Outsourcing

Definition: 

The use of specialised external providers to perform non-core business activities. This involves identifying and closing one internal function of the business and utilising expertise of another business (sometimes international - but think about complexities of global finance) in order to cut costs, focus on core competencies (that lead to competitive advantage), improve quality, and increase profitability.

Businesses hope that the drawbacks of using an external firm are outweighed by the benefits—there are risks involved in outsourcing. 

Advantages:

• Simplification of internal operations processes (focus on core operations)

• Increased processing capacity of specialist firm 

• Access to specialised, highly skilled staff and cutting edge resources 

• Efficiency gains and cost reductions (streamlining)

Disadvantages:

• Increased dependency on external firm (no control over delivery / quality)

• Communication / language barriers (if utilising global outsourcing / global contracting)

• Loss of information / critical patents / financial details

• Organisational change and resistance (poor image from firing local workers)

When to apply this strategy:

• When a firm has inefficient internal functions. 

• When a firm seeks to drive down costs and is able to bear the risk and backlash from outsourcing. 

• When a firm can access better technology / services without investing in them internally. 

Human Resources also uses outsourcing for key HR functions and to provide labour through contracting.