What is Outsourcing?

So much has been said about outsourcing, but what does it really mean and how does it work?


What is outsourcing?

Outsourcing is turning over business processes to a third party. SMEs can outsource easily defined tasks such as bookkeeping to complex processes such as IT management.

With the rise of globalisation and advancements in technology, outsourcing can also mean accessing services and capabilities from a third party. SMEs can lease an offshore web developer for a project, without having to fire anyone from existing staff.

Offshoring is often used interchangeably with outsourcing, but they are not the same. Offshoring is outsourcing processes to a third party in a country that’s geographically far from where the client is located. Other terms for outsourcing based on location such as onshore outsourcing (domestic outsourcing) and nearshoring are also used.

Insourcing is the process wherein the business takes back outsourced processes to be done in-house. 

Why are businesses outsourcing or offshoring?

Outsourcing is not limited to reducing costs. Reasons vary by situation, but the business case includes one or more of the following:

  • Cost savings due to economies of scale
  • Scalability and flexibility
  • Focus on core competencies
  • Lack of in-house resources such as skills and technology
  • Predictable costs
  • Lower investment in internal infrastructure
  • Access innovation and thought leadership  

What about BPO, KPO, and ITO ?

There are two basic types of outsourcing:

Business Process Outsourcing (BPO)

Outsourcing specific business process such as payroll and web development. It's usually categorised in two ways: back office processing that covers internal business functions (such as HR and accounting), and front-office outsourcing which includes customer-related services (such as customer service and tech support).  Other known types such as IT outsourcing, Legal Process outsourcing, and R&D outsourcing are actually subsets of BPO.

Knowledge Process Outsourcing (KPO)

Outsourcing processes that involve advanced research. It also provides analytical, technical and decision-making skills. This includes pharmaceutical research and development, and patent research. KPO is less mature and known than the popular BPO, but is beginning to gain acceptance.

Is Cloud Computing outsourcing too?

Yes, if the client procures the service from a third party. There are outsourcers who offer Cloud Computing as part of their toolkit. It offers web based applications and capabilities. For example, SMEs can access data storage or pay for software-as-a-service through “the cloud”.

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