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Outsourcing is a term which has received a great deal of attention lately.
Despite the increasing trend in companies relying on outsourcing there are
still some who do not clearly understand what is meant by the term
outsourcing. This article will examine some of the key elements of
outsourcing to help the reader develop a better understanding of the concept
of outsourcing.
Outsourcing Defined
What is outsourcing? This is the most basic question many have about the
subject of outsourcing. They are not yet interested in more complex aspects
of the issue because they have not yet grasped the most basic understanding
of the process. In the simplest language outsourcing is when a company
delegates the completion of certain 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 of outsourcing makes it far easier to understand the
concept. Most people incorrectly assume outsourcing only applies to
situations where large corporations have products manufactured overseas by a
subsidiary and don’t realize examples of outsourcing can be seen just about
everywhere in corporate America.
Domestic Outsourcing
Domestic outsourcing refers to outsourcing where both the primary company and
the independent contractor or subsidiary are located in the same country. One
of the main reasons for outsourcing is to reduce costs but it is not always
necessary to outsource work overseas to reduce costs. Cost savings will be
discussed in greater detail in the section on the benefits of outsourcing but
essentially outsourcing results in a savings as a result of a reduction of
labor costs.
Overseas Outsourcing
Overseas outsourcing is the type of outsourcing most people already
understand. 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 lease would be considerably higher in
the United States than they are in these other countries.
Benefits of Outsourcing
Now that you have a clearer understanding of the concept of outsourcing, you
might wonder why companies would go to the trouble of outsourcing certain
tasks. Outsourcing is popular because there are a great deal of benefits to
the companies who outsource the work. Some of the benefits include:
One of the main reasons companies resort to outsourcing is it can
significantly reduce costs. In the case of overseas outsourcing of
manufacturing tasks, costs can be cut dramatically because there are lower
wages and costs associated with managing and maintaining the manufacturing
plants. However, companies also enjoy a cost savings when they outsource
tasks domestically. Reduction of labor costs is the primary source of savings
in this case. Independent contractors hired on a contract basis for the
purpose of completing specific tasks are often not given benefits such as
social security, Medicare and workers’ compensation.
Another benefit to outsourcing is enjoying a larger workforce without
actually hiring additional employees. Companies who maintain networking
relationships with qualified individuals have more opportunities open to them
because they are able to rely on these individuals to assist them if they
acquire large or complicated projects.
Finally, outsourcing gives a company a great deal of flexibility. Companies
who have a significant workload and backlog of work where the majority of the
employees are highly utilized might be hesitant to compete for new work
because they do not have a great deal of employee availability. However, with
a network of individuals to rely on if the need to outsource arises, the
company has more flexibility in pursuing new work.
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