Outsourcing is the transfer of an internal business function, process or project to a business partner. The following are illustrative examples.
ManufacturingShifting production to a contract manufacturer, often in another country with a lower cost base. This is extremely common in industries such as fashion whereby firms view their core capabilities as design and marketing with manufacturing outsourced to partners.
Customer SupportOutsourcing customer support functions such as call center services to a firm that specializes in these processes. When customer support is outsourced to a foreign country, it is common for customers to notice due to language differences.Outsourcing human resource management processes or the entire function. For example, it is quite common to outsource payroll processing, benefits management and training.
LegalIt is common for a firm to maintain a minimal legal team and outsource legal matters and processes to law firms. Law firms themselves commonly outsource processes to legal service firms in foreign countries to reduce costs.Outsourcing the management of facilities such as offices and data centers to a third party. This is typically done when facility management capabilities such as security, maintenance and building operations are viewed as non-core capabilities.
The outsourcing of marketing functions in areas such as design, data analytics, market research, creatives, advertising, lead management and sales. For example, a firm might contract a market research firm to report brand and customer experience metrics on a weekly basis.Outsourcing the development, operations and support of information technology. For example, an IT service company might completely support the systems, applications and infrastructure of a firm. IT service companies commonly follow standard service management practices with a help desk and service level agreement.
Business ProcessesIt is most common to outsource processes such as human resources or customer support that can be standardized across industries. It is also possible to outsource business processes that are specific to your firm. This is typically done when a process is labor intensive. For example, a newspaper that needs to manually review comments for spam might outsource this process to reduce costs.
Process Outsourcing vs Project OutsourcingProcess outsourcing applies to a repeated business function such as customer service. Project outsourcing applies to a one time process that creates a series of deliverables such as a software development project.
Outsourcing vs OffshoringOutsourcing is the transfer of a business process or project to a third party. Offshoring is the transfer of a business process to a foreign country. Offshoring can be a type of outsourcing if you are transferring things to another company. It is also common for offshoring to be done as a captive model whereby you invest in capabilities in another country that you control. In other words, offshoring isn't necessarily outsourcing because it is common to offshore to organizations that you own.
Outsourcing vs InsourcingInsourcing is the opposite of outsourcing. The term usually applies to taking a function that was outsourced and bringing it in-house such that work is performed by your employees. For example, a small fashion company may begin by using contract manufacturers but may decide to build its own manufacturing facilities as it grows.
Outsourcing vs BPOBusiness process outsourcing, or BPO, is a common term for outsourcing at the process level. This can be contrasted with outsourcing a project such as a construction project.
Outsourcing vs PrivatizationWhen outsourcing is done by a government, it is known as privatization because this represents a transfer of responsibilities from the public to private sector. This can be controversial because it may create lower quality jobs than the public sector. Private firms are motivated by profits while public services are mandated to serve the public good. This can produce very different results. In some cases, privatization resembles cronyism whereby important public infrastructure is transferred to the friends of the government. Privatization can also lead to a monopoly. For example, a firm may be sold the water infrastructure of a city on the premise that they can lower prices. Once in control, they may raise prices over time as they have no competition.
Advantages of OutsourcingThere are several potential advantages to outsourcing:CostOutsourcing is often done to reduce costs. For example, outsourcing to a country with lower labor costs.Customer ServiceOutsourcing makes it clear that business units are customers. This can be contrasted with an internal function whereby users of a service may be viewed as peers. For example, an internal IT team may be viewed as inflexible and difficult to deal with by business units such that they prefer the services provided by external partners.Risk TransferOutsourcing often results in the transfer of risks to a partner. For example, a partner may provide a service level agreement whereby there are penalties for certain types of failures.ScaleThe ability to scale up and down as required. For example, a firm with an IT department of 30 people can't easily double its workload. If you outsource to an IT services company with 70,000 employees they can easily scale up and down to handle any workload.Know-howTransferring processes and projects to a vendor that has more know-how in a particular area than your internal teams. For example, outsourcing digital advertising campaigns to a firm with sophisticated capabilities in this area.FocusTransferring functions that you view as non-core in order to concentrate on areas where you create the most value. For example, a design firm filled with creative people that outsources functions such as accounting that is doesn't view as creative.
Disadvantages of OutsourcingThere are several common disadvantages to outsourcing:Vendor Lock-inOutsourcing can be very sticky such that it is difficult to change partners. It is common for outsourcing partners to integrate with your firm, control your data and understand your processes better than you do. When you become completely dependent on a partner they may feel free to raise prices and/or reduce quality as they know it is difficult for you to leave.RiskAlthough outsourcing typically transfers a number of risks, it also typically creates a large number of secondary risks. For example, an IT function might be transferred from a nation with a highly stable political environment and developed IT infrastructure to a nation with unstable politics and unreliable infrastructure.Management ControlAn internal function can be completely directed and controlled by management. This is not true of an external partner. If you decide you want something changed at a partner company, this can require complex negotiations and a change in commercial terms.CultureIn some cases, relationships between firms and their outsourcing partners become negative due to differences in organizational culture.SustainabilityFirms may outsource to nations with low environmental, safety and quality of life standards. This is increasing viewed as a risk as firms are accountable for the full impact of their operations and can't bypass accountability by outsourcing it.
This is the complete list of articles we have written about procurement.
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