Outsourcing involves the transfer of the management and/or day-to-day execution of an entire business function to an external service provider. The client organization and the supplier enter into a contractual agreement that defines the transferred services. Under the agreement the supplier acquires the means of production in the form of a transfer of people, assets and other resources from the client. The client agrees to procure the services from the supplier for the term of the contract. Business segments typically outsourced include information technology, human resources, facilities and real estate management, and accounting. Many companies also outsource customer support and call center functions like telemarketing, customer services, market research, manufacturing and engineering.

Outsourcing and offshoring are used interchangeably in public discourse despite important technical differences. Outsourcing involves contracting with a supplier, which may or may not involve some degree of offshoring. Offshoring is the transfer of an organizational function to another country, regardless of whether the work is outsourced or stays within the same corporation.

REASONS OF OUTSOURCING

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 offshoring 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.

Knowledge. Access to intellectual property and wider experience and knowledge.

Contract. Services will be provided to a legally binding contract with financial penalties and legal redress. This is not the case with internal services.

Operational Expertise. Access to operational best practice that would be too difficult or time consuming to develop in-house.

Staffing Issues. Access to a larger talent pool and a sustainable source of skills.

Capacity Management. An improved method of capacity management of services and technology where the risk in providing the excess capacity is borne by the supplier.

Catalyst For Change. An organization can use an outsourcing agreement as a catalyst for major step change that can not be achieved alone. The outsourcer becomes a Change agent in the process.

Reduce Time To Market. The acceleration of the development or production of a product through the additional capability brought by the supplier.

Commodification. The trend of standardizing business processes, IT Services and application services enabling businesses to intelligently buy at the right price. Allows a wide range of businesses access to services previously only available to large corporations.

Risk Management. An approach to risk management for some types of risks is to partner with an outsourcer who is better able to provide the mitigation.