What is Outsourcing? Definition, Types, Strengths, Weaknesses, and Examples

Outsourcing can be said as an outsourcing term in business practices where work services are transferred to third parties. There are various types of labor that can be outsourced, including work carried out separately from the main activity, work carried out under direct or indirect orders by employers, and others.

In this case, for example in information technology, outsourcing initiatives with technology providers can involve a wide range of operations, from the entire IT function to discrete and easily defined components, such as network services, software development or QA testing.

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Outsourcing

Outsourcing is sometimes better known as ” contracting out “. Which in essence occurs the process of transferring tasks, operations, work, or processes to external labor, by contracting with third parties for a significant period of time.

The outsourcing function can be carried out by third parties both inside and outside the business location.

Definition of Outsourcing

Outsourcing is a series of strategic decisions made by companies to reduce costs and increase efficiency by hiring individuals and groups or even other companies to perform tasks, provide services, and handle operations that were previously carried out by employees within the company.

Understanding Outsourcing According to Experts

The definition of outsourcing according to experts, among others:

1. Soewondo (2003)

 the definition of outsourcing is the delegation of operations and daily management of a business process to outsiders (outsourcing service companies).

2. Business Encyclopedia

 The definition of outsourcing is a process occurring in a business when it pays outside suppliers to provide goods and services, rather than doing the work themselves.

This practice started in the 1970s and became popular in the 1990s as a way for companies to reduce their internal cost structures.

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Types of Outsourcing

As for the types of work that are allowed to be outsourced or handed over to outsiders through an outsourcing system, they include;

1. Executed separately from the main activity
2. Executed by direct or indirect orders by the employer
3. It is a support activity for the company as a whole
4. Does not hinder the production process directly

In addition to the types of work that can be done by implementing the outsourcing system as mentioned above, the types of outsourcing can also be distinguished based on the category of work performed, including:

1. Professional Outsourcing (Professional outsourcing)

Professional outsourcing includes accounting, legal, purchasing, information technology (IT), and administrative support among other specialized services. This work is one of the most popular types of outsourcing because there is a high potential for cost savings.

Companies only pay for services actually provided while having access to high-quality resources, which significantly reduces  overhead costs .

2. Outsourcing Information Technology or IT (IT outsourcing)

One of the most common services today, IT outsourcing involves subcontracting an outside organization to look after all or part of a business’ IT needs, ranging from software development to maintenance and support.

Nearly every type of business today has an IT need or at least works with technology to some degree, making it the most commonly outsourced department.

For many companies, it will ultimately be cheaper to contract a third-party IT management team than to build one internally. Companies will often outsource IT to store and manage data, but most large businesses outsource only part of the IT function.

3. Manufacturing outsourcing (Manufacturing outsourcing)

Manufacturing outsourcing services are usually quite industry specific. For example, a car manufacturer may have outsourced arrangements for installing windows on all of the car product models it produces. Such outsourcing arrangements can result in significant cost reductions and faster assembly times.

The only major risks of this type of outsourcing are quality issues and possibly production line disruptions. Many believe that manufacturing outsourcing is also important for small and medium enterprises to survive in today’s relentless market competition.

Without the help of third-party companies, some businesses lack the economies of scale that allow them to compete with larger competitors. Fewer companies have the ability to actually invest in and continuously upgrade the equipment, people, and process technology needed to compete in markets where product life cycles are shrinking.

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4. Outsourcing Proses (Process outsourcing)

Today, it is very common to outsource certain operating processes to other companies or units that specialize in that particular service. For example, a bakery may outsource the delivery of packaged cookies to a courier company such as UPS or FedEx.

Such a contract would then involve details on delivery schedules, customer contacts and costs, allowing each company to focus on its strengths and improve customer service while reducing costs and time.

Process outsourcing is also used to describe the practice of handing over control of public sector services such as firefighting, police, armed forces, etc. to non-profit corporations.

5. Project Outsourcing (Project outsourcing)

Sometimes companies have difficulty managing one of their projects or even completing part of a certain project. This is why many will outsource projects to a project management company.

In some cases, companies may not have enough in-house workforce with the necessary skills to undertake projects. It may also be more expensive to complete the project in-house than to outsource it to another, more qualified company.

Advantages and Disadvantages of Outsourcing

The practice of outsourcing is often controversial in many countries. For countries that oppose this system argue that the practice of outsourcing has resulted in the loss of domestic jobs, especially in the manufacturing sector.

However, proponents of this system say that it creates incentives for businesses and companies to allocate resources where they are most effective, and that outsourcing helps maintain the nature of a free market economy on a global scale. Which has advantages and disadvantages. The explanation;

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The outsourcing system has the following advantages;

1. lower costs (due to economies of scale or lower labor rates) or in other words an outsourcing system can reduce operating, labor and overhead costs
2. increased focus on strategy/core competencies, thereby increasing its competitive advantage by outsourcing time-consuming processes to external companies
3. access to skills or resources
4. increased flexibility to meet changing business and commercial conditions
5. Speed ​​up product distribution time to market
6. reduce ongoing investment in internal infrastructure
7. access to innovation, intellectual property, and thought leadership
8. possible cash inflows resulting from the transfer of assets to new providers
9. reduce various risks because they are jointly shared with external parties, while building meaningful partnerships with external parties
10. increase flexibility and efficiency by delegating responsibilities that are difficult to manage and control to external companies

Although the implementation of an outsourcing system has various advantages as mentioned above, this system also has some disadvantages or disadvantages in practice, including;

1. Risk of data loss and loss of confidentiality due to outsourced activities or processes to external parties
2. Loss of management control and inability to control the operation of the outsourced activity or process
3. Outsourcing companies can charge hidden or unanticipated fees by concluding lengthy contractual agreements
4. Lack of quality control, as outsourcing companies are often more profit oriented than focused on doing a good job

Outsourcing example

Below are some examples of how companies perform or implement outsourcing systems for certain functions:

1. Company A is growing rapidly and needs more office space. However, the company is located in a very expensive location and there is no more room to build or expand. Therefore, companies can outsource some of the work that takes up office space (for example, data entry or customer service support) to reduce the need for additional space.
2. Company B has enjoyed great success over the last few years and is currently looking to expand its product line. However, the company is constrained by a limited number of workers. Therefore, in order to expand its own product line, Company B needs to slow down production of some of its existing products. Companies can outsource work to external local factories to reduce labor constraints.
3. Company C is an automaker facing rising raw material and labor costs. Therefore, the profit margin on its manufactured goods continues to decline as costs increase. Companies can outsource part of their production process, for example, the manufacture and installation of windows on their cars. Time and assembly costs can be saved by outsourcing expensive production processes to external companies who can perform them at lower cost.

That was an article that could be put forward to all people regarding  the meaning of outsourcing  according to experts, types, advantages, disadvantages, and examples.