What is outsourcing

Outsourcing refers to the process of commissioning an outside entity to provide services that might otherwise be performed by in-house employees. This relationship may involve transferring or sharing management control or decision-making of the business function with the outside supplier. The outsourced business functions or processes usually fall out of the client's core competencies but are still vital to the regular functioning of the business. Interactive information exchange, coordination and trust between the outsourcer and the client are all ingredients of an ideal outsourcing partnership.

Outsourcing first hit the economic scenario in the 1980s and has now become a popular global business phenomenon. Generally, two typical segments of outsourcing are Information Technology (IT) outsourcing and Business Process Outsourcing (BPO). BPO includes outsourcing in sectors like accounting, HR, benefits, payroll, and finance functions. Many companies also opt for outsourcing in customer support and call center functions, manufacturing, engineering, healthcare data processing etc.

Offshoring - isn't it the same?

In common parlay, offshoring and outsourcing are treated as synonyms and are often used interchangeably. Although they are related concepts, an important difference in meaning separates them. Outsourcing is the transfer of an organizational function to an outsider. If work is assigned to a third party located in another country, the term offshore outsourcing would be more apt. Offshoring, on the other hand, refers to relocation of a function to another country, irrespective of the work remaining within a company or not. Outsourcing involves the sharing of organizational control with the external agency, while offshoring does not entail a transfer or transformation of internal control.

Offshoring or moving jobs out of the country was initiated in the developed countries in the 1970s and began with the translocation of factories from the developed to the developing world. IDC expects offshoring to grow some 15 percent a year, becoming a $29.4 billion market by 2010. The economics of low cost predominantly drives offshoring and it can take the guise of production offshoring, services offshoring and innovations offshoring.

Cultural similarity is mostly the vital criterion in the choice of optimal offshoring destination, with language skills looming large over the transactions. India has seen an offshoring boom from US and UK because of the presence of a large pool of technically skilled, English speaking population. German companies prefer Poland and Romania which offer proficiency in the German language while French companies offshore to North Africa on similar lines.

Together, offshoring and outsourcing are phenomena dictating business and industrial equations worldwide. They have transformed the face of countries and companies globally and will continue to do so in the coming years.

Vidhu Panicker
Outsourcenews.com network