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Outsourcing refers to contracting of existing business functions and processes of one organization or corporation to a totally independent organization. The outsourcing organization should cease all internal production or management of the functions and processes, instead consider it as a purchased service or services.
Depending on the outsourcing deal agreed upon by both companies, outsourcing may also involve transfer of employees of outsourcing companies to their outsourcing partners. It has been known that outsourcing help business organizations improve their performance on core competencies. It also addresses the issue on shortage of skill of current employees on areas that they are outsourcing.
Those business organizations that want to outsource are seeking to realize the following benefits or find solutions to the following issues:
• Cost-saving – outsourcing companies seek to lower the overall business cost. This involves reduction of scope, re-defining quality levels, re-negotiation, re-pricing, cost re-structuring, and training costs. These low-cost services can be accessed by outsourcing to countries with regular wages significantly lower than what is offered in countries of companies that want to outsource.
• Focus on core business functions – Resources such as people, investment, and infrastructure can finally be delegated to focus on the development of core businesses. For example, most organizations outsource their IT and technical support to offshore companies specializing in IT services.
• Cost restructuring – Outsourcing help change the balance between fixed costs and variable costs by offering a bold move from fixed cost to variable cost and by making sure that variable costs can be more predictable.
• Quality improvement – outsourcing can aid organizations and companies in the improvement of quality by contracting out the service to companies offering new service-level agreement
• Knowledge- Contracting out part of the company or business can also provide the organization wider access to knowledge and experience
• Contract – As compared to internal services, outsourcing services are provided within a legally binding contract involving legal redress and financial penalties.
• Access to talent – A chance for better access to a bigger talent pool especially in the field of engineering, information technology, and science
• Operational expertise – Access to operational expertise that would be otherwise time consuming to develop and enhance locally
• Catalyst for change – A business organization can consider an outsourcing deal to be a major step towards business strategy
• Reduction of time to market – There is a significant acceleration in the production or development of a product or service through the additional capabilities brought about by the supplier
• Tax Benefit – Destination countries offer tax breaks and incentives to counter the high corporate taxes offered in the source country
• Improves capacity for innovation – companies are given the chance to use the external knowledge and expertise of their outsourcing partner to aid limited in-house capability for product innovation and development
• Risk management – an outsourcing partner can provide reliable solutions for effective risk management
• Creates leisure time – some people opt to outsource tasks to be able to achieve an optimal work-leisure balance.