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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.

Special Interest Group

Outsourcing Special Interest Group.

Special Interest Group (168 members)


Forum discussions about Outsourcing. Below you can ask a question about this topic, share your experiences, report a new development, or explain something.

Start a new topic about Outsourcing


What is Integral Outsourcing?
A term that came from the UK, is 'Integral Outsourcing', basically outsourcing the outsourcing.
In the past decennia, several (non-core) processes have been outsourced in many organizations. For ...
Combining Outsourcing with the Wisdom of the Crowd: Crowdsourcing
In the HBR of April 2013, K.J.Boudreau and K.R. Lakhani are writing about the concept of Crowdsourcing (C). According to them C is a recent development in which organizations use the crowd for problem...
🔥 NEW Service Transition Management (Outsourcing)
In general, a "transition" is a process of transfer of something from one position/place/phase to another. Considering that, "Transition Management" is the process of effectively managing the transiti...

Best Practices

The best, top-rated topics about Outsourcing. Here you will find the most valuable ideas and practical suggestions.

When to Outsource Innovation?
According to Michael A. Stanko, Jonathan D. Bohlmann and Roger J. Calantone in the article “Outsourcing Innovation” (Executive Adviser, November 2009), outsourcing research and development and the cre...

Public Services Outsourcing
Given 35 years of both private and public sector experience, I am very cautious of embracing outsourcing as a panacea for reducing costs and increasing performance in public services. As experience ha...

Incentivised Outsourcing Contracts
I've been looking to see any proof that incentivised contracts in outsourcing really work i.e. do they actually increase quality or meet on-time delivery deadlines etc, etc? Anyone put any statistics ...

What is Outsourcing - Definition
Is the management or day-to-day execution of an entire business function by a third-party service provider. Outsourced services may by provided on or off premises in the same country, or in a separate...

How to Maintain Control in Outsourcing (jobwork)
I am working on a outsourcing project witha textile company. Here the weaving process is outsourced to an external vendor. I need to know what are the various control measures one can use over the ven...

Shared Services Models and Theories
I'm doing a research on shared services in the public sector. Does anyone have info on the types of models and theories available in shared services?...

Pricing of Outsourcing
Could someone advise how pricing is done in the outsourcing industry?...

Outsourcing Customer Services
My experience is the bigger the company moving to outsourcing of customer service, the higher the risk in customer satisfaction. Offshoring increases the risk even more....

Disadvantages of Outsourcing
All the above mentioned benefits made me think: OK, but what are the limitations and disadvantages of outsourcing? I can think of these:
1. Less management control over the outsourced activities<...

How to Estimate Loss of Intellectual Property in Case of Outsourcing
I am working on the analysis of a product which is already being produced... Completely in-house in our company. My task is to draw a model in which effects of outsourcing are visible. I would like to...

Expert Tips

Advanced insights about Outsourcing. Here you will find professional advices by experts.

Outsourcing Alternative: Insourcing

These outsourcing risks are the reasons why companies should first ponder on it before plunging in. In fact, a better al...

Offshoring of Creative Work and Knowledge Work

The Future of High End Outsourcing
I recommend the amusing and instructive case by management writer Stephen Brown in Harvard Business Review September 200...

Benefits of Outsourcing Innovation

Improving Innovation Performance
Michael A. Stanko, Jonathan D. Bohlmann and Roger J. Calantone (“Outsourcing Innovation”, Executive Adviser, November 20...


Making Onshoring Work
In a recent article titled "How to Make Onshoring Work" by Aditya Pande (Harvard Business Review, March 2011), the autho...

Dimensions of Business Processes to Consider before Outsourcing

Determining Outsourcing Viability of a Process
Researchers Deepa Mani, Anitesh Barua and Andrew B. Whinston have found that outsourcing arrangements stand a better cha...

When Should a Firm Consider to Outsource Innovation?

Outsourcing Best Practices, Innovation
According to Michael A. Stanko, Jonathan D. Bohlmann and Roger J. Calantone in the article “Outsourcing Innovation” (Exe...

List of Reasons for Offshoring

Offshoring, Outsourcing, Best Practices
Increasingly, companies no longer perceive offshoring as a way of cost cutting only, but also as a growth strategy. Rece...

Traditional versus Transformational Outsourcing

Cost Reduction versus Adaptability
Nowadays, we can distinguish two types of outsourcing: traditional– and transformational outsourcing. - Traditional out...

Service Level Agreements and Service Level Management

Effective BPO Management
In today’s highly globalized and specialized business environment, characterized by frequent outsourcing of one or more ...

Outsourcing Trends

Outsourcing, Market Development
In an article (How to be an Outsourcing Virtuoso) by Vinay Couto and Ashok Divakaran they mention 4 trends for outsourci...
Information Sources

Various sources of information regarding Outsourcing. Here you will find powerpoints, videos, news, etc. to use in your own lectures and workshops.

Governance Model for Outsoucing

Outsourcing Organization
Studies reveal that half of the strategic outsourcing investments fail. PwC recommends a rigorous three-tiered approach ...

The Politics and Economics of Offshore Outsourcing

Politics and Economics
Paper by N. Gregory Mankiw and Phillip Swagel reviews the uproar over offshore outsourcing and examines the differing wa...

Introduction to HR Outsourcing

Human Resource Management Outsourcing, HR Outsourcing, HRM Outsourcing
Introduction into the outsourcing of HR, including the following sections: 1. Current HR status? 2. What is happening ...

International Business Process Outsourcing. Trends, Drivers, Objectives, Advantages, Risks, Reasons for Failure

Business Process Outsourcing, BPO, Outsourcing to India,
1. Agenda 2. Business Process Outsourcing Definition 3. Industry trends for application outsourcing 4. Significant gr...

Outsourcing Benefits

A 3-legged Stool
Paper by Monika Wienskowska and Waldemar Stronka develops Umesh Bhatia’s idea that service receivers should consider out...

Outsourcing to Global Business Service Providers and Sustainable Development

Globalization, Outsourcing, Sustainable Development
This presentation covers the issue of globalization of services, thereby emphasizing business process outsourcing and IT...

Outsourcing and Technological Change

Impact of IT / ICT on Outsourcing
In this paper, Ann P. Bartel, Saul Lach and Nachum Sicherman argue that an important source of the recent increase in ou...

Outcoursing in a 'Flattened' World

Global Outsourcing, Business Process Outsourcing
Presentation about the subject of outsourcing, specifically focused on IT services. The presentation includes the follow...

Introduction to IT Outsourcing

IT Outsourcing
Presentation that introduces the concept of outsourcing, and includes the following sections: 1. What is outsourcing? ...

Research Links

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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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