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What is Outsourcing?

Outsourcing occurs when a business pays an outside supplier to provide goods and services, rather than doing the work in-house. The practice started in the 1970s and grew popular in the 1990s as a way for companies to reduce their internal cost structure.

The global outsourcing market amounted to $88.9 billion in 2015, which was down considerably from the $104.6 billion spent in 2014, according to Statista. India, China, and Malaysia are the top three countries to which companies outsource. But that doesn’t mean companies have to send business outside the U.S. – outsourcing refers simply to having work done by a non-employee of your business.

Perhaps the most commonly outsourced service as of the 2010s is telephone customer service, which major corporations outsourced to companies in India because the cost was a fraction of what American companies charged. But outsourcing can occur on a smaller scale, too.

Don’t want to hire a full-time public relations (PR) manager? Turn your PR work over to an independent contractor or PR firm that is paid based on the work completed. Hate the liability of having employees do deliveries to customers? Hire a local delivery firm to do it for you.

On a larger scale, a dress designer might outsource belt manufacturing a company that specializes in leather. An electronics manufacturer might outsource the assembly of some of its parts to another company.

To Outsource or not to Outsource

Outsourcing only makes sense when the cost to buy goods or services from an outside vendor is much lower than the cost to deliver the service or manufacture the product in-house. However, many companies have discovered that cost is not the only consideration when evaluating outsourcing as a strategy.

While many overseas vendors can deliver lower-cost goods, they are not always at the same quality level. Some online retailers that have outsourced technical support to non-English-speaking countries have discovered their customers have difficulty communicating with the phone operators, creating dissatisfaction the retailers hadn’t anticipated. Consequently, some businesses are shifting work back to the U.S., despite the higher costs.

Outsourcing’s Disadvantages

While outsourcing can be a smart way to reduce internal expenses, there are potential downsides, too. By shifting responsibility for parts of your operation to other companies, your human resource capabilities will become more limited. That is, you’ll have more specialists than generalists on staff. This will make it more challenging to remain flexible if the market shifts. It also dampens creativity.

Not only that, but outsourcing can wreak havoc on your production if something catastrophic happens at your vendor’s location. For that reason, it’s best not to become too reliant on any one vendor. And keeping core aspects of your business in-house can help protect you from disruption.

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