Transferring business processes: (Business Process) Outsourcing explained
What is outsourcing? Definition
Outsourcing is a strategic management model transferring business processes to another company. The concept is to have
the management and/or day-to-day execution of one or more business functions performed by a third party service
provider, who is insourcing those same processes. Outsourcing occurs when a company uses an outside firm to provide a
necessary business function that might otherwise be done in-house. Its aim is mostly to make an organization more
competitive by staying focused on its core competencies.
It is different from subcontracting because the function is provided on an ongoing basis, rather than for a specific project.
It can be provided on or off premises, in the same country or in a separate country (Offshoring).
In it's most advanced form, outsourcing makes it possible to build a large, entirely virtual company with only a single
employee: the entrepreneur.
Potential Benefits of Outsourcing
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Renewed focus on core business.
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Ability to reward workers with career opportunities in a specialty company.
Mitigation of risks by reliance on an expert.
Improved customer satisfaction through improved processes not previously part of the enterprise's culture or
experience.
Project enhancement.
Service improvements.
Skills upgrade.
Skills retention.
Skills access.
Technology infusion.
Cost accounting and overall visibility of accounting and performance in a business process.
Cost reduction.
Management of volatility in costs through financial engineering.
Asset conversion.
Avoidance of capital investment.
Glossary of some typical Outsourcing terms:
Insourcing
Application Service Provider (ASP)
An ASP is a company that rents applications and related
services over the Internet. Examples include email, payroll
processing and ERP applications.
Insourcing is the transfer of an outsourced function to an
internal department of a company, to be managed entirely
by employees. The term has also been used to describe
foreign companies locating facilities in the United States and
employing U.S. workers.
Nearshoring
Business Process Outsourcing (BPO)
BPO is the outsourcing of back office and front office
Nearshore outsourcing or 'nearshoring' is outsourcing
within nearby territory, accessible by short travel or
functions typically performed by white collar and clerical
workers. Examples include accounting, human resources
and medical coding and transcription.
telephone in the same or neighboring time zone.
Offshoring
Competitive Insourcing
Offshore outsourcing or 'offshoring' is outsourcing overseas
or in a separate country. Outsourcing to a contiguous
Competitive insourcing is a process whereby internal
country may be considered nearshore outsourcing (see
employees engage in bidding to compete with competitive, above).
third-party bidders for a defined scope of work. See also
insourcing.
Service Level Agreement (or SLA)
Contract Manufacturing
An SLA is a contract or addendum to a contract that defines
the type, value and conditions of the outsourcing services to
Contract manufacturing is the outsourcing of a
be provided. Typically, SLAs address quality of service
manufacturing job to an onshore or offshore third-party with conditions, such as response time, availability, speed, et
the necessary infrastructure and know how to perform the cetera.
job.
Shared Services
Co-Sourcing or Cosourcing
Cosourcing is where a business function is performed by
both internal staff and external resources, such as
consultants or outsourcing vendors, with specialized
knowledge of the business function.
Shared services is the outsourcing of a business function
within an enterprise to a highly skilled internal department
or group. For example, the purchasing department at one
plant may provide purchasing services to all other plants
within a given manufacturing company. Shared services
may also be provided to third parties.
Facilities Management
An outsourcing solution in which the customer entrusts to
an external services provider the responsibility for
operations and maintenance of one or more facilities.
Compare with Outsourcing: Business Process Reengineering | Co-Creation | Value Stream Mapping | Value Chain |
Core Competence | Bricks and Clicks | Delta Model | Management buy-out | M&A | SWOT analysis |
Benchmarking
Return to Management Hub: Change / Organization | Finance / Investing | Human Resources | Program / Project
Management | Strategy | Supply Chain / Quality
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