What is Outsourcing? Definition, Advantages, and Examples

Many businesses have successfully adopted outsourcing processes into various aspects of their logistics and supply chain operations. Outsourcing all or part of these functions can improve efficiency and in some cases, reduce costs.

This article describes the concept of outsourcing, as well as the pros, cons, and examples of outsourced functions. This information is intended to prepare business logistics managers to make an informed decision regarding the potential benefits of outsourcing.

Definition of Outsourcing

Outsourcing refers to the practice of a business contracting with a third-party supplier to provide products or services that are currently handled in-house by staff. 

Because of outsourcing, many businesses have been able to reduce expenses, gain access to specialized expertise, and improve overall performance. 

How Outsourcing Works 

Outsourcing involves transferring specific tasks or functions from within an organization to an outside contractor or third-party logistics provider. 

When businesses outsource logistics, their employees can focus on their strengths and the goals of the business while depending on external vendors for specialized assistance in areas including IT, customer service, labor management, finances, warehousing and fulfillment, and more. 

Outsourced activities can range from simple administrative tasks like data entry to complex projects like network design and order fulfillment.

Types of Outsourcing

There are several types of outsourcing. 

Because every business has its own requirements, expenses, and systems in place, the business must carefully assess the benefits of outsourcing, and the type of outsourcing most applicable to the company’s needs.

Here are the most common types of outsourcing and a quick explanation for each one: 

BPO (Business Process Outsourcing)

When people talk about outsourcing, BPO is the concept they often describe. 

Simply put, Business Process Outsourcing involves outsourcing a particular business process, such as HR, IT, accounting/payroll, customer service, and other tasks, to an external provider.

If a company is small, but planning to launch a new product and expects plenty of inquiries, the business may consider outsourcing the chat or voice calls to a third-party customer service representative. This representative can be a freelancer or an employee of a BPO call center.

LPO (Legal Process Outsourcing)

LPO is similar to BPO, except the processes involved in legal process outsourcing are exclusive to legal services. 

For example, a new company without an in-house lawyer could outsource legal research, contract management, document review, and other law-related tasks to a third-party law firm or lawyer.

KPO (Knowledge Process Outsourcing) 

KPO tackles knowledge-based processes, such as data analysis, R&D, or market research. 

Larger enterprises usually have their own research and development teams, but smaller companies may not. Outsourcing to R&D firms not only guarantees that the process will be done properly by experts but also saves the company money because they can select the level of assistance they need and purchase outsourced services based totally on their needs.

ITO (Information Technology Outsourcing)

This kind of outsourcing involves IT services, such as web development, application management, software or game development, networking maintenance, and more. 

Traditional companies may find it hard to stay current with the ever-evolving world of technology. If a widget company wants to build a webiste, it would make sense to outsource the job to someone (or a web dev company) who can build a website quickly and properly. 

Facilities Management Outsourcing

Companies often contract with third-party agencies or companies to handle security, housekeeping, or janitorial services, maintenance, landscaping, electrical work, and other similar tasks. When they do this, they’re outsourcing facilities management to another company. 

Creative Process Outsourcing

When a company hires a photographer to take professional images of its products to be featured on a website, the business is outsourcing the creative process to that photographer. 

Other types of creative process outsourcing involve content creation, graphic design, video production, and voice recording. 

Manufacturing Outsourcing

If you’re aware of drop shipping, the concept of manufacturing outsourcing will be easier to understand. 

In this kind of outsourcing, businesses hire other companies to build parts or the entire product or project. 

Let’s say someone is a cosplayer who is scheduled to attend an event next weekend. They hire another cosplayer to help with the play sword or another artist to sew the cape. This process is a simpler example of manufacturing outsourcing. 

Some technology companies contract other Asia-based companies to build parts of their smartphones; this is an example of outsourcing manufacturing.

Different types of outsourcing providers can benefit companies in specific ways, from simple data entry to complex projects like product manufacturing. However, it is important to carefully evaluate the risks and benefits of outsourcing before making the decision to outsource.

Advantages of Outsourcing

These examples illustrate the potential advantages of outsourcing:

Cost Savings 

If a particular task must be done, but the company would need to hire and train someone to do the job, the company is paying for work that is not being done while it gets an employee onboard.

However, by outsourcing this task to an expert, the job will be done quickly and properly. After all, they’re experts in that particular field. 

The BPO industry is a perfect example of how cost savings can be achieved by investing in offshore outsourcing. Companies in third-world countries can provide competitive rates for BPO services or manufacturing services because the cost of the business in their part of the world is usually lower. 

This is the reason many companies from the United States, Canada, Australia, Europe, and other countries prefer offshore outsourcing for a variety of industries, not just for BPO companies. Cost savings can be significant.

Increased Efficiency and Productivity

Why spend time training people how to process payroll if a third-party accounting firm or accountant can do it for your company in less time?

When companies streamline tasks and outsource non-essential activities, they can focus on core competencies and value-added work. If the company is a game development firm, the company can spend more time investing in its game designers instead of training the HR staff on how to locate and retain designers. 

If the company is a small bakery wanting to branch out, the company can now create franchising programs or develop new recipes instead of directing janitors in cleaning the storefronts. 

Key Takeaway: The goal of outsourcing services is to reduce expenses and optimize performance while still upholding quality requirements. Outsourcing gives smaller companies a way to compete with bigger companies that have already established their processes and may have more resources. In short, outsourcing is an ideal strategy for staying ahead of the competition in today’s evolving market. 

Drawbacks of Outsourcing

Outsourcing services also come with a few risks. The three main ones are:

Loss of Control 

One of the main disadvantages of outsourcing is the potential for loss of control over quality and processes. 

When a business delegates its operations, it provides control and authority over how tasks are carried out to a third-party provider. 

The possibility of inferior goods or services being provided can result from a lack of oversight, potentially leading to customer dissatisfaction and damaging the company’s reputation.

Lack of Data Security 

Data security is another major concern when it comes to outsourcing. 

Businesses may not feel fully assured that their outsourcing partners can properly guard sensitive data against any unauthorized use or access. 

Poorly secured systems could result in data breaches, leading to financial losses and reputational damage for the business involved in the arrangement.

Communication Issues 

Poor communication between parties involved in an outsourcing agreement can create issues if expectations are not properly communicated or understood by all sides at the beginning of a project or contract period. 

Without proper communication channels established beforehand, misunderstandings may arise,  which could affect delivery times and even impact quality standards agreed upon before the outsourced work begins.

Decisions about outsourcing should be considered carefully. Choosing the wrong partner or failing to establish clear goals may have a detrimental effect on quality and reputation.

Tips for Successful Outsourcing

There are a few general best practices to follow for successful outsourcing. 

• Work with reputable third party logistics companies. Do extensive research before signing any contracts and make sure the company of choice has plenty of reviews and experience. Trust is critical. Discuss core competencies with the company being considered for outsourcing to ensure alignment.
• Establish an outsourcing liaison. The person in this position will be in charge of communicating with and monitoring the company you choose as an outsourcing partner. Having someone specifically assigned to this task will limit communication issues and concerns. 
• Embrace cultural differences. While working with an international or offshore company, there may be unexpected conditions. This can include pay expectations, work ethic, employee benefits, and hours of work. Embrace these differences and don’t be afraid to ask respectful questions as needed while adapting to new business operations. 
• Encrypt your data. Encrypting the information you send back and forth with your outsourcing company will ensure all personal information and intellectual property stays between you and your service provider. 

FAQs

Below are some of the most frequently asked questions about outsourcing. 

What is an example of outsourcing? 

IT management is one of many outsourcing provider examples. Companies may outsource their IT needs to a third-party provider, such as an IT consultant or managed service provider (MSP) that they may not have internally. 

By outsourcing, businesses can save not only in hiring IT teams but also by not purchasing expensive hardware and software. 

Examples of IT services that can be outsourced comprise cloud computing, data storage, system maintenance and backing, software development, network security administration, web formation, web configuration, application production, and amalgamation facilities. By relying on outsourcing, business processes can become more streamlined and organized. 

What is the main purpose of outsourcing? 

By transferring tasks that would otherwise require additional staff members or equipment, outsourcing can help companies lower costs significantly and minimize in-house business processes and costs. 

Final Thoughts 

Now that you know the pros and cons of outsourcing, some real-world examples of outsourcing, and the possibilities outsourcing can offer your business functions, you can determine if outsourcing is a good choice for the company.

For most companies, having the capacity to change rapidly to meet client needs and market patterns and the ability to scale up and scale down services based on business demands are valid reasons to find an external service provider. Outsourcing business processes is a great way to streamline business practices, lower labor costs, and develop a competitive business strategy.