OK, so you want to know what outsourcing is? In the broadest sense, almost everything in business is outsourced. Think about it. When a company buys parts from a supplier to build its own products, it is Outsourcing. When it hires a cleaning crew to clean its offices, it is outsourcing that service. When a construction firm hires a subcontractor, it is Outsourcing. When a corporation hires an executive search firm, it is Outsourcing that responsibility. Accounting, security services, advertising, IT networking, payroll services, legal counseling, market research, manufacturing (Apple doesn’t even build its own computers. That task is outsourced to a company you’ve never heard of.), insurance, landscaping, engineering and customer service—the list of Outsourcing is never ending. So what constitutes Outsourcing? Well, that depends on your point of view. To help structure our understanding of Outsourcing, here are three different definitions to consider:
Basic Definition:
Outsourcing is the transfer of any business function or service to external vendors, suppliers or consultants that was previously or potentially performed in-house. “The company’s entire business model was based on Outsourcing all of its operations to a variety of service providers.”
Tactical Definition:
Outsourcing is a business tactic to reduce long-term costs, liability and overhead by contracting out business processes to a specialized third-party. “The corporation is determined that Outsourcing its entire R&D department could save millions of dollars.”
Political Definition:
The collective Outsourcing of jobs overseas to offshore countries as a result of rising labor costs and the long-term legacy costs associated with economic and market factors. “U.S. companies have been Outsourcing IT jobs to India and China for the last ten years at the expense of customer service.”
Types of outsourcing
The evolution of Outsourcing has led to a wide variety of Outsourcing services today. With a wide list of Outsourcing services, it is important in learning – What is outsourcing, to uncover what the different types exactly are. Therefore, in this section, types of Outsourcing will be discussed.
In the 19th and early 20th centuries, companies did not use Outsourcing as a business practice like today. There was no IT outsourcing at all, in fact, Outsourcing was not even formally identified as a business strategy until 1989. The only type of Outsourcing that really occurred during this period was when companies hired external suppliers for ancillary services. Unaware of the possible benefits of outsourcing, this early Outsourcing only occurred because most organizations were not completely self-sufficient; they outsourced the functions for which they had little to no competency internally. Publishers, for example, would often outsource printing and fulfillment services. Whereas today, Outsourcing print needs is simply a business strategy, as Outsourcing is a way for organizations to reduce costs. Also, Outsourcing takes many more forms today. Sticking with the print example, the forms of Outsourcing range from organizations Outsourcing the placement of printers to Outsourcing printing and publishing jobs completely and on a print-on-demand basis. However, Outsourcing as a business strategy only started to emerge during the Industrial Revolution.
The Industrial Revolution brought us specialization which in time brought us Outsourcing and changed the way companies did business. During this period, companies started to answer that seemingly heavy question – why outsource? Here, Outsourcing more services occurred because there was a rapid increase in the production of goods. The market for goods quickly expanded and profits were like never before. This led more and more managers to ask and discover What is outsourcing? And here, companies started Outsourcing accounting, insurance, engineering, and legal needs to specialized firms. Also at this point in time, Outsourcing to such specialized firms only took place within the home country unlike today where offshoring is a popular business practice.
Outsourcing support services appeared to be the next round of Outsourcing services. By the 1990s, organizations began to focus more on cost-saving strategies. This entailed functions necessary to run a company, but not specifically related to the core business. Here, managers contracted emerging specialized companies to deliver Outsourcing services such as accounting, human resources, data processing, internal mail distribution, security, and maintenance work. These specific Outsourcing services are still highly relevant today and commonly involved in an answer to What is outsourcing?
Unlike the 19th and early 20th centuries, today, there are many different types of Outsourcing services that managers should understand when wondering why outsource services anyway? These Outsourcing services are often grouped into five main categories: professional process, manufacturing, process-specific, operational and project Outsourcing. These types of Outsourcing services can also now be found outside of the country. Today, companies from the United States outsource to specialized units, organizations and individuals from all over the globe. This type of Outsourcing can be referred to as offshoring, nearshoring or reshoring depending on the location. With more and more types of Outsourcing services arising, Outsourcing in general has continued to grow in popularity as companies look to reduce business costs while improving performance.
Professional Outsourcing
Professional Outsourcing includes accounting, legal, purchasing, information technology (IT), IT or administrative support and other specialized services. This is the most common area for these specific types of Outsourcing services, as there is a potentially high cost savings associated with this type of arrangement. The company pays only for services actually provided while having access to high quality resources, which significantly reduces overhead costs.
IT Outsourcing
IT outsourcing, a type of professional Outsourcing, is one of the more common services outsourced today. It refers to the practice of seeking technology related resources or subcontracting outside of an organization for all or part of an informational technology function. Companies use IT outsourcing for functions ranging from infrastructure to software development, maintenance and support. Almost every type of business today has IT needs or at least deals with technology on some level, which makes it so commonly outsourced. A good example of IT outsourcing would be if a company outsources its IT management because it is less expensive to contract a third party to do so than it would be to build its own in-house IT team. Or, an enterprise might outsource all of its data storage needs because it cannot afford to or simply does not want to buy and maintain its own data storage devices. These two examples are common for smaller or medium size organizations. Most large businesses only outsource a portion of any given IT function.
IT outsourcing is its own narrow field as businesses can also be involved in external domestic IT outsourcing and external international IT outsourcing. External domestic IT outsourcing is often termed the baseline stage in the evolution of IT outsourcing. With external domestic IT outsourcing, companies enter into an Outsourcing relationship with a domestic IT provider. Kodak’s move to outsource its IT needs to IBM in 1989 is an example of such an IT outsourcing relationship. Today however, companies are no longer restricted to domestic IT outsourcing providers, which is where external international IT outsourcing providers come in to play. Today’s wireless wonder known as the Internet as well as low communication costs provide a basis for transferring IT activities to almost anywhere in the world. This means internal IT outsourcing relationships are able to exist wherever the IT provider is located, which could be thousands of miles away.
Multisourcing
Multisourcing is another important term and provision of IT outsourcing worth exploring more. Multisourcing is a term that can apply to any business area, but is most commonly used when referring to IT outsourcing and IT services, as it is the blending of business and IT services from the main set of internal and external providers in the pursuit of business goals. It was first introduced by a market technology research firm in 2005 and is most frequently used by large enterprises, where IT operations and technology infrastructure are contracted to multiple vendors. This specific type of Outsourcing has recently become popular as multi-sourcing leverages several “best-of-breed” specialist teams that are expert in and focus on a single IT management function. Multisourcing is also known to be outcome-focused, well integrated and operates in a “partner” relationship manner, which gives it better visibility into real project status information as well as little to no conflict of interests between functions. However, multisourcing requires you to have a strategy, a network of relationships and governance as well as requires creating measurements that matter.
Manufacturer Outsourcing
The term “Outsourcing” became popular in the U.S. near the turn of the 21st century and was widely adopted and forged in the manufacturing industries. This mainly involved the transferring of blue collar jobs to a third party for various reasons such as expertise, human capital, time to market and cost factors. Outsourcing since has evolved to include white collar jobs for many of the same reasons the manufacturing industries outsourced their blue collar jobs.
Zooming back in on the main sectors of Outsourcing, manufacturer Outsourcing is another common Outsourcing service today that companies involving the production of goods should understand when asking What is outsourcing, what are the types and why outsource these services anyway? Manufacturer Outsourcing services are usually quite industry-specific. An automobile manufacturer for example, can have an Outsourcing arrangement for building and installing windows in all their models. Such outsourcing arrangements can result in significant cost savings and reduced assembly time. The only primary risk of this type of Outsourcing would be quality issues and perhaps interruption of the production line. Many believe manufacturer Outsourcing is also essential for small and mid-size to survive today’s non-stop competitive market. Without this type of Outsourcing, companies simply lack the economies of scale that enable them to compete with larger competitors, as not many companies have the ability to actually invest in and continuously upgrade equipment, personnel and process technology necessary in order to compete in a market where product lifecycles are shrinking.
Process-Specific Outsourcing
Other Outsourcing services can be specific to a process or internal procedure, which is commonly referred to as process-specific Outsourcing. Today, it is very common to outsource specific operation-related aspects to other companies or units that specialize in that specific service. For example, a bakery can outsource the delivery of a packaged cake to a courier company like UPS or FedEx. Such an Outsourcing contract would then involve details on delivery timelines, customer contacts and costs, which then allows each company to focus on its strength and improve customer service all while reducing costs and time. Process Outsourcing is also used to describe the practice of handing over control of public sector services such as (fire, police, armed forces, etc.) to for-profit corporations.
BPO
Besides professional process Outsourcing, manufacturer Outsourcing and process-specific Outsourcing, there is also Outsourcing services for operational activities. This specific type of Outsourcing is more common within a manufacturing context than in other industries, as the nature of manufacturing provides opportunities for specific operational activities to be handled outside of companies. For example, machine maintenance and equipment repair can be acquired through Outsourcing services or even specialized IT outsourcing services that specialize in that specific type of equipment or machinery. Other types of operational activities can include landscaping, cleaning services, facilities maintenance or property management.
Project Outsourcing
Sometimes companies have trouble managing one of their projects or even just completing a portion of a specific project. In such a case, companies can project outsource. There are individuals and specialized units that specialize in project management that companies can outsource to. These Outsourcing services can be contracted to either manage entire projects or complete portions of projects. There may be a number of reasons why companies would want to outsource such a function, especially because there are many benefits of outsourcing parts of projects, but project outsourcing most often occurs because companies simply do not have enough available people in house or enough skills, or funds to do it on their own. It’s a more appealing choice than taking the time and money to contract someone in house and long term or even to train someone, especially if it is on a function that is commonly dealt with by IT outsourcing. Companies need to understand these benefits of outsourcing when learning What is outsourcing exactly and what are all the benefits of outsourcing, as it thus saves time and money.
Offshore Outsourcing
In the 19th and early 20th century, it was normally unheard of to outsource to a specialized unit, individual or specialized company outside of that country. Today however, the notion of Outsourcing (and especially IT outsourcing) outside country lines is highly common and even encouraged as a smart business strategy. Such business practices are referred to as offshoring, nearshoring and also reshoring depending on the location. It is important to understand the differences between each.
The practice of offshoring means having the outsourced business functions done in another country. This type of Outsourcing grew in popularity before nearshoring and reshoring did. Work is often offshored in order to reduce labor expenses. Sometimes outsourcing is used as a strategic way to enter new markets and tap talent unavailable domestically or as an attempt to overcome current regulations within the home country that prohibit certain activities. India, Indonesia and China have emerged as dominant countries for Outsourcing offshore. A major reason why offshoring became possible and quite appealing to U.S. industries was due to the global ubiquity of the Internet and massive telecommunications capacity in the 90s and on.
Reshoring
In the recent past, companies thought sending manufacturing jobs from the US to areas like China and India were low-cost, and a no-brainer Outsourcing move. However, now many of these manufacturers are beginning to realize that offshoring production services to countries like China and India may not be as cost-effective. As companies asked the question – What is outsourcing, more and more, this realization led US-based companies to start bringing their offshore manufacturing capacity and jobs back home. This process is referred to as reshoring. It can be summed up as the reversal of Outsourcing or the transfer of a business operation back to its home country. There are some benefits to reshoring, such as the rising cost of oil, which has impacted shipping costs is not a problem with reshoring. Companies also have to account for duties, custom charges, long shipping times and time delays with offshoring, which adds stress to cash flow and can even increase the cost of goods for consumers or businesses. Some Companies go even further and do what is called insourcing—the opposite of Outsourcing. This entails bringing previously outsourced processes handled by third-party firms in-house, and is sometimes accomplished via vertical integration.
Nearshoring
The practice of offshoring means having the outsourced business functions done in another country. This type of Outsourcing grew in popularity before nearshoring and reshoring did. Work is often offshored in order to reduce labor expenses. Sometimes outsourcing is used as a strategic way to enter new markets and tap talent unavailable domestically or as an attempt to overcome current regulations within the home country that prohibit certain activities. India, Indonesia and China have emerged as dominant countries for Outsourcing offshore. A major reason why offshoring became possible and quite appealing to U.S. industries was due to the global ubiquity of the Internet and massive telecommunications capacity in the 90s and on.
A recent and rapidly growing Outsourcing trend is the process of nearshoring. Rather than reshore services back to the US, companies have begun to move business functions to a country geographically closer with a closer time zone or economic structure to the company’s home country. This is a means of cutting costs and improving services. Basically, nearshoring combines the benefits of outsourcing offshore and the benefits of reshoring to create a strategy that cuts costs and improves services (only two of the many benefits of outsourcing, as stated). Latin American countries are proving to be dominant players in this type of Outsourcing for US companies. Specifically, the up-in-comers are Costa Rica, Columbia, and Chile. Nearshoring to this area is also only becoming more appealing to US companies as Latin America’s time zone and proximity to the US offers opportunities including lower costs, greater speed-to-market, and ease of doing business like shorter travel times and no early or late work hours. However, many are curious of the future of nearshore Outsourcing and believe it is very much in the hands of Mexico, Brazil and Argentina (which are well-established nations in the Outsourcing market) in that they must address the political, economic and social risks, which could threaten nearshoring business. As market trends, the economy, technology, cost of oil, and labor practices continue to change, businesses will continue to tweak their Outsourcing business strategies accordingly, as they have done since the 18th century.
