Understanding Outsourcing

Understanding Outsourcing

Outsourcing is a term that has received a great deal of attention lately. 

Despite the increasing trend in companies relying on outsourcing, some still need to understand what the term means. This chapter will examine some of the critical elements of outsourcing to help the reader better understand the concept of outsourcing. 

Outsourcing Defined 

What is it about outsourcing that makes it happen? This is the most fundamental question when it comes to outsourcing. They have yet to grasp the most basic understanding of the process, so they are not interested in more complex aspects of the issue. Language outsourcing is when a company delegates the completion of specific tasks to an individual not employed by the company directly.

This individual may be an independent contractor or an employee of another company who is subcontracted to complete these tasks. In exchange for the individual’s services, he or his company receives monetary compensation. 

This description makes it much easier to understand the concept of outsourcing. Many assume outsourcing only applies to situations where large corporations have products manufactured overseas by a subsidiary and need to realize that examples of outsourcing can be seen everywhere in corporate worldwide.

Domestic Outsourcing 

Domestic outsourcing is known as domestic outsourcing when the primary company and the independent contractor are located in the same country. One of the main reasons for outsourcing is to reduce costs. Still, it is only sometimes necessary to send work overseas.

Cost savings will be discussed in greater detail in the section on the benefits of outsourcing, but essentially outsourcing results in savings due to a reduction of labor costs. Most people already know that overseas outsourcing is a type of outsourcing.

This is where large corporations such as Nike, and even some smaller companies, employ manufacturing plants overseas in third-world countries to upsize their profits. 

This is significant because their costs, including wages, materials, and building leases, would be considerably higher in the United States than in other countries. 

Benefits of Outsourcing

Now that you have a clearer understanding of outsourcing, you might wonder why companies would go into the trouble of outsourcing specific tasks. Outsourcing is popular because there are many benefits to the companies who outsource the work. 

Some of the benefits include: 

  • Reduced labor costs 
  • Increased workforce 
  • Greater flexibility 

One of the main reasons for companies to use outsourcing is that it can reduce costs. In the case of overseas outsourcing of manufacturing tasks, prices can be cut dramatically because lower wages and costs are associated with managing and maintaining the manufacturing plants.

Companies can save money when they outsource tasks domestically. Benefits such as social security, Medicare, and workers’ compensation are not often given to independent contractors hired on a contract basis to complete specific tasks.

It is possible to enjoy a larger workforce without actually hiring more employees. Companies that maintain networking relationships with qualified individuals have more opportunities open to them because they can rely on talented individuals to assist them if they acquire large or complicated projects.

A company can have a great deal of flexibility with outsourcing. It can be difficult for companies with much work to compete for new jobs because they need many available employees.

However, with a network of individuals to rely on if the need to outsource arises, the company has more flexibility in pursuing new work.

The Advantages Of Outsourcing

For several valid reasons, outsourcing has become a trendy alternative. In the beginning, outsourcing was used to cut costs by having manufacturing and assembly done in overseas locations where prices are much lower. Lower wages and operating costs caused the reduced costs.

These lower costs were appealing because they significantly improved the profit margins for the companies. However, outsourcing is now gaining in popularity for various reasons. 

While cost reduction is still a primary advantage, other elements such as access to industry experts, a larger workforce, and more flexibility are being embraced as welcomed advantages that outsourcing offers.

Cost Reductions From Outsourcing 

As previously mentioned, reducing costs was the original purpose of outsourcing. Although outsourcing has since been demonstrated to have other significant advantages, cost reduction remains one of the prime advantages. 

It would be more expensive to complete tasks in-house, so companies outsource them. An example of this type of task would be a software-related task requiring specialized training. Companies that don’t have on-staff employees qualified to complete this task can benefit from outsourcing it.

There may be significant fees required to retain the services of an industry expert on a contractual basis. Still, the efficiency of this individual will enable him to complete the task much more quickly than it could have been done in-house. 

If the task were not outsourced, an in-house employee would have had to complete it, and it may have taken significantly longer, costing the company more in the long run. 

Outsourcing process

On Call Experts 

In the previous section, we talked about how having industry experts available to complete outsourcing tasks can result in cost savings for the company. Still, it also provides the potential for new opportunities for the company. The company can go after more extensive and specialized work because of the experts waiting in the wings. The company must do this because it will help them enjoy greater prosperity.

A Larger Workforce 

Still another advantage to outsourcing is the benefit of enjoying a larger workforce when necessary without the hassle of maintaining a more extensive staff. 

During times of prosperity, outsourcing companies can bring in additional employees on a contract basis without having to lay them off or keep them utilized when the surge of work begins to diminish. This is relevant to industries that enjoy peak and off seasons.

Another advantage of having a larger workforce is generating a more significant profit. This is important because smaller companies can find themselves competing with larger companies for bigger jobs by outsourcing a portion of the workload. 

More Flexibility 

More flexibility is one of the advantages of outsourcing work. Minor errors, changes in plans, or other unimportant activities can cause a project to end up behind schedule or under time constraints.

Smaller companies that need more resources to compensate for these inevitable mishaps may find themselves in serious trouble without the ability to outsource work when necessary. 

These companies can use outsourcing in times of trouble to help them deal with problems without alienating clients or performing poorly on a project.