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Transferring business processes. Explanation of Outsourcing.


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What is outsourcing? Definition

Outsourcing is a strategic management model wherein business processes are transferred to another company. The concept is: to let a third party service provider perform the management and/or day-to-day execution of one or more business functions. This third party service provider 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.

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 the same or another location, in the same country or in a separate country (Offshoring).

In its most advanced form, outsourcing makes it possible to build a large, entirely virtual company with only a single employee: the entrepreneur himself.

Why business process outsourcing? Main Motives

The most important motives for outsourcing are:

  1. To make an organization more competitive, by staying focused on its Core Competence.
  2. To achieve cost reduction and efficiency.
  3. Access to special resources or capabilities. Compare: 3rd Party Logistics (3PL)
  4. To stimulate entrepreneurship in small organizational entities.

outsourcing business models

At least three business process outsourcing models can be distinguished:

  1. Shared Service Center. (See below)
  2. Spin-off. This spin-off company leaves the parent company to specialize in certain activities which are outsourced by the parent company.
  3. Outsourcing to an external organization. Compare: Organization Chart.

Other Potential Benefits of Outsourcing

  • Renewed focus on core business.
  • Mitigation of risks by reliance on an expert.
  • Improved customer satisfaction through improved processes not part of the enterprise's culture or experience.
  • Ability to reward workers with career opportunities in a specialty company.
  • Project improvement.
  • 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 typical Outsourcing terminology:

Application Service Provider (ASP)

An ASP is a company that provides applications and related services over the Internet. Examples include email, payroll processing and ERP applications.

Business Process Outsourcing (BPO)

BPO is the outsourcing of Back Office and Front Office functions, typically performed by white collar and clerical workers. Examples include accounting, human resources and medical coding and transcription.

Competitive Insourcing

Competitive Insourcing is a process whereby internal employees are competing in bidding against competitive, third-party bidders for a defined scope of work. See also Insourcing.

Contract Manufacturing

Contract Manufacturing is the outsourcing of a manufacturing job to an onshore or offshore third-party. With the necessary infrastructure and know-how to perform the job.

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.

Facility Management

A solution in which the customer entrusts to an external services provider the responsibility for operations and maintenance of one or more facilities. Compare: Kraljic Model.


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 that start facilities in the United States and employ U.S. workers.


Nearshoring is outsourcing within nearby territory, accessible by short travel or telephone in the same or neighboring time zone.


Offshoring is outsourcing overseas or in a separate country. Outsourcing to a contiguous country may be considered as Nearshoring (see above).

Service Level Agreement (or SLA)

An SLA is a contract or addendum to a contract that defines the type, value and conditions of the outsourcing services to be provided. Typically, SLAs deal with the quality of service conditions, such as response time, availability, speed, et cetera.

Shared Services

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.

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Compare with Outsourcing:  Business Process Reengineering  |  Vertical Integration  |  Horizontal Integration  |  Co-Creation  |  Value Stream Mapping  |  Value Chain  |  Core Competence  |  Bricks and Clicks  |  Delta Model  |  Management Buy-out  |  Acquisition Integration Approaches  |  SWOT Analysis  |  Benchmarking  |  3rd Party Logistics (3PL)  |  Vendor Managed Inventory

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