What Is Outsourcing? Definition and Guide

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.

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.

Commonly outsourced services include order fulfillmentwebsite development, customer service, accounting, and SEO marketing. But outsourcing can occur for just about anything.

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.

Outsourcing FAQ

What is outsourcing in simple words?

Outsourcing is the practice of hiring a third-party company or individual to perform tasks or provide services instead of doing the work yourself. It is often used to cut costs or access specialized talent.

What are the 4 types of outsourcing?

  • Offshore Outsourcing: This type of outsourcing is when a company contracts with a third-party organization in another country to provide services or products.
  • Onshore Outsourcing: This type of outsourcing is when a company contracts with a third-party organization in the same country to provide services or products.
  • Nearshore Outsourcing: This type of outsourcing is when a company contracts with a third-party organization in a neighboring country to provide services or products.
  • Backsourcing: This type of outsourcing is when a company brings back services or products previously outsourced to an external organization.