The term “outsourcing” comes from the word combination "outer source using". Outsourcing services were initiated by Alfred Sloan, the head of General Motors in the 1930s, who used it to rebuild the company.
What is outsourcing in business?
Outsourcing is the transfer of a company's functions and tasks to other organizations. Most often, non-core tasks are outsourced to specialized companies, but there are also cases of basic functions delegation.
By outsourcing, the company releases itself from responsibilities and saves both finances and time by concentrating on the main business tasks.
It’s important to evaluate the work performed by outsourcers. And it’s necessary to establish certain rules in the contract to settle disputes.
What do companies outsource and why?
Most often, outsourcing services are used by companies that need to focus all their energy on competitive advantages. Some tasks can also be outsourced by small companies.
Outsourcing helps if there is no possibility to expand the staff, but you need the help of highly skilled workers.
For example, Kodak outsourced all IT tasks to IBM in the early 1990s. Thus, IBM agreed to do most of the data processing work for one of the largest photo companies. At the time of the deal, Kodak hoped to cut half of the costs of the outsourced tasks.
With outsourcing, it is possible to replace not only one department, but several at once. And you get the benefits: saving money on staff, using the capacity of third parties, and focusing on the competitive advantage.
IKEA is primarily engaged in retail (several hundred stores around the world) and, working with a multitude of suppliers, has almost no in-house production. The company has also outsourced logistics.
There are examples of global companies that have outsourced some of their core tasks.
Ford, following in the footsteps of its main competitor at that time, General Motors, now manufactures one-third of its products using its own facilities. The other two-thirds are handled by outsourcers.
Outsourcing can be found in animation: famous cartoons were not drawn in the countries in which they were created. And most often this was due to the difference in salary for animators.
60 out of 100 episodes of "Duck Tales" were drawn in Japan (TMS Entertainment), while Disney handled production, design, scripting, soundtracks, and voice-over in the United States. The rest of the episodes were drawn jointly by Taiwanese (Wang Film Productions) and Australian (Burbank Films) companies.
American "The Simpsons", "Adventure Time", and "Gravity Falls" were drawn in South Korea.
The profitability of outsourcing companies can also be viewed from a geographical perspective. Often, production in a third country is much cheaper than in the country where the company is located.
In 2004, Apple closed its last factory in the United States and relocated production to East Asia. Today, there is also a factory in America, but most of the production is located in China. This allows Apple to save money through taxation, hourly rates, and labor market supply and demand.
The essence of third-party services is that you use them only when you need them. Accordingly, you pay only for the amount of work done, rather than having to pay salaries and deal with the tax authorities by hiring another employee.
The difference between outsourcing and outstaffing
Outstaff vs outsource vs freelance: the concepts of outsourcing, freelance, and outstaffing are similar, because in each of these terms you outsource your work. Outstaff vs outsource vs freelance
Concluding a contract with an outsourcing company, the customer doesn't set requirements for specific outsourcer employees who will perform the tasks. The main purpose is to get the result in the right quality and at the right time according to the contract. Such relationships are long-term.
Outstaffing involves the work of specific specialists from a specialized company. This contract describes an employee who will perform certain tasks in the assigned work position. In this case, the number of hours worked is important. Most often, this type of employment relationship is long-term.
If you need to do a one-time job without hiring new highly qualified employees, then freelancing is the solution. You can find freelancers on specialized sites.
Types of outsourcing
Outsourcing types vary by tasks and may not be limited to the following list
- Manufacturing outsourcing
This type of outsourcing is the ability to use the production facilities of another organization and direct your own work into engineering, design, sales, etc.
- Accounting and financial outsourcing
Not only large but also small organizations can outsource accounting and financial tasks. This type of cooperation allows you to decrease the cost of creating an accounting department.
- Legal outsourcing
Outsourcers can be engaged to solve labor and tax law issues, as well as during the reorganization, closing down or registration of an organization. The services of a qualified lawyer can be used without hiring one on the staff.
- IT outsourcing
Hardware management, software development, data processing, and anything else related to information technology can be outsourced to specialized companies.
- Logistics outsourcing
This is a quite popular type of outsourcing in which a contractor performs the functions of transportation, packaging, labeling, and storage. For example, it can be modern delivery services.
What is outsource company and how to choose an outsourcer?
What is an outsourcer? This is a company that can perform some business functions for you. Here's a brief step-by-step process of choosing an outsourcer:
1. Analyzing the need for outsourcing
- Analyze the cost of your own staff
- Analyze the cost of outsourcing
2. Selecting an outsourcing company
- Make a list of requirements for an outsourcer
- Study the market and choose several outsourcers
- Analyze the outsourcer's offer and customer feedback
- Choose an outsourcer and discuss the contract
All relations between the customer and the outsourcer are regulated by a contract with the following paragraphs:
- the subject of the agreement;
- the number of involved employees and their qualifications;
- the amount of work to be performed;
- the cost of the contractor's services;
- payment procedure;
- rights and obligations of the parties;
- term of the agreement;
- service acceptance procedure.
4. Organization of work with an outsourcing company
5. Share information about the tasks
6. Plan the work according to the contract
7. Control of outsourcing services
Even at the stage of discussing the terms of the contract, it is important to establish a system for monitoring the implementation of tasks. This will allow you to identify mistakes in the future, make adjustments to the work or stop working with the outsourcer.
Pros and cons of outsourcing
So, let's summarize the advantages of outsourcing and its disadvantages.
Advantages of outsourcing:
- the ability to concentrate on the company's main tasks and give outsourcers tasks that they do better than others;
- improving the quality of additional services or obtaining better results from highly qualified employees;
- the use of outsourcing capacities which are unavailable to the client company;
- cost savings due to the specifics of the labor market in different countries (geographical outsourcing);
- guaranteed completion of the work on time;
- reduction of liabilities to tax authorities and zero obligations to pay salaries.
Disadvantages of outsourcing:
- dependence on an outsourcer, the need to introduce new employees to the nuances of the work;
- the unscrupulousness of the outsourcer;
- risk of confidential information disclosure;
- the motivation to do the work by the company's own employees is higher. This is influenced by corporate culture.
Сhoosing between outsourcing and in-house, consider how much you can gain from using the resources of a third party. And if outsourcing is not right for you, you can always choose a different contractor or refuse to outsource at all.