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Outsourcing is subcontracting a process, such as product design
or manufacturing, to a third-party company. The decision to
outsource is often made in the interest of lowering firm costs,
redirecting or conserving energy directed at the competencies of
a particular business, or to make more efficient use of labor,
capital, technology and resources. Outsourcing became part of the
business lexicon during the 1980s. Advantages:
Organizations that outsource are seeking to realize benefits or
address the following issues:
Cost savings: The lowering of the overall cost of the
service to the business. This will involve reducing the scope,
defining quality levels, re-pricing, re-negotiation, cost
re-structuring. Access to lower cost economies through off
shoring called "labor arbitrage" generated by the wage gap
between industrialized and developing nations.
Cost restructuring: Operating leverage is a measure
that compares fixed costs to variable costs. Outsourcing changes
the balance of this ratio by offering a move from fixed to
variable cost and also by making variable costs more predictable.
Improve quality: Achieve a step change in quality
through contracting out the service with a new service level
agreement. |
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