What it is:
Outsourcing is the process of contracting a portion of a company's activities to third-party providers.
How it works (Example):
Outsourcing involves subcontracting parts of a company's value-chain, (i.e. steps in the design, supply, production, marketing, sales, and services processes) to other companies or contractors that specialize in those activities. Through outsourcing agreements, the client company hires separate companies to perform specific tasks in the value-chain on its behalf. Often, the work is performed under the name of the client.
The kinds of outsourcing work performed vary widely across industry sectors. Some common outsourcing activities include: human resource management, facilities management, supply chain management, accounting, customer support and service, marketing, computer aided design, research, design, content writing, engineering, diagnostic services, and legal documentation.
Why it Matters:
The decision to outsource usually stems from a focus on lowering costs and improving the efficient allocation of resources within a company. Outsourcing allows a company to redirect its attention to its own competencies and hire outside resources to handle other tasks. However, outsourcing requires a high degree of standardization and management control in order to be effective.