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Outsourcing refers to the obtaining of goods or services from an outside or foreign provider, especially in place of an internal source. This would involve restructuring of company tasks, departments and processes as required. Outsourcing can be complete or partial, depending on the type of IT system, services or the supply of materials.
In most cases, outsourcing is a key component of corporate strategy and can save resources, time and labor, and enable the company to focus on core competencies. As a rule, the type of cooperation (services, obligations, and time period) between the contracting authority and service provider is regulated by contract. The opposite of outsourcing is described as insourcing. In this case, business processes are integrated into the internal operational processes again.
Outsourcing can be defined differently and have different meanings in different regions:
- All external services that have been outsourced are covered by the term.
- Former internal services are outsourced.
- Only specialized areas are outsourced and, for example, referred to as IT outsourcing or facility management.
The idea of using external resources comes from manufacturing and industrialization. It is assumed that when workers specialize on certain specific tasks, the company can work more efficiently. Division of labor is often referred to as the origin of the outsourcing concept. With globalization, in many cases whole production sites were moved abroad. This is also described as offshoring or offshore outsourcing. Over time, the tasks and processes that were being outsourced became more and more demanding, and today a reduction in the value creation depth and contract manufacturers have evolved, which take over parts of the original value chain.
The reasons for outsourcing can be very diverse. Cost reduction and profit maximization are not always the main reasons. Outsourcing of business processes is often accompanied by a specialization of the company and a shift in know-how and competences. When companies outsource certain processes, they can focus on other tasks and the external service provider will then be the specialist in the outsourced business area. Outsourcing can therefore be a win-win situation if the processes are restructured according to content criteria.
How it works
The fact that outsourcing can result in specialization for customers and service providers becomes clear when the example of IT infrastructures is considered. Large companies and corporations rely on functioning IT systems, but these do not constitute the core of their actual performance. Companies need specialist personnel, specialized departments and an infrastructure that is adapted to the size of the company. These requirements are often outsourced in order to compensate for such situations. This is sometimes associated with a cost reduction, but it is not the primary goal of IT outsourcing. Rather, the purpose is that the specialist knowledge is available when it is needed.
Examples of IT outsourcing are:
- E-Outsourcing: Tasks and processes that can be processed online are given to third parties. Various marketing disciplines, design projects of logos and websites, search engine optimization or the hosting of servers should be mentioned in this context.
- Application service providers (ASP): Individual applications can also be outsourced. ERP and CRM systems, business intelligence applications or software as a service (SaaS) are areas that can be taken over by ASPs.
- Cloud computing: This is actually an example of the outsourcing of IT services, but there are other price models and, in some cases, more flexible conditions for customers. Cloud computing can be associated with ASP services. One disadvantage is that sensitive data could be stored in the cloud.
In the modern world of work the role of outsourcing has changed significantly. The purposes for outsourcing range from cost reductions, a shift of competence to the optimization of processes. All processes within a value chain are at the heart of these developments. It is no longer a question of how a product can be produced in a more cost-effective way, but how the production processes can be optimized in general. Smaller tasks are often outsourced in particular since this also makes sense from a business perspective in order to optimize the overall process.
Process outsourcing is also mentioned in this context:
- Business process outsourcing (BPO): Entire company-internal processes are outsourced to third parties. Recruiting, payments, acquisition or controlling are examples of processes that can be outsourced. Service-oriented architectures (SOA) are also part of BPO.
- Knowledge process outsourcing (KPO): Special tasks and processes in companies require very specialized expertise. Complex areas such as research, law or creative services can be outsourced within the framework of the KPO.
- Transformational outsourcing: If consultants are added to the mix to optimize the processes you speak of transformational outsourcing (TO). The processes are reorganized and then reintegrated or continued externally.
- Next generation outsourcing: Individual business areas are strictly separated from facilitating departments, such as IT. The third-party provider does not work with the company’s IT department but with the technical department itself. These models are not concerned with the provision of individual services, but with the assured support for all relevant processes, which the department is responsible for.
Benefits and Disadvantages
Outsourcing has many different advantages and disadvantages, which can be applied in different specialist areas and departments. In general, outsourcing involves the following risks:
- Too high dependency on third parties.
- Insufficient cost analysis will result in additional costs.
- Ensuring the quality of the outsourced services is not always given.
- The flow of information between internal departments can be interrupted.
- Competencies and know-how are shifted out and not adequately protected.
- Third parties may be part of the competition and may become competitors.
On the other hand, there are different advantages:
- Focus on core competences is possible.
- Cost reductions and savings can result.
- Specialized third-party providers sometimes generate better results.
- Synergy effects can result from relieving departments.
- Access to special knowledge is possible if required.
- Strategic cooperation can lead to a competitive advantage.
Relevance to online marketing
Outsourcing in its various forms and expressions is often used in online marketing and related disciplines. When experts speak of an outsourcing industry, they are referring to the different business areas in which outsourcing is put to good use. This can be content marketing, SEO, SEA or payment services, as well as software-as-a-service, business intelligence, cloud computing, and other special areas that require in-depth know-how. Depending on the application, cost savings can result, but the implementation of outsourcing solutions is a challenging task involving different departments and stakeholders. Outsourcing is ideally linked to change processes and supply chain management in order to be able to keep an overview of the various changes. Insofar as outsourcing involves different departments and persons, it is a task that requires clear responsibilities and should also be legally sound.
- IT sourcing strategy guide for enterprise CIOs searchcio.techtarget.com. Retrieved on October 27, 2016