Outsourcing is a business practice in which companies use external providers to carry out business processes that would otherwise be handled internally.Smale, T., In-House or Outsourced? How Do You Decide?, Entrepreneur, published 1 March 2017, accessed 24 December 2022 Outsourcing sometimes involves transferring employees and assets from one firm to another, or forming a separate legal entity that acts as a management service organization (MSO).
The term outsourcing, which came from the phrase outside resourcing, originated no later than 1981 at a time when industrial jobs in the United States were being moved overseas, contributing to the economic and cultural collapse of small, industrial towns.Outsource 1979, outsourcing 1981: OED In some contexts, the term smartsourcing is also used.Nevin, M., Insourcing / Outsourcing / SmartSourcing - A new paradigm for innovating the IT Supply chain, accessed on 15 August 2024
The concept, which The Economist says has "made its presence felt since the time of the Second World War", often involves the contracting out of a business process (e.g., payroll processing, claims processing), operational, and/or non-core functions, such as manufacturing, facility management, call center/call center support.
The practice of handing over control of public services to private enterprises (privatization), even if conducted on a limited, short-term basis, may also be described as outsourcing.
Outsourcing includes both foreign and domestic contracting, and should not be confused with offshoring which refers to relocating a business process to another country and may or may not involve a third-party provider.Davies, Paul, What's This India Business?: Offshoring, Outsourcing, and the Global Services Revolution. London: Nicholas Brealey International, 2004. Print. In practice, the concepts can be intertwined, i.e. offshore outsourcing, and can be individually or jointly, partially or completely reversed, as described by terms such as reshoring, inshoring, and insourcing.
Motivation
Theoretical frameworks Global labor arbitrage can provide major financial savings from lower international labor rates, which could be a major motivation for offshoring. Cost savings from economies of scale and specialization can also motivate outsourcing, even if not offshoring. Since about 2015 indirect revenue benefits have increasingly become additional motivators.Forrester Research, Inc.
Another motivation is speed to market. To make this work, a new process was developed: "outsource the outsourcing process". Details of managing DuPont's chief information officer Cinda Hallman's $4 billion 10-year outsourcing contract with Computer Sciences Corporation and Accenture were outsourced, thus avoiding "inventing a process if we'd done it in-house". A term subsequently developed to describe this is .The term "Midsourcing" subsequently became known as contracting a local or regional manufacturing service provider to arrange for the outsourced task(s).
Outsourcing can offer greater budget flexibility and control by allowing organizations to pay for the services and business functions they need, when they need them. It is often perceived to reduce hiring and training specialized staff, to make available specialized expertise, and to decrease capital, operating expenses, and risk.
"Do what you do best and outsource the rest" has become an internationally recognized business tagline first "coined and developed" in the 1990s by management consultant Peter Drucker. The slogan was primarily used to advocate outsourcing as a viable business strategy. Drucker began explaining the concept of "outsourcing" as early as 1989 in his Wall Street Journal article entitled "Sell the Mailroom".Drucker, Peter F. (1989), "Sell the Mailroom", Wall Street Journal, accessible at
From Drucker's perspective, a company should only seek to subcontract in those areas in which it demonstrated no special ability. The business strategy outlined by his slogan recommended that companies should take advantage of a specialist provider's knowledge and economies of scale to improve performance and achieve the service needed.
In 2009, by way of recognition, Peter Drucker posthumously received a significant honor when he was inducted into the Outsourcing Hall of Fame for his outstanding work in the field.
The biggest difference between outsourcing and in-house provision is with regards to the difference in ownership: outsourcing usually presupposes the integration of business processes under a different ownership, over which the client business has minimal or no control. This requires the use of outsourcing relationship management.
Sometimes the effect of what looks like outsourcing from one side and insourcing from the other side can be unexpected; The New York Times reported in 2001 that "6.4 million Americans .. worked for foreign companies as of 2001, [but] more jobs are being outsourced than" [the reverse].
Reasons for outsourcing
While U.S. companies do not outsource to reduce high top level executive or managerial costs, they primarily outsource to reduce peripheral and "non-core" business expenses.Forey, Gail, and Jane Lockwood. Globalization, Communication and the Workplace: Talking across the World. New York: Continuum, 2011. Electronic Book #21-26. Common drivers include labor cost differences, tax considerations, access to the worlds' top talent, and compliance requirements.
Mandated benefits like social security, Medicare, and safety protection (e.g. Occupational Safety and Health Administration regulations) are also motivators.Buchholz, Todd G. Bringing the Jobs Home: How the Left Created the Outsourcing Crisis — and How We Can Fix It. New York: Sentinel, 2004. Print 97-118. By contrast, executive pay in the U.S. in 2007, which could exceed 400 times more than average workers—a gap 20 times bigger than it was in 1965, is not a factor.
Other reasons include reducing and controlling operating costs, improving company focus, gaining access to world-class capabilities, tax credits,Carbon Copy accepted tax credits to move software duplication and packaging to Puerto Rico: (Captive) freeing internal resources for other purposes, streamlining or increasing efficiency for time-consuming functions, and maximizing use of external resources. For small businesses, contracting/subcontracting/"outsourcing" might be done to improve work-life balance.
Outsourcing agreements Two organizations may enter into a contractual agreement involving an exchange of services, expertise, and payments. Outsourcing is said to help firms to perform well in their core competencies, fuel innovation, and mitigate a shortage of skill or expertise in the areas where they want to outsource.Overby, S. (2007), ABC: An Introduction to Outsourcing . CIO.com. Established good practices include covering exit arrangements within an outsourcing agreement, with an exit period and a mutual commitment to maintaining continuity until the exit phase is completed.Outsourcing Law Group, Practice Guide on Exit Services in Outsourcing, p. 4, published in May 2014
History 20th century Following the adding of management layers in the 1950s and 1960s to support expansion for the sake of economy of scale, corporations found that agility and added profits could be obtained by focusing on core strengths; the 1970s and 1980s were the beginnings of what later was named outsourcing. Kodak's 1989 "outsourcing most of its information technology systems" was followed by others during the 1990s.
In 2013, the International Association of Outsourcing Professionals gave recognition to Electronic Data Systems Corporation's Morton H. MeyersonEDS's founder named it for Mort Meyerson who, in 1967, proposed the business model that eventually became known as outsourcing.
IT-enabled services offshore outsourcing The growth of offshoring of IT-enabled services, although not universally accepted, both to subsidiaries and to outside companies (offshore outsourcing) is linked to the availability of large amounts of reliable and affordable communication infrastructure following the telecommunication and Internet expansion of the late 1990s. Services making use of low-cost countries included:
back-office and administrative functions, such as finance and accounting, HR, and legal call centers and other customer-facing departments, such as marketing and sales services IT infrastructure and application development knowledge services, including engineering support, product design, research and development, and analytics
Early 21st century In the early 21st century, businesses increasingly outsourced to suppliers outside their own country, sometimes referred to as offshoring or offshore outsourcing. Other options subsequently emerged including: nearshoring, crowdsourcing, multisourcing, strategic alliances/strategic partnerships, strategic outsourcing.See Holcomb & Hitt, 2007 and Vested outsourcing
Forbes considered the 2016 U.S. presidential election "the most disruptive change agent for the outsourcing industry", especially the renewed "invest in America" goal highlighted in campaigning, but the magazine tepidly reversed direction in 2019 as to the outcome for employment. In the case of armament acquisition, section 323 of the National Defense Authorization Act for 2014 requires military personnel "to solicit information from all U.S.-owned arsenals regarding the capability of that arsenal to fulfill the manufacturing requirement" when undertaking a make-or-buy analysis.Congress.gov, H.R.3304 - National Defense Authorization Act for Fiscal Year 2014, Section 323, accessed 3 September 2023
Furthermore, there are growing legal requirements for data protection, where obligations and implementation details must be understood by both sides.e.g. NYS-mandated cybersecurity standards affecting "all institutions authorized ... to operate in New York..." This includes dealing with customer rights.South Korea requires giving digital service even when "the user refuses to give permission for data or functions that are not necessary to the provision of the service".
UK government policy notes that certain services must remain in-house, citing the development of policy, stewardship of tax spend and retention of certain critical knowledge as examples. Guidance states that specific criteria must govern the identification of such services, and that "everything else" could potentially be outsourced.Government Commercial Function, 'Make or Buy' Decision: Outsourcing Guidance Note, published February 2019, accessed 22 August 2023
There are few companies from all around the world like Automation Anywhere, UiPath, Datamatics Business Solutions Limited (DBSL), and Nintex which provide Outsourcing services.
Limitations due to growth Inflation, high domestic interest rates, and economic growth pushed India's IT salaries 10–15%, making some jobs relatively "too" expensive, compared to other offshoring destinations. Areas for advancing within the value chain included research and development, equity analysis, tax-return processing, radiological analysis, and medical transcription.
Growth of white-collar outsourcing