What Is Outsourcing in Business? Definition, Purpose, & Examples

What is outsourcing in business? Businesses have a lot on their plate and a limited budget, so they may opt to outsource certain functions such as IT services.

As 2020 has shown, remote work can be as effective as working in an office. Today, companies rely on remote outsourcing services to fill an estimated 300,000 positions, with the outsourcing industry being worth $85.6 billion.

However, despite its popularity in the business world, many people are unclear about what outsourcing is, as well as how it works.

So what is outsourcing in business? Keep reading for a guide that will break it down for you.

What Is Outsourcing in Business?

When a company outsources, it means that it relies on another company to complete specific job functions or services. The outside company, or the third-party provider, completes the required tasks with its own workers, systems, and technology.

Depending on the business, they may choose to work with a very large third-party provider. For example, companies may work with a company like IBM for IT help. In other cases, the third-party provider can be an individual freelancer.

IT outsourcing is common as many companies are looking for managed IT services.  Outsourcing customer support and program and application development are also popular. Companies can choose to outsource entire departments or specific roles.

Types of Outsourcing

There isn’t a universal type of outsourcing, and every company does it differently. However, most of the differences between the different types of outsourcing stem from distance.

Offshoring is when a company chooses to work with a third-party provider that is overseas. India, China, Malaysia, and Mexico are some of the most popular offshoring locations.

Onshoring is another type where companies relocate work to cheaper locations in the same country. For example, a manufacturing company based in Shanghai may onshore to factories in Guangdong for cheaper prices.

Nearsourcing falls in between the other two types of outsourcing. It involves allocating work to nearby regions or countries. These countries often border the company’s country.

How to Make Outsourcing Work

While logistics is important in outsourcing, the business relationship between the two companies is the most important aspect.

This relationship isn’t a purchasing project, but rather a partnership between one company and another. Many companies struggle with creating and developing a relationship with their third-party provider.

It’s also important that both parties are always on the same page. Having a clear and concise contract that dictates when work starts and finishes will help ensure that both parties adhere to their responsibilities until the job is finished.

Why Do Companies Outsource?

If you’re a perfectionist, you might be wondering why companies go through the hassle of partnering with another company. Businesses outsource to cut down on costs, boost efficiency, and enjoy the expertise of the third-party provider.

If you can find a company that can complete a task faster, better, and cheaper, why wouldn’t you want to work with them? Doing so allows companies to focus more on their primary operations.

Aside from these primary reasons, other factors can motivate or require companies to outsource. Often, businesses can’t afford to take on a full-time employee to handle a required task. In that case, they’ll turn to another company for help.

Real-World Examples

Although companies can choose to outsource any department or task, there are some areas where it’s becoming more and more common to do so.

Virtual assistants play a big role in the day-to-day operations of many companies, yet most businesses choose to outsource VA development. They know that it would be too expensive and time-consuming to hire their own workers, so they choose to let someone else do it.

If an English insurance company is looking to outsource VA development, they might “offshore” that work to a Malaysian tech company. If they nearshore the job, they may work with a French company. If they onshore, they might work with contractors outside of London.

Working with a company that’s closer cuts down on cultural differences and the time needed to get the job done. However, tech development is often asynchronous, meaning that proximity may not matter to many companies today.

Pros and Cons

When a company outsources a job to someone else, that frees up money, facilities, and workers. That means that the company can then redirect those resources towards existing projects, or invest them in new ones. This can lead to higher profits, new customers, and many other things.

If the third-party providers are efficient, this can lead to a streamlined production process. Third-party providers that specialize in a certain task will, on average, be able to complete it much faster than the company looking to outsource the task.

However, there can also be some cons. As mentioned, the outsourcing relationship is important. This means that companies need to devote resources to maintaining it. In some cases, this can outweigh the costs saved by outsourcing in the first place.

If the third-party provider operates on the other side of the world, this also opens the door for miscommunications and cultural misunderstandings. Companies may need to hire translators for maximum efficiency, which can further strain resources.

The Future of Outsourcing

What is outsourcing in business? As this guide explains, it’s a great way for companies to obtain a competitive advantage, while also getting to save money. Given the prevalence of remote work, it’s likely that outsourcing will continue to grow in popularity for the foreseeable future.

Do you now have a better understanding of why different businesses rely on outsourcing? If you do, make sure to take a look at some of our other blog posts for more guides and tips.

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