What Is Outsourcing?
Outsourcing is a business strategy that includes transferring work from a company’s employees to an external party. Many companies outsource their services and the creation of goods with the goal of decreasing costs such as employees, overhead, equipment, and technology.
Outsourcing work or production to other countries may further decrease costs and allow a company to focus more heavily on its critical operations. However, to preserve domestic jobs, companies may also outsource within their own country.
What Are Some Common Terms for Outsourcing?
Outsourcing may be used interchangeably with the terms contracting-out and externalization.
Are Outsourcing and Subcontracting the Same?
Outsourcing and subcontracting are similar, but the level of control held by the company in each case is different.
For instance, outsourcing delegates an entire project or department’s operations to an unaffiliated individual or business. Subcontracting may only assign part of a project temporarily, and each task is mutually agreed upon on a contractual basis.
Outsourcing vs. Offshoring
While outsourcing refers to any shifting of work to a third-party, offshoring refers to outsourcing work to a third-party in a different geographic area. Offshoring can save money for companies on products and services while also providing jobs for workers in developing countries.
Examples of Outsourcing
Companies can outsource many of their operations in an effort to reduce costs, save time, and earn more money. It may even give them a competitive advantage in their industry.
Common outsourcing examples include:
Shipping and logistics
Research and development
Bookkeeping or payroll
Famous Companies That Outsource
Companies which outsource their employees include (but are certainly not limited to):
Ford Motor Company
Common Outsourcing Models & Pricing
There are eight common outsourcing pricing models, including:
A service provider handles a project for a specified period. During this time, the client has full control and is given the necessary equipment and workspace to complete the work.
Fixed Price Model
A service provider sets a standard rate for the services to be provided monthly or annually. This includes charges for equipment and workspaces.
Cost Reimbursable Model
A service provider limits the number of expenses they will accrue before adding a percentage for profit.
Time and Materials Model
A service provider will bid on a project by providing the potential client with a proposal of time needed and cost.
Consumption-Based Pricing Model
A service provider charges their client based on actual usage.
Profit-Sharing Pricing Model
A service provider receives a percentage of profits from the client.
Incentive-Based Pricing Model
On top of their normal rate, the service provider receives bonuses or commissions for their work, based on performance.
Shared Risk-Reward Pricing Model
A service provider will share the risk and reward with the company. In addition to their normal rate, they receive compensation based on company performance. If the company experiences challenges, however, their additional compensation may decrease or not exist.
Is Outsourcing Good or Bad?
Outsourcing has advantages and disadvantages that need to be considered. It can be both good and bad, depending on the company’s situation, motivators, and goals. Outsourcing work may be beneficial for one company while unsuitable for another.
Advantages of Outsourcing
There are many pros of outsourcing, including:
Reduced costs such as overhead, staff, equipment, and technology
Work may be less expensive than hiring staff members
May have greater access to experts in the field
Tasks may reach completion more quickly
Companies can focus on revenue-driving work
Assistance in planning and mitigating against potential risks
Ability to take on more projects that work towards the company’s mission and goals
Disadvantages of Outsourcing
There are many cons of outsourcing, including:
Complex contracts between companies with possible hidden costs
Access to confidential data can cause security threats or data breaches
Communication challenges that cause project delays and slower turnaround time
Language and cultural barriers
Time zone differences
Little control over quality from the originating company
Less knowledge of the industry or domain
Public backlash or moral dilemmas
How Does Outsourcing Affect the US Economy?
The effects of outsourcing on the US economy can be viewed from multiple lenses. Outsourcing enables companies to lower their production costs and the savings can be passed on to consumers who will make more purchases. Outsourcing helps US companies be more globally competitive.
However, outsourcing can also hurt the US economy if many people lose their jobs. Individuals and families without stable incomes aren’t as likely to make discretionary purchases.
Are Outsourcing and Globalization the Same?
Globalization refers to the interdependence of various countries in terms of economies, cultures, jobs, products, information, technology, and populations. Global outsourcing is just one factor that causes globalization.
How Outsourcing Affects Developing Countries
When companies outsource their work to developing countries, it can have an overwhelmingly positive impact on economies and workers alike. The creation of jobs enables people to afford basic necessities as well as make discretionary purchases. Outsourcing has the potential to improve the standard of living in developing countries and has helped to create the middle-class in nations like China and India.
Negative Effects of Outsourcing on Developing Countries
Workers are understandably typically drawn to cities that have larger outsourced industries and promises of higher earnings. As people seek out higher-paying roles that aren’t critical to their nation’s development (e.g. call centers, assembly lines), this exodus creates a large hole in farming and cottage industry communities.
Due to a cheap and replaceable labor force, some employers may exploit employees by enforcing longer working hours and unsafe conditions. Because developing nations also tend to have more lax environmental standards than those in developed countries, factories may cause more pollution (in order to create cheaper goods).
Table of Contents
- What Is Outsourcing?
- What Are Some Common Terms for Outsourcing?
- Examples of Outsourcing
- Common Outsourcing Models & Pricing
- Is Outsourcing Good or Bad?
- How Does Outsourcing Affect the US Economy?
- Are Outsourcing and Globalization the Same?
- How Outsourcing Affects Developing Countries