Outsourcing

economic-dictionary

Outsourcing is a business process by which a company transfers responsibility for its tasks to another firm specialized in that activity.

The subcontracted company, called a subcontractor or supplier, is one that performs certain tasks for another firm (contractor or client). This commercial relationship is usually defined in a contract.

It should be noted that outsourcing is also known by its English name, outsourcing.

In the globalized business environment in which we currently live, outsourcing of production processes has become more and more frequent. This, by outsourcing activities that companies do not consider key.

In this sense, outsourced companies enjoy certain advantages that help them to be useful in the market and satisfy various needs.

Outsourcing example

An example of outsourcing is that carried out by companies that produce smartphones, which are responsible for their manufacture and marketing. However, they delegate to another company the development and update of their system and software, as in the case of the Android system offered by Google.

Thus, these smartphone companies offer a product with a good system that they could not create by themselves because they do not have the necessary knowledge or means to do so.

Advantages of outsourcing

The main advantages of outsourcing are the following:

  • Costs: An outsourced company has the ability to offer lower prices compared to what it would cost the company requesting its services if it did so on its own. This type of advantage appears for various reasons, such as having developed economies of scale or a certain degree of specialization in a particular production process (experience effect).
  • Volume flexibility: On certain occasions there are changes in the market and the demand for a product or service increases. Companies choose between meeting this demand, taking charge of satisfying this increase in orders themselves, or resorting to subcontracting.
  • Process flexibility: Outsourcing allows companies to choose from several options. Therefore, subcontracted companies seek to improve their processes and resources in order to distinguish themselves from the rest and grow by improving their productive factors.
  • Technical or financial capacity: Often subcontractors have the opportunity to do certain types of work that others cannot. This, either by knowing the production process in particular or by having the necessary resources to face the activity.
  • Legal and fiscal advantages: Companies can be located in areas where there is another type of legislation that makes the development of certain activities more attractive. We see daily, for example, in the products we consume that many of them are produced in distant countries. This is due to the fact that the brands outsource production services to points where they obtain tax advantages and, therefore, higher profit margins.

Disadvantages of outsourcing

The main drawbacks of outsourcing are the following:

  • Risk of choosing a bad company: If the service provider company is not chosen well, it can deteriorate the image of the contracting firm.
  • Risk that the supplier becomes a competitor of the contractor: The subcontracted company could take advantage of the know-how of its client to become its competition.
  • The reduced cost may be minimal: The expected benefit from outsourcing, considering what it would cost the company to develop this activity itself, may not be as high as expected.
  • Jobs are lost: If we eliminate a sector of the company to subcontract, those jobs are lost, unless the subcontracted company hires them.

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