Why Do Companies Outsource?

What Is Outsourcing?

Outsourcing can be defined as “the strategic use of outside resources to perform activities traditionally handled by internal staff and resources." Outsourcing is a strategy by which an organization contracts out major functions to specialized and efficient service providers, who ultimately become valued business partners. And in some cases, outsourcing involves the transfer of employees from the company to the outsourcing company.

Why Do Companies Outsource?

There are many reasons why a company may choose to outsource certain business functions. Some of the most common reasons include:

• Reducing and controlling operating costs
• Improving company focus
• Gaining access to world-class capabilities
• Freeing internal resources for other purposes
• Streamlining or increasing efficiency for time-consuming functions
• Maximizing use of external resources
• Sharing risks with a partner company

But these reasons aren't enough to implement a successful outsourcing program. In fact, companies must ensure that they consider all of the components and are able to meet the requirements for successful outsourcing.

Requirements for Successful Outsourcing

In the early days, cost or headcount reduction were the most common reasons to outsource. Today, the drivers often are more strategic and focus on carrying out value-adding activities in-house where an organization can best utilize its own core competencies.

The critical areas for a successful outsourcing program include:

• Clarity concerning company goals and objectives
• A strategic vision and plan
• Vendor selection
• Relationship management
• Properly structured subcontract and vendor agreements
• Open communication with affects stakeholders
• Senior leadership support and involvement
• Careful attention to personnel issues
• Short-term financial justification