the benefits of offshoring without having to outsource to vendors. This is usually done when companies believe that their offshore centers for production/service will provide them with an edge over the competition.

Risks and Criticism

Offshoring and outsourcing have both been subject to a lot of criticism, especially from a political standpoint. Politicians and laid-off workers often blame offshoring for "stealing jobs". Most economists, however, agree that offshoring lowers costs for companies and passes on benefits to consumers and shareholders.

There are, however, risks associated with offshoring. These include project failure due to poor communication; civil or political unrest impacting production or service delivery; arbitrary changes in economic policy of governments may force unncessary restrictions on MNCs; and poor infrastructure in the developing country may affect quality or timeliness.

While the benefits of outsourcing and offshoring largely overlap, they do not face the same disadvantages. Outsourcing, when done within the country, does not face the same political criticism of loss of jobs. Risks associated with outsourcing can largely be attributed to the vendor's lack of familiarity with the client's business. Another risk is a lack of alignment of long-term business objectives of the client and the vendor.

Offshore Outsourcing

When outsourcing is combined with offshoring, not only is work contracted out to a third party, but it is also agreed that the work will be performed in a different country. The reasons are usually to take advantage of the benefits of outsourcing and offshoring both.

Benefits of offshore outsourcing

Offshore outsourcing combines the benefits of outsourcing, such as easier resource ramp up and ramp down, and more specialized skills; with the benefits of offshoring, such as lower costs and higher productivity.

In the past decade and a half of increasing globalization, offshoring has been the fastest growing segment of the outsourcing market. This is especially true in the case of manufacturing - with China being a leader - and information technology services, with India leading that space. Business process outsourcing is another area of offshoring that has grown tremendously.

Risks of offshore outsourcing

Just as offshore outsourcing combines the benefits, it is also susceptible to the risks of both business practices. Critics claim that these risks are magnified because of the complexity being multiplied. For example, while it can be challenging to work with an external organization for projects that require knowledge of your business operations, these challenges could increase manifold when members of the external organization are located in a different country. Risks include poor communication, incorrect setting of expectations and disconnected control structures.

Best Practices

There are several best practices that have evolved over the past two decades to mitigate risks and improve outcomes of projects that are offshored and outsourced. Many of these practices are related to business processes. Process maturity models like CMMi and Six-sigma measure not only the quality of processes that outsourcing vendors employ, but also how well companies monitor their processes, measure key metrics and how they continually improve these processes.

Industry Trends

On the whole, both outsourcing and offshoring are on the rise. The worldwide economic recession has forced companies to explore all options to increase efficiencies and cut costs. Companies are getting increasingly comfortable outsourcing (as well as offshoring) larger parts of their businesses as they realize they are not core.

Another trend - especially in information technology (IT services) outsourcing - is industry consolidation, with larger companies acquiring smaller vendors. For example, HP acquired EDS in 2008.

Political backlash has also been growing with unemployment rising in the developed world.

References and Further Reading

• wikipedia:Outsourcing
• wikipedia:Offshoring

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Outsourced Marketing | What Is It and Should You Do It?

Steve Eveleigh

When it comes to outsourced marketing, there are more choices than ‘Do I or don’t I?’ You can fully outsource all your marketing activity. You can supplement your in-house marketing team with an outsourced partner to upskill or get the resource needed to execute your goals. You can outsource certain marketing tasks. You can have a long-term outsourced partner or outsource just for short-term projects… 

In short, there are lots of options. What’s important is to make sure that the strategy you choose is aligned with your business goals.

Over 60% of B2B companies fully or partially outsourced their marketing. 1 Outsourcing allows businesses to take advantage of a range of marketing activities they might not be able to execute by themselves — because they don’t have either the expertise or the capacity in-house. 

Deciding to outsource your marketing can be a big decision, but it can yield many benefits if it’s right for you. In this article, we’ll explain what outsourced marketing is, the different options available and why companies choose to outsource.

What is outsourced marketing?

Outsourced marketing is the process of hiring an external agency or marketing company to handle your marketing efforts for you. There are two main ways to outsource your marketing: fully or partially.

Fully outsourced

In a fully outsourced model, a business outsources all their marketing to a marketing partner. Marketing companies generally offer a more comprehensive range of outsourced marketing services, provide a team of experts, and work faster, more flexibly and more efficiently.

The business outsourcing their marketing will remain closely involved, helping to set goals and review marketing activity, but the work is done by the outsourced partner. Businesses often choose to fully outsource when there is limited resource or expertise in-house, want to develop a long-term partnership with an outsourced partner, or have a view to move to a partially outsourced model as the business grows.

Partially outsourced

This is where a business outsources some of their marketing activities. This can be done in several ways.

• Outsourcing particular tasks, such as social media or content writing
• Bringing in outsourced support capacity to supplement in-house capacity, for example through a fractional CMO , a freelancer or digital marketing agency
• Enlisting outsourced expertise to help upskill and develop the in-house team
• Using an outsourced partner on a project-by-project basis.

This can happen when a company doesn’t have the internal resources to handle all aspects of its marketing, when it wants its in-house resource to focus on its core competency or when they’re getting started and want to build their brand presence quickly.

Who can I outsource to?

So if you want to outsource, who can you outsource to? An individual or a team. We’ve compared the types of marketing roles that you can outsource to…

Fractional CMOs and freelancers, as individuals, offer limited resources and capacity. They are often used to help businesses on a project-by-project basis or for a shorter period of time. 

Marketing agencies are often the choice for businesses looking for a longer term, closer partnership. By working on numerous projects over time, the business and the agency become closer aligned, creating a close working relationship, and delivering successful results over a longer period. Some agencies, however, prefer to work with businesses on certain projects rather than as a partner. 

Ultimately, the choice of how you outsource your marketing depends on your specific needs, goals, and resources.

What are the benefits?

Deciding whether to outsource depends on various factors, including your business’ size, budget, number of employees, and marketing goals. Let’s dive into a few scenarios where you might benefit from outsourcing your marketing.

• You need to grow your marketing function fast: Businesses starting out or looking to grow brand awareness quickly might need to grow their marketing function quickly. Outsourced expertise can get started quickly, without the need for businesses to recruit and build their marketing function in-house.
• You don’t want to commit to in-house resources: Recruiting resource and capacity in-house takes time and expense. If certain tasks will be repeated, bringing in technology and training people to execute these tasks over the long term can make sense. But outsourcing offers flexibility, scalability and quickly deployed capacity and expertise.
• You need to fill skills gaps: Businesses might have no marketing skills in-house or the expertise might be limited to certain areas. An outsourced partner can fill skill gaps or bring a comprehensive skillset through a full marketing team.  

Whichever strategy you choose, it’s vital to understand where you’re coming up short in your current marketing efforts to understand what you’re looking for as you advance. 

Some businesses might think, “Let’s just outsource, they’ll know what to do’. But this is a decision that needs careful consideration as it can impact your ROI, reputation, brand visibility and trustworthiness. 

What activities can be outsourced?

If you’ve decided to outsource your marketing needs, the next step is deciding which marketing activities you’ll outsource. Factors to consider include your in-house workload, skill sets, timelines, budget and so forth. You don’t have to outsource every component of your marketing strategy. You can outsource one, a combination of, or all of the following components.

Social media

As brands increasingly embrace social media, this is particularly important. Customers often contact your brand through social media or tag you in comments and posts. It’s public-facing and the most direct way to engage with your customers. When you outsource your social media, you can:

• choose an agency or social media strategist with a proven track record of getting results
• decide only to outsource certain social media activities, such as PPC campaigns 
• delegate one social media channel to a specialist third-party with experience in that channel.

Survey results indicate that content writing is the most outsourced (81%) marketing activity. 2 You can either hand off your entire content marketing strategy or outsource only content writing after you’ve developed the content marketing plan and brief. Whichever way you decide to go, there are benefits for your business:

• outsourcing your content writing gives you the gift of time since your marketing team no longer has to spend hours researching and writing content. 
• outsourcing your content writing to a content agency means you only pay for content when you need it and not the salary of a full-time in-house writer or team.
• when you outsource your content writing to a freelancer, you’re not limited to one or two writers — outsourcing gives you access to a pool of writers that can deliver content across many different fields.

Marketing strategy

A solid marketing strategy should cater to all stages of the buyer’s journey, from lead generation to email workflows. You can outsource your entire marketing strategy or execute it in-house after getting a strategy skeleton from an outsourced marketer or marketing agency that your in-house team can build on. However, when you outsource your marketing strategy:

• you can promote your product or service through different marketing strategies, whereas a full-time marketing team might only have the capacity to focus on a handful of strategies
• you leverage new talents when developing your marketing strategy, which can help you see the bigger picture
• you’ll have more chances to enter and promote your product into new markets.

Email marketing

Email marketing and email nurturing are essential elements of a successful marketing strategy. It’s also a more personalised form of marketing. Companies that nurture leads through inbound marketing close 50% more sales. 3  Outsourcing your email marketing:

• takes the manual and time-consuming load of creating and setting up lead-nurturing email workflows from your in-house team’s shoulders
• you no longer have to worry about formulating and maintaining KPIs and metrics among your in-house team — agencies already have these in place

Search engine optimisation (SEO)

80% of buyers will do an online search as the first step in their market research for a product or service. 4 Optimising your website content is crucial, as it can increase your chances of appearing in these search results. Outsourcing your SEO gets you:

• expertise from an SEO expert whose sole focus is to boost brand visibility through SEO best practices
• better tools and resources — agencies that specialise in SEO already have the software needed to track SEO campaigns and the people to handle all the campaign work
• a documented SEO content strategy that will be vital when having to pass down information for future strategies.

Research shows that 42% of people will leave a website if it has poor functionality. 5 That’s why tailormade always trumps off-the-rack, as it sets you apart from your competitors. It says: “I mean business”. Outsourcing web design gives you:

• access to experts while saving you the cost of appointing a web developer in-house
• professional maintenance and risk management are built into the service
• extra resources within a flexible model.

PPC campaigns

PPC campaigns can optimise sales and increase your business revenue if done right. Yet many companies don’t know how to utilise PPC and lose out on the gains of these ads. Outsourcing PPC campaigns to a professional ad agency will get you the desired results as they:

• offer fast and more reliable results — a PPC ad agency has the expertise to implement the campaign successfully
• covers keywords research, campaign setup, optimisation, and reporting — this is especially beneficial if you’re an SME with limited time and resources
• maximise revenue — campaigns are set up to yield a high ROI.

Choosing the right outsourced marketing for you

Choosing the right outsourced marketing is, first and foremost, about forming a partnership. You want to ensure that whoever you work with — digital agency, fractional CMO or freelancer — is aligned with your business goals and marketing aims. You can measure their performance and get an overview of what they’re doing to ensure you stay in the loop and collaborate with them more effectively.

Done right, outsourcing your marketing can help you free up your time and save money — particularly if you want to develop a long term partnership with an agency. You get expert help from day one, technology and expertise without any upfront investment and enhanced ROI without having to recruit and train anyone yourself. You can focus on other aspects of your business while they handle your marketing. 

As an expert digital agency, Gripped can work with your in-house team, adding our own specialists in web development, content writing, and sales and lead generation to your strategy. If you’re a B2B, SaaS or tech business looking for a partner to help you meet your marketing goals, we can help. Get a free growth audit today

1   MARKETING MIX REPORT  

2   Types Of Content Creation Services Outsourced By Marketing Professionals Worldwide In 2020.

3   Consumer and Lead Nurturing .

4   Gartner Says 80% of B2B Sales Interactions Between Suppliers and Buyers Will Occur in Digital Channels by 2025 .

5   Half of Consumers Consider a Company’s Website Design Crucial to Their Opinion of that Brand .