IB Handouts # 6

Outsourcing in International Business

What is Outsourcing?
Outsourcing is a business practice where a company hires a third-party to perform tasks, handle
operations, or provide services that were previously done by the company's own employees.

Characteristic features of outsourcing

 Hiring a third-party: Instead of using its own internal staff, a company contracts with
an external company or individual to do the work.
 Tasks, operations, or services: This can include a wide range of functions, such as:
o Manufacturing: A company might outsource the production of its goods to a
factory in another country.
o Customer service: A company might hire a call center to handle customer
inquiries.
o IT services: A company might outsource its data storage or software
development to a specialized IT firm.
o Human resources: A company might outsource payroll processing or benefits
administration.
 Previously done internally: The key aspect of outsourcing is that the company is
giving up control of a function that it used to handle itself.

Types of Outsourcing
Outsourcing can be categorized in several ways, depending on the focus. Here are some of the
most common classifications:

1. By Function:
 Business Process Outsourcing (BPO): This involves outsourcing entire business
processes, such as:
o Customer service: Call centers, email support, etc.
o Human resources: Payroll, recruitment, benefits administration.
o Finance and accounting: Bookkeeping, tax preparation, auditing.
o Marketing: Digital marketing, content creation, social media management.

 IT Outsourcing (ITO): This focuses on outsourcing IT-related functions, such as:

o Software development: Creating and maintaining software applications.
o Data storage and management: Cloud storage, data backup, cybersecurity.
o Network management: Monitoring and maintaining network infrastructure.
o Technical support: Help desk services, troubleshooting.

 Professional Outsourcing: This involves outsourcing specialized professional

services, such as:
o Legal services: Legal advice, contract drafting, litigation support.
o Accounting and financial services: Auditing, tax preparation, financial
planning.
o Consulting services: Management consulting, business strategy, market
research.
  Manufacturing Outsourcing: This involves outsourcing the production of goods to
third-party manufacturers, often in other countries.

2. By Location:
 Offshore Outsourcing: This involves outsourcing to a company located in a different
country, often to take advantage of lower labor costs.

 Nearshore Outsourcing: This involves outsourcing to a company located in a

neighboring country or a country in the same region.

 Onshore Outsourcing (or Domestic Outsourcing): This involves outsourcing to a

company located within the same country.

3. By Relationship:
 Multisourcing: This involves using multiple vendors for different aspects of a project
or function.

 Single-source Outsourcing: This involves using a single vendor for all aspects of a
project or function.

4. By Project Type:
 Project Outsourcing: This involves outsourcing a specific project with a defined scope
and timeline.

 Process-Specific Outsourcing: This involves outsourcing a specific process or task

within a larger function.

 Operational Outsourcing: This involves outsourcing ongoing operational tasks or

functions.

Why do companies outsource?

There are many reasons why a company might choose to outsource, including:
 Cost reduction: Outsourcing can often be cheaper than hiring and training in-house
employees, especially if labor costs are lower in other countries.
 Focus on core competencies: By outsourcing non-core functions, a company can focus
its resources on its core business activities.
 Access to specialized skills: Outsourcing can give a company access to specialized
skills and expertise that it may not have in-house.
 Increased efficiency: Outsourcing can improve efficiency by leveraging the expertise
and economies of scale of the third-party provider.
 Flexibility: Outsourcing can provide greater flexibility to scale up or down operations
as needed.

Examples of outsourcing:
 A clothing company outsources the manufacturing of its garments to a factory in
Bangladesh.
 A software company outsources its customer support to a call center in India.
 A small business outsources its accounting to a CPA firm.
Outsourcing has become a common business practice in today's global economy. It can offer
many benefits to companies, but it's important to carefully consider the potential risks and
challenges before making the decision to outsource.

Category Type Description

Business Process Outsourcing entire business processes (e.g., customer
By Function Outsourcing service, HR, finance).
Outsourcing IT-related functions (e.g., software
IT Outsourcing development, data storage).
Professional Outsourcing specialized professional services (e.g.,
Outsourcing legal, accounting, consulting).
Manufacturing
Outsourcing Outsourcing the production of goods.
By Location Offshore Outsourcing Outsourcing to a company in a different country.
Outsourcing to a company in a neighboring country
Nearshore Outsourcing or the same region.
Onshore Outsourcing Outsourcing to a company within the same country.
By Using multiple vendors for different aspects of a
Relationship Multisourcing project or function.
Single-source Using a single vendor for all aspects of a project or
Outsourcing function.
By Project Outsourcing a specific project with a defined scope
Type Project Outsourcing and timeline.
Process-Specific Outsourcing a specific process or task within a larger
Outsourcing function.
Operational
Outsourcing Outsourcing ongoing operational tasks or functions.

Advantages of Outsourcing
 Cost reduction: Outsourcing can often be more cost-effective than hiring in-house
staff. This is because you can avoid expenses related to salaries, benefits, training, and
office space.
 Increased efficiency: Outsourcing providers often specialize in specific tasks or
processes, allowing them to perform them more efficiently than in-house staff.
 Access to expertise: Outsourcing can provide access to specialized skills and
knowledge that may not be available within your company.
 Improved focus: By outsourcing non-core activities, you can free up your internal
resources to focus on your core business functions.
 Increased flexibility: Outsourcing can provide greater flexibility in scaling your
operations up or down as needed.
 Faster turnaround times: Outsourcing providers often have the resources and
expertise to complete tasks more quickly than in-house staff.
 Reduced risk: Outsourcing can help mitigate risks associated with factors such as
employee turnover, technology changes, and regulatory compliance.
Disadvantages of Outsourcing
 Loss of control: When you outsource a task or process, you relinquish some control
over how it is performed. This can lead to concerns about quality, timelines, and
adherence to your company's standards.
 Communication challenges: Differences in language, time zones, and cultural norms
can create communication barriers between your company and the outsourcing
provider. This can lead to misunderstandings, delays, and errors.
 Security risks: Sharing sensitive data with a third-party provider can increase the risk
of data breaches and security vulnerabilities. It's crucial to carefully vet outsourcing
providers and ensure they have robust security measures in place.
 Hidden costs: While outsourcing can often reduce costs, there may be hidden costs
associated with things like contract negotiations, transition management, and ongoing
communication.
 Dependence on the provider: Becoming reliant on an outsourcing provider can create
vulnerabilities if the provider experiences financial difficulties, goes out of business, or
fails to meet your expectations.
 Negative impact on employee morale: Outsourcing can sometimes lead to job losses
within your company, which can negatively impact employee morale and productivity.
 Quality issues: If the outsourcing provider does not have the necessary expertise or
resources, the quality of the work may suffer. This can damage your company's
reputation and lead to customer dissatisfaction.

Self-Test Quiz

What is the core definition of outsourcing?

o a) Hiring only internal employees.
o b) A business practice where a company hires a third-party to perform tasks.
o c) Expanding a company's physical location.
o d) Investing in new equipment.

What does BPO stand for in the context of outsourcing?

o a) Business Product Output.
o b) Business Process Outsourcing.
o c) Basic Project Outsourcing.
o d) Budget Planning Operations.

Outsourcing to a company located in a different country is known as:

o a) Nearshore outsourcing.
o b) Onshore outsourcing.
o c) Offshore outsourcing.
o d) Multisourcing.

A primary reason why companies outsource is to:

o a) Increase internal hiring.
o b) Reduce costs.
o c) Limit access to specialized skills.
o d) Decrease efficiency.

What is a key advantage of outsourcing?

o a) Increased internal control.
 o b) Reduced flexibility.
o c) Access to expertise.
o d) Higher communication barriers.

IT outsourcing (ITO) primarily focuses on:

o a) Customer service.
o b) Manufacturing.
o c) IT-related functions.
o d) Legal services.

Outsourcing to a company within the same country is known as:

o a) Offshore outsourcing.
o b) Nearshore outsourcing.
o c) Onshore outsourcing.
o d) Project outsourcing.

What is a potential risk associated with sharing sensitive data with an outsourcing provider?
o a) Increased efficiency.
o b) Security risks.
o c) Improved communication.
o d) Reduced costs.

Process-Specific outsourcing refers to:

o a) Outsourcing a complete project.
o b) Outsourcing ongoing operational tasks.
o c) Outsourcing a specific task within a larger function.
o d) Using multiple vendors.