According to Dictionary.com, to outsource means to purchase goods or subcontract services from an outside supplier or source, or to contract out jobs and services. For example, a small business that outsources bookkeeping to an accounting firm abroad.
According to the Wikipedia, Outsourcing means “transfer or delegation to an external service provider the operation and day-to-day management of a business process”.
It is being used by every organization in one way or the other. The functions being outsourced by the business are basically considered non-core to the business itself.
“The contracting or subcontracting of noncore activities to free up cash, personnel, time, and facilities for activities in which a company holds competitive advantage. Companies having strengths in other areas may contract out data processing, legal, manufacturing, marketing, security services, payroll accounting, or other aspects of their businesses to concentrate on what they do best and thus reduce average unit cost. Outsourcing, also called contracting out, is often an integral part of downsizing or reengineering..
For instance, a car company requires a variety of screws and bolts. Rather than manufacturing screws and bolts themselves, the company might outsource their production to some other company or firms that specialize in making screws and bolts. Such outside companies or firms that provide the outsourcing services are referred to as “third-party providers”, or as they are more commonly called, “service providers”.
For businesses, outsourcing means saving money, lots of it. It is a fact that labor in other parts of the world cost significantly less than those in developed countries. Professional fees take up a big chunk of a company’s budget. Labor in countries such as India, Philippines and some part of Africa are 50% to 70% cheaper than labor found locally so you can just imagine the amount of money that can be saved when companies hire individuals from other parts of the globe. To save money is the goal of any company. In the age of globalization, the best way to save money is to take advantage of the benefits that outsourcing brings.
Even though outsourcing exists ever since work specialization, but in the recent past, companies have started employing the outsourcing model for functions, like payroll, billing and data entry. These functions can be carried out more efficiently and cost-effectively, by the companies that acquire specialized tools and facilities and specially trained personnel for such functions.
Outsourcing has taken many forms in recent times. Like the past organizations still hire service providers to handle diverse business functions. But now many organizations prefer to outsource whole operations to another company or firm. These outsourcing companies are most commonly known as Business Process Outsourcing (BPO) and Information Technology Outsourcing (ITO). These are also the most common form of outsourcing.
A Business process outsourcing usually includes Call Center Outsourcing, Human Resources Outsourcing (HRO), Finance and Accounting Outsourcing, and Claims Processing Outsourcing. Fundamentally these deals comprise of contracts that can extend for a number of years and cost the client company hundreds of millions of dollars. Often, the employees of the client firm who used to perform their work internally are transferred to the service provider and become their employees.
The success of an outsourcing company depends on mainly three factors. Firstly a proper executive-level support from the client’s organization for the outsourcing mission. Secondly, there should be frequent communication between the client organizations (that is hiring services) and the service providing firm or company. And last but certainly not the least a lot depends on the client’s ability to manage and handle its service providers.
Source: What is Human Resource.com