Literal meaning of the word Outsourcing is: to Obtain goods or services from an outside supplier; to contract work out. This envisages delegation of jobs or specific important operations of a business to an outside agency that specializes in that activity.
Such outsourcing gives two benefits, financial as well as the improvement in quality because the third party is an expert in the subject.
However, the day-to-day management of the outsourced process rests with the third party. This is the essential difference between the traditional purchase of services or goods from an outside agency. Outsourcing is common practice in sectors like IT, Human Resources, real estate and accountancy.
From the beginning of the 1990s, small, high tech companies found the need for outsourcing as they did not have the financial or manpower resources to run in-house HR or customer service functions. In addition, these functions are highly technical and need specific skills. Hence the story of outsourcing started with these high tech companies.
The outsourcing industry does face criticism especially because of some instances where call centre staff could not explain to their customers that they were not on the rolls of the original company. They were sometimes not trained properly or had the technical knowledge to answer customer queries.
The new outsourcing area is data analysis services. Proliferation of internet and the widespread use of computers resulted in demand for data management. The extraction of specific information from the plethora of data available is a highly skilled task. Fortunately, this can be easily outsourced.
Sometimes outsourcing is used along with the term off-shoring. The basic difference being that off-shoring involves getting the job done by an agency that is based in another country. Off-shoring gives the advantage of cost reduction due to lower labor costs in the overseas country and thus increases the profitability of the company that is hiring the outsourcing services.
Off-shoring has its own set of detractors and is condemned by some as it is perceived as denying job opportunities to the local workers. At the same time it is seen to cause shortages of skilled workers in the host country. There is a lot of debate on both sides of the Outsourcing discussion as to who wins and what is the best approach. There is no right answer but from an pure global economics standpoint, outsourcing provides natural market mechanisms to the labor pool and in the long run outsourcings jobs should provide the most efficient pricing for the labor markets.