What is outsourcing? Definition

Outsourcing is a strategic management model wherein business processes are transferred to another company. The concept is: to let a third party service provider perform the management and/or day-to-day execution of one or more business functions. This third party service provider is Insourcing those same processes. Outsourcing occurs when a company uses an outside firm to provide a necessary business function that might otherwise be done in-house.

It is different from Subcontracting, because the function is provided on an ongoing basis, rather than for a specific project. It can be provided on the same or another location, in the same country or in a separate country (Offshoring).

In its most advanced form, outsourcing makes it possible to build a large, entirely virtual company with only a single employee: the entrepreneur himself.

Why business process outsourcing? Main Motives

The most important motives for outsourcing are:

1. To make an organization more competitive, by staying focused on its Core Competence.
2. To achieve cost reduction and efficiency.
3. Access to special resources or capabilities. Compare: 3rd Party Logistics (3PL)
4. To stimulate entrepreneurship in small organizational entities.

Outsourcing business models

At least three business process outsourcing models can be distinguished:

1. Shared Service Center. (See below)
2. Spin-off. This spin-off company leaves the parent company to specialize in certain activities which are outsourced by the parent company.
3. Outsourcing to an external organization. Compare: Organization Chart.

Other Potential Benefits of Outsourcing

• Renewed focus on core business.
• Mitigation of risks by reliance on an expert.
• Improved customer satisfaction through improved processes not part of the enterprise’s culture or experience.
• Ability to reward workers with career opportunities in a specialty company.
• Project improvement.
• Service improvements.
• Skills upgrade.
• Skills retention.
• Skills access.
• Technology infusion.
• Cost accounting and overall visibility of accounting and performance in a business process.
• Cost reduction.
• Management of volatility in costs through financial engineering.
• Asset conversion.
• Avoidance of capital investment.