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What is outsourcing?

Outsourcing is the business practice of hiring someone outside the company to perform services that were traditionally performed by the company’s own employees. Typically, the reason for outsourcing is to cut company costs. By enlisting the help of outside parties, companies are able to complete the work for less money, thus reducing salary, overhead, technology and equipment costs.

In addition, outsourcing enables companies to prioritize their core operations. Some companies find that they improve efficiency and productivity when they focus only on the core aspects of the business, and hire a third party to complete smaller or more peripheral tasks.

Outsourcing was first recognized as a business strategy in 1989 and became mainstream by the 1990s. While a common practice, it is also controversial. People opposed to outsourcing argue that it threatens domestic jobs. In sectors such as manufacturing, this practice tends to involve hiring cheaper labor abroad.

When it comes to starting a business, deciding wether to deploy outsourcing, is a consideration for many business owners.

Outsourcing examples

From a business perspective, there are two main advantages to outsourcing: saving time and cutting costs. Across many different industries, companies use outsourcing to reap these benefits.

A smartphone manufacturer, for instance, might outsource the production of its internal components to save on costs. In this case, an outside company (typically in a country where labor is less costly) would produce these internal components and sell them to the smartphone manufacturer.

Businesses may also choose to outsource services. A small company, for example, might prefer to outsource accounting or human resources tasks, rather than hiring its own payroll or HR team. This would help them save on staffing costs while directing most of its resources toward the core aspects of the business.

Another commonly outsourced task is customer service. Many large corporations have eliminated in-house customer service teams in favor of third-party call centers. These call centers are in lower-cost locations overseas, where labor and resources are cheaper than in the corporation’s home country.

Businesses may also choose to outsource their fulfillment services, in order to ensure more reliable delivery and order fulfillment.


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Criticisms of outsourcing

Outsourcing has advantages from a business perspective, but it also has notable downsides, both for the company and the economy as a whole:

  • Security concerns: Issues over security can arise when the third party has access to confidential company data. If that party suffers a data breach, the company may be compromised.

  • Legal complexity: A firm’s legal team must always be involved when signing contracts with third-party companies. This may take time and extra effort, and may be inefficient when communication is difficult or slow.

  • Communication challenges: Communication between the company and outside providers can be difficult. Not only is there a geographic barrier that restricts in-person communication, but there may also be language barriers and culture differences that both parties must adapt to.

  • Disruption of the labor force: Outsourcing moves jobs abroad, thereby disrupting the labor force. In America, in particular, the manufacturing industry has been largely outsourced overseas. This has reduced job opportunities that require unskilled labor, and has replaced them with higher-skilled jobs that require specialized training or education.


Related Term

Business Plan

Related Term

Capital Expenditure (capex)

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