Q&A - Explain what is meant by outsourcing

A business does not have to do everything that is required to produce its products and services.  For example:
- A retailer rarely designs and makes the fixtures and fittings that create the shop interior
- A large consumer products business will not do all its own primary market research
- A local baker will not grow wheat or even mill it into flour

Why don’t these businesses do these things?  Because there are other businesses that are specialised in the tasks required and can do it better and cheaper. This process is called outsourcing.

Outsourcing can be defined as follows:

“the delegation of one or more business processes to an external provider, who then owns, manages and administers the selected processes to an agreed standard” [CIPD]

It is important to note that outsourcing is NOT the same thing as “offshoring” (the two terms are commonly, but wrongly taken as meaning the same thing.

Offshoring involves either outsourcing business activities or services to a third party overseas and/or moving business activities or services to another country as a direct or indirect employer. In other words, offshoring does not always involve the services of an external provider.

Outsourcing always involves getting another business or organisation to provide the service for you.

Most businesses have always outsourced some of their activities.  For example, businesses of all sizes have used the services of professionals like management consultants, auditors and lawyers - rather than having them employed on the payroll.

However in recent decades a larger proportion of business activities and processes are now bought-in from suppliers.

The main reason for increased outsourcing is normally as a way of reducing costs.  However, there can also be some significant gains in the quality and flexibility of the service or product offered.

The choice of whether to outsource or not is really part of a debate that a business has about what the scope of its business should be. In other words:

- What should a business do itself?
- What should a business buy in from others?

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