Understanding Outsourcing

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:

* Reduced labor costs
* Increased workforce
* Greater flexibility

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.