Outsourcing - Reasons

Outsourcing

outsourcing is simply the farming out of services to a third party. It is a practice used by different companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally.

Outsourcing is an effective cost-saving strategy when used properly. It is sometimes more affordable to purchase a good from companies with comparative advantages than it is to produce the good internally. An example of a manufacturing company outsourcing would be Dell buying some of its computer components from another manufacturer in order to save on production costs. An organization can outsource many functions of its day to day operations – manufacturing, marketing, human resources management, information technology services to name a few. It is thus a type of make-or-buy decision, wherein typically an earlier “make” decision is altered to a “buy” decision.

Although outsourcing has been around as long as work specialization has existed, in recent history, companies began employing the outsourcing model to carry out functions outside its core competency. Those processes could be done more efficiently, and therefore more cost-effectively, by other companies with specialized tools and facilities and specially trained personnel.

The process of outsourcing generally encompasses four stages:

1) strategic thinking, to develop the organization's philosophy about the role of outsourcing in its activities;

2) evaluation and selection, to decide on the appropriate outsourcing projects and potential locations for the work to be done and service providers to do it;

3) contract development, to work out the legal, pricing and service level agreement (SLA) terms;

4) outsourcing management or governance, to refine the ongoing working relationship between the client and outsourcing service providers.

Reasons of Outsourcing :-

1.) Lower Wages

As the old saying goes, it’s all about the money. The fact of the matter is that...