Outsourcing

Outsourcing is the business practice of obtaining goods or services from external suppliers rather than producing them internally. It often involves transferring a previously internal activity to a third-party contractor, which may be located domestically or abroad.

The practice emerged in manufacturing and services in the late 20th century and gained momentum with information technology outsourcing and business process outsourcing in the 1990s and 2000s. Globalization, better communications, and cost pressures contributed to its growth. Modern outsourcing often includes cloud services and shared services centers.

Common forms include offshore outsourcing (to distant low-cost countries), nearshore outsourcing (to neighboring regions), and onshore outsourcing (within the same country). Subtypes include business process outsourcing (BPO), IT outsourcing (ITO), and knowledge process outsourcing (KPO).

Drivers include cost reductions, access to specialized skills, scalability, and the ability to focus on core activities. Outsourcing can also speed implementation and extend operating hours across time zones.

Risks include quality control issues, vendor dependence, data security and privacy concerns, regulatory compliance, and exposure to political or currency risk. Cultural and language differences can hinder communication. Transition costs can be high if not well managed.

Governance is typically maintained through contracts and service-level agreements, vendor selection criteria, ongoing performance management, and clear transition plans. Multi-sourcing and centralized vendor management are common arrangements.

The economic impact is mixed: outsourcing can reduce costs and improve efficiency, but may raise concerns about domestic jobs and wage effects in supplier regions.