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Why is Outsourcing Needed?

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In the modern era, there have been fundamental changes in the way business is done. The term “mode of business” refers to the way the business is conducted, and the word “emerging” emphasizes that these changes are happening now, and, that these trends are likely to continue. As a result of this, business worldwide is changing their organization, way of working, use of technology, and redesigning of business processes. The three trends that are shaping business are (i) e-business, (ii) outsourcing, (iii) internationalization, and globalization. The present article focuses on understanding the meaning and the need for business outsourcing. 

What is Outsourcing?

Businesses perform various activities for successful conduct, such as production, buying, selling, arranging finance, advertisement, and after-sale services to their customers. Usually, these activities are performed by the business organization itself. However, with the expansion of the business, the single organization is not competent enough to have specialization in all these activities. Therefore, to overcome the difficulties and to get the benefit of specialization, these services are now obtained from outside the organization. This is called outsourcing of business. Outsourcing is the practice of contracting out some of its activities to a third party, which was earlier performed by the organization.

Outsourcing refers to a long-term contracting out generally the less important activities to specialized service providers to take benefits of their expertise, experience, and cost-effectiveness and allow managers to focus on the core activities. 

Earlier, companies used to hire agencies to handle jobs that would arise on occasion. For example, companies hire consultants to train their employees or to design advertisements. But now, the trend has changed. The company employs outside agencies to perform routine jobs such as after-sale services, customer care services and maintaining books of accounts, etc. The company must identify its core (significant) activities and should concentrate only on that and outsource non-core (insignificant) activities, which are specialized in these functions.

It is said that need is the mother of all inventions. This holds in the case of outsourcing as well. The main factors that force a business to re-think or re-look at business processes are evolving technologies, ever-demanding customers, and worldwide competitive demands for higher-quality products at cheaper costs. So let us understand the need for business outsourcing.

Need for Business Outsourcing

Need for Business Outsourcing

Several factors are responsible for the emergence of outsourcing as a mode of business. Today outsourcing is used not as a compulsion, but also out of choice. Some of the reasons for adopting business outsourcing are discussed below:

1. Focusing of Attention:

Outsourcing allows businesses to concentrate on the core (significant) areas and outsource routine tasks. It enables them to focus their attention and resources on the selected areas for better efficiency and effectiveness. For example, the company can focus on maintaining the quality of the products and increasing the productivity of the employees by outsourcing the activities, such as advertisement, and book-keeping. 

2. Cost Reduction:

In the competitive world, the only way to ensure the survival and profitability of businesses is cost reduction. With the division of labour, and specialization, the company can reduce its cost. It happens due to economies of scale, which accrue to the outsourcing partners, as they perform the same task for different companies. So, it helps client companies to get the benefit of economies of scale and save 10% to 20% of costs. In case, a foreign company outsources its activities to an Indian organization, the foreign company can get the benefit of cheap manpower in India. It also reduces the cost of production.

3. Quest for Excellence:

Outsourcing helps firms to get excellence in two ways:

  • The business can succeed in the things it does best.
  • The firms can contract out the remaining activities to expert and specialized service providers. For example, a company can give the work of developing software to TCS or Infosys.

4. Excellence-driven Growth

The company avails services from other firms enabling the growth and expansion of business as resources saved from outsourcing can be used for expanding the production capacity and exploring new markets. Therefore, businesses can expand rapidly. Apart from financial returns, it facilitates inter-organizational knowledge, sharing, and collaboration. For this reason, today, firms are outsourcing not only their routine, non-core activities, but also, their strategic processes, like Research and Development, etc.

5. Filip (Boost) to Economic Development

Outsourcing stimulates entrepreneurship, employment, and exports in countries where outsourcing is done (known as the host countries), like the IT sector of India. India has become a leader in the global outsourcing of software development and IT-enabled services ( with a 60% global outsourcing share in the IT sector).

6. Smooth Operation of Business

Outsourcing is needed to run the business smoothly. The attention of businessmen gets diverted from various small things and focused on the main activity. In this way, the whole business runs decently.

Thus, outsourcing includes obtaining some services from an outside organization to run the business successfully and also have the benefit of specialization.

 


Last Updated : 06 Apr, 2023
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