Instead of hiring workers, a business may choose to outsource the provision of services and labor to other businesses or people.
What is Outsourcing?
When a business contracts for goods and labor from beyond its own borders rather than recruiting staff, erecting facilities, or controlling its supply chain, it is said to be outsourcing. Companies that provide outsourcing services offshore can reduce labor costs in countries with lower living costs and take advantage of tax breaks.
Offshore outsourcing can also give companies access to supply chain management and resources not available in the U.S. Companies can also outsource back-office business functions such as human resources (HR) and information technology (IT), or front-office functions such as customer support.
How does outsourcing work?
Most people know that many big tech companies outsource the production and assembly of their products to other countries like China and India because it gives them access to more labor that will work for lower wages.
But companies can outsource all types of business functions, both domestically and abroad, to other countries. Outsourcing can mean sending product production abroad. Or it could mean hiring a delivery service to transport products and materials (supply chain management).
Companies can also outsource entire departments such as information technology (IT), software development and customer service. Or they can outsource work to specialists such as lawyers, accountants or marketing experts.
Why do companies resort to outsourcing?
The main reason the company outsources jobs is to reduce costs. Companies can outsource manufacturing jobs to countries with lower wages and tax benefits. Companies can produce more products or services for less, creating economies of scale.
Small businesses that cannot afford to hire full-time professionals can also access expertise through outsourcing. For example, small businesses can outsource accounting because hiring an accounting firm is more cost-effective than hiring full-time full-time accountants. This practice is also common for legal needs.
Outsourcing day-to-day operations such as product delivery, customer support call centers, and manufacturing can allow companies to focus more resources on their key competencies (the core business goal), such as video game creation or shoe design, for example.
Types of outsourcing
Today, companies outsource all types of business processes. This led to the emergence of business process outsourcing (BPO) companies. BPO companies provide outsourcing services by connecting companies with outsourcing providers.
When a company outsources domestically, it is often referred to as onshoring. Companies outsource business procedures to other companies on land because it’s easier and more cost-effective than building entire departments in-house.
Outsourcing jobs to another country is called offshoring. The United States has a high cost of living, which usually results in higher wages. Businesses often take advantage of cost savings by using emerging markets with lower labor costs, such as India or China, as labor.
Offshore outsourcing to a country close to the United States, such as Mexico or Canada, is called nearshoring. Many jobs in the automaker have been moved to Mexico because of lower labor costs. Outsourcing to a distant country such as India, China or Malaysia is called stuffing. Many call centers and customer service departments have been relocated to India and the Philippines because workers in those countries speak English and work for lower wages.
The pros and cons of outsourcing
Pros:
Increased efficiency: Outsourcing service providers specializing in any process or service can offer higher quality products and services, resulting in the correct performance of the work the first time.
Cost savings: Outsourcing business processes is cheaper than it would cost internally can free up money to invest in other areas of the business. Access to expertise: Outsourcing can give a firm access to specialists or funds that it may not have internally or that it cannot afford to develop on its own.
Competitive advantage: Reducing production and/or service costs may allow a company to charge less for its goods or services, giving it an advantage over other companies in the same industry. If a company can sell goods or services cheaper, it will typically sell more goods and services than other companies.
Cons:
Unemployment: Some economists blame outsourcing for domestic unemployment because it sends many jobs abroad. But others argue that many jobs simply no longer exist because of advances in technology (such as robots building cars).
Leak: Outsourcing providers that work for many companies in the same industry can steal information. They can sell intellectual property or trade secrets to competing companies or use that information to create their own products.
Lack of quality control: Outsourcing too many players can make it difficult for companies to track the quality of products they produce. Savings cuts: Wages in other countries are rising as their economies improve. This trend makes outsourcing less profitable than it once was.