Outsourcing was formally recognized by the business community during the 1980s. It is the practice of delegation of non-core operations from internal production to an external entity specializing in the management of that operation.
Benefits that outsourcing organizations reap include cost savings in the form of not having to spend on hiring and training new and/or temporary workers, and cost restructuring (operating leverage is a measure that compares fixed costs to variable costs. Outsourcing changes this ratio by making variable costs more predictable). Companies that do everything themselves have much higher research, development, marketing, and distribution expenses, all of which must be passed on to customers. An outside provider’s cost structure and economy of scale can give the firm an important competitive advantage: increased efficiency. Outsourcing releases capital for investment elsewhere in the business, and allows the firm to avoid large expenditures in the early stages of the business. It can also make the firm more attractive to investors, since the firm is now able to pump more capital directly into revenue-producing activities. A good outsourcing firm has the resources to start a project right away. Also, the start up process becomes much easier if the project requires major capital investments (such as building a series of distribution centers).
Outsourcing means that the business can focus on its core manufacturing operations. Every business has limited resources; every manager has limited time and attention. Outsourcing helps managers set their priorities more clearly.
The benefits of outsourcing also include access to intellectual property, wider experience, greater knowledge, and operational expertise, because it provides access to a larger talent pool and a sustainable source of skills. They also include acceleration of the development or production of a product through the additional capability brought by the supplier; Capacity Management (an improved method of capacity management of services and technology where the risk in providing the excess capacity is borne by the supplier); and better Risk Management (for instance, an approach to risk management for some types of risks is to partner with an outsourcer who is better able to provide the mitigation. Outsourcing also offers overall reduced risk – every business investment carries a certain amount of risk. Outsourcing providers assume and manage this risk for the firm, and they generally are much better at deciding how to avoid risk in their areas of expertise.
Moreover, outsourcing levels the playing field: most small firms can not afford the in-house support services that larger companies maintain. Outsourcing can help small firms act “big” by giving them access to the same economies of scale, efficiency, and expertise that large companies enjoy.
To the service provider, outsourcing is a blessing, since it provides employment, and opens up avenues of opportunities that are both larger in number, and greater in scope, providing further occasion to grow and develop, through transfer of technology and managerial expertise.
Maliha Abidi
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