Definition: Outsourcing, the name itself suggest its meaning, i.e. source from outside. It refers to a practice of contracting out the non-core and sometimes core activities of the organisation to a captive unit or a third party. It is a process, in which business-houses handover their regular or peripheral work to the external organisation, who has got experience and expertise in the respective field and can perform it in a better way.
Outsourcing aims at freeing cash, time, manpower and other resources, for the activities, in which the organisation has got a competitive advantage. It covers both domestic as well as foreign contracting.
Need for Outsourcing
The key factors that cause the firms to rethink at business processes are the best quality products at the minimum price, ever demanding customers and emerging technologies. These determinants are the reason for the advancement of outsourcing as a business mode. And now, company resort to outsourcing, not because of compulsion, but because of choice. The main reasons for outsourcing are provided as under:
- Concentrating on primary activities: Outsourcing of lower-level work or non-core activities can help the company to focus on the activities in which they have an edge over others.
- Quest for excellence: With the help of outsourcing, the firm can gain excellence in two ways; first the firm itself perform those activities in which they are specialised, due to limited focus and next they excel by outsourcing the rest of the activities to the external service provider who excels in performing them.
- Cost savings: A savings in cost can be marked, by transferring work to the third party. This is due to economies of scale, as the third party service provider performs the same work for many organisation. It may also be due to low labour cost, i.e. the labour is available at cheap rates in developing countries.
- Fewer regulations: Companies generally outsource their businesses to developing countries, where the regulatory restrictions are low. It results in the low cost of operations and increase in productivity.
- Flexibility: As the non-core activities of the company are outsourced, the firm can stay stress-free and easily adapt change.
- Helpful in economic development: It encourages entrepreneurship, employment and export in the countries in which outsourcing is performed, i.e. host country, which results in the overall economic growth.
Outsourcing of activities like human resources, marketing, data processing, manufacturing, customer support, technical support, accounting, legal and the like, are in vogue so that the company can focus on the activities, at which they excel. In this way, the company can reduce the average cost per unit and improve efficiency, by assigning their work to outside organisation instead of performing it internally.