Reviewed by Aug 27, 2020| Updated on
Outsourcing is a business practice, where a company hires another company to carry out some of its business functions. These functions could have been performed in-house by the company’s own staff and resources. Companies outsource activities, such as human resources, customer support, and data processing for various reasons.
One of the main reasons to outsource such functions is to reduce overall costs for the company. Outsourcing is also carried out when a company plans to downsize or would prefer to concentrate only on key business functions. Sometimes, companies outsource activities when they find that they can get access to world-class capabilities and specialised services as compared to letting their own employees carry out the same functions.
Types of Outsourcing
On the basis of location, outsourcing can be classified as
Onshore outsourcing: This is a practice of hiring a locally-based organisation (within the same country), to perform its outsourced business functions. For example, a company in Germany may hire another company based in Germany to perform certain business functions, say payroll or accounting.
Nearshore: This type of outsourcing is chosen when the outsourced organisation is located in a country nearby, but not in the same country as the outsourcing company. For example, a German company outsources its after-sales services to a company in Poland.
Offshore outsourcing: When a company outsources its business functions to a distant country, most often due to the benefits of highly reduced costs, it is called offshore outsourcing. For example, a German company may outsource some of its business functions to an Indian company, such as data entry and customer support.
Advantages and Disadvantages of Outsourcing
- Reduction in time and costs to the outsourcing company, and increased efficiency and output in the same work being carried out elsewhere.
- Access to world-class services and resources, often specialised services in the concerned field.
- Ability to free up manpower to be used to focus on core business functions.
- Less investment required in infrastructure and energy.
- Business functions outsourced to entities in foreign countries could result in language and cultural barriers.
- Time-zone differences are often a constraint hindering effective coordination with outsourced activities.
- Data security, confidentiality, and lack of control are the key challenges that come with processes being outsourced.
- The additional effort required on signing contracts and other legal matters.