Outsourcing is the contracting out of a business process to a third-party. The term “outsourcing” became popular in the United States near the turn of the 21st century. Outsourcing sometimes involves transferring employees and assets from one firm to another, but not always. Outsourcing is also used to describe the practice of handing over control of public services to for-profit corporations.
Outsourcing includes both foreign and domestic contracting, and sometimes includes offshoring or relocating a business function to another country. Financial savings from lower international labor rates is a big motivation for outsourcing/offshoring.
The opposite of outsourcing is called insourcing, which entails bringing processes handled by third-party firms in-house, and is sometimes accomplished via vertical integration. However, a business can provide a contract service to another business without necessarily insourcing that business process.
Two organizations may enter into a contractual agreement involving an exchange of services and payments. Outsourcing is said to help firms to perform well in their core competencies and mitigate shortage of skill or expertise in the areas where they want to outsource.
Reasons for outsourcing
Companies primarily outsource to avoid certain costs – such as peripheral or “non-core” business expenses, high taxes, high energy costs, excessive government regulation/mandates, production and/or labor costs. The incentive to outsource may be greater for U.S. companies due to unusually high corporate taxes and mandated benefits, like social security, Medicare, and safety protection (OSHA regulations). At the same time, it appears U.S. companies do not outsource to reduce executive or managerial costs. For instance, executive pay in the United States in 2007 was more than 400 times more than average workers—a gap 20 times bigger than it was in 1965. In 2011, twenty-six of the largest US corporations paid more to CEO’s than they paid in federal taxes. Such statistics imply that the reason companies outsource is not to avoid costs in general but to avoid specific types of costs.
Insourcing
Outsourcing has gone through many iterations and reinventions. Some outsourcing contracts have been partially or fully reversed, citing an inability to execute strategy, lost transparency & control, onerous contractual models, a lack of competition, recurring costs, hidden costs, and so on. Many companies are now moving to more tailored models where along with outsource vendor diversification, key parts of what was previously outsourced has been insourced. Insourcing has been identified as a means to ensure control, compliance and to gain competitive differentiation through vertical integration or the development of shared services also called a ‘center of excellence’. Insourcing at some level also tends to be leveraged to enable organizations to undergo significant transformational change.
Co-sourcing
Co-sourcing is a business practice where a service is performed by staff from inside an organization and also by an external service provider. It can be a service performed in concert with a client’s existing internal audit department. The scope of work may focus on one or more aspects of the internal audit function. Co-sourcing can serve to minimize sourcing risks, increase transparency, clarity and lend toward better control over the processes outsourced.
Examples of co-sourcing services are supplementing the in-house internal audit staff with specialised skills such as information risk management or integrity services, providing routine assistance to in-house auditing for operations and control evaluations in peak period activity and conducting special projects such as fraud investigation or plant investment appraisals.
