Introduction to Outsourcing

Outsourcing has seen a lot of press over the years. Some look to outsourcing as the savior of their company, while others see outsourcing as an evil, job-killing management tactic. Before you start to evaluate if an outsourcing strategy is right for your company, you need to understand what it is and what it is not.

Outsourcing Defined
Outsourcing is the contracting out of any task, operation, job or process that was originally performed by employees within your company to a third party for a significant period of time.

These outsourced functions can be performed by the third party on-site or off-site. Hiring a temporary employee while your secretary is on maternity leave is not outsourcing.

The most common story of outsourcing in the news today involves jobs that are sent overseas to countries like India or China—often manufacturing jobs, but outsourcing is not limited to this sector. It is more commonly called offshoring. Examples include customer service and tech support call center jobs, as well as computer programming jobs. Examples of jobs that are generally safe from being moved overseas are janitorial services and security services, though completely outsourcing a department or division of a company may remove the need for these jobs in that location so that they can be eliminated.

Why Outsourcing?
There are many reasons why a company may choose to outsource a particular function of their business, which may include:

Resource Shortages
A particularly strong reason to outsource involves a shortage of a critical resource. This can be available employees that possess knowledge in a certain area (e.g., engineers), the availability of raw material (e.g., petroleum or minerals) and an available labor force that possesses a necessary level of expertise at the right price.

Realignment with Core Business
Some peripheral operations are outsourced frequently. It gives the managers the ability to concentrate on the core business issues instead of devoting resources to areas that may be necessary but are not related to the business’ core competencies. A good example is a major hospital that outsources its security operations to an outside company that specializes in security.

Cost Savings
The prices of labor and/or materials keep increasing, and competition keeps forcing prices lower. If there is an outsourcing solution that can save your company money and overcomes the disadvantages of outsourcing, these areas should be investigated.

Business Flexibility
Seasonal or cyclical demands that ebb-and-flow put varying demands on the resources of the company. An outsourcing contract could provide the flexibility needed to stabilize these varying demands. Example: A business brings in extra accountants during tax season and when being audited by the holding company that owns the business.

Reduced Overhead Costs
Some functions require a large outlay of money just to get started. This expenditure could be avoided by contracting with a third party. For example, outsourcing a call center rather than undertaking a costly expansion to the telephone system and office space to meet increasing customer service demands.

Common Outsourced Areas
Although many areas and functions are outsourced, here are some of the frequently outsourced areas:

Information Technology Functions
Network and Telecommunications
Human Resources and Insurance Administration

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