Words Used in Outsourcing
Most of us are somewhat familiar with outsourcing. It's simply when one company hires a separate company to perform work that, in the past, it has done itself.
So instead of having a payroll department, an organization may decide to outsource its payroll function to another company that specializes in such work.
What are the key motivations and expected benefits of outsourcing work versus doing it in-house?
- Companies hope that the work will be done quicker, and more efficiently.
- They hope it will decrease costs.
- They expect that it will free resources that can be applied to core competencies.
When outsourcing first became popular, there was understandable resistance to it, particularly from the workers whose jobs were replaced. In the 1980s and 1990s, outsourcing and downsizing were often viewed as the same thing. The practice earned a bad reputation, because it made people think of massive job losses, and corporate greed.
Now, however, many see outsourcing as a valuable strategic choice. It makes more efficient use of people, and financial resources. It can be done on a very small scale, with one specific function – or on a very large scale, where complete departments are outsourced.
Because the influence of outsourcing is felt across all industries, and across companies of all sizes, the chances are that you'll encounter outsourced work during your career.
This glossary explains outsourcing terms, helping you to understand the circumstances and implications of outsourcing in your workplace. It covers the following terms:
Location of Outsourced Service Providers
- Sourcing strategy.
- Delivery model.
- Sourcing model.
- Tactical sourcing.
- Core competences.
- Outsourcing portfolio/outsourcing mix.
- Contracting out.
Types of Outsourcing
Also known as the supplier, outsource service supplier (OSS), or vendor.
This is the organization that provides outsourced services.
Also known as the buyer or outsourcer.
This is the organization that buys outsourcing services from another company.
This is when the company that provides outsourcing services is located in the same country as the client.
This is when the outsourcing service provider operates from a different country, but that country is still close to the client. For instance, this can be when a North American company outsources to another company somewhere in North or Central America, or when a European company outsources to a different country within the European Union. With near-shore outsourcing, there are generally fewer cultural issues or time zone differences.
This is when the outsourcing service provider is in a country far away from the client. Typically, the cultural and time zone differences are significant. An Australian company outsourcing to a provider in India is an example of offshore outsourcing.
This is when the outsourcing services are provided by staff who are based at the client's site. For example, maintenance of IT equipment usually involves on-site outsourcing.
This occurs where the services are performed at the outsourcing service provider's worksite. For example, customer service call centers are typically set up off-site.
This is the process of aligning a company's outsourcing practices with internal strategic factors, and with the marketplace. A company might ask these questions: What are our business goals? What internal capabilities do we have? What capabilities are available in the outsourcing market? And what sourcing model will best meet our needs?
The type of business model used to structure the outsourcing arrangement is called the "delivery model". The model chosen depends on how deep a company's commitment to outsourcing is, the type of outsourcing it wants, and where it outsources to. Some companies decide to form joint ventures with suppliers. Other delivery models include having more than one supplier; using offshore, near shore, or on-site suppliers; and even subcontracting management of the outsourcing function.
This refers to the depth and scope of outsourcing activities within a company. At the most basic level, an outsourcing supplier is used to perform a specific area of work. But a client might enter into a long-term contract with a supplier to source an entire business process – for example, the IT function – where the supplier has total responsibility for managing, operating, and developing that function for the client.
This is the use of outsourcing to ease a current business pressure, or solve an immediate problem. This is a short-term approach to outsourcing that focuses on getting the job done now, not on building a long-term outsourcing relationship or strategy.
This involves performing work within the client company, with the client's own staff, but organizing it similarly to previously outsourced work. Insourcing typically involves setting up a stand-alone unit that has one specific function, and is tightly controlled. For insourcing to work well and be cost-effective, the company needs appropriate physical, human, and management resources.
Core competences are the unique set of skills and knowledge that defines an organization and its capabilities. These competences are what give the company its competitive advantage. Outsourcing is one way to make sure the company's resources are dedicated to core competence work – and not spread too thinly across activities that don't create high value. Core competences generally should not be outsourced, but the services that outsourcing suppliers provide should be their own core competences. You can learn more about core competences in our article on the subject.
This is often confused with outsourcing, but there's an important difference: When a client contracts out work, the client keeps full control of the process and tells the service provider what to do and how to do it. Outsourcing usually assumes that the service provider agrees to perform a service and keeps control of how the service is delivered.
This is the specific mix of outsourcing methods used in a client's outsourcing strategy. It answers the questions: What does the company outsource offshore and near shore? What does it do on-site versus off-site? Does it contract out any work?
This is the process by which a buyer asks for, and collects, information about various suppliers' capabilities and experience. This is a tool to evaluate which suppliers may be asked to go further in the selection process, and submit an actual proposal.
When clients are clear about exactly what they want, they send out an RFP to ask for specific proposals from vendors. These include deliverables, time frames, cost, and so on. The RFP is typically quite unstructured – this allows the bidding companies to demonstrate their understanding of the buyer's needs, and how best to address those needs. From there, the buyer may ask for more information to make a final decision on an outsourcing supplier. Click here to learn more about RFP documents.
A part of the outsourcing contract, this defines the nature and quality of the service to be delivered. It specifically transfers responsibility for a particular function to the outsourcing provider. These service expectations are negotiated up front, and they're used as the primary tool to evaluate the success or failure of the outsourcing relationship. SLAs generally outline the performance metrics to be used.
Also known as application service provision, this is when a supplier hosts a major application, and several clients then use that application on the supplier's servers – but the host keeps all data from different clients separate. This model allows smaller organizations to use sophisticated applications in a cost-effective way.
This is where management responsibility is transferred to an outsourcing provider (or other third party). The supplier typically uses its resources to maximize its ability to provide quality services. The client then takes advantage of these capabilities, and still maintains control for the overall level of service provided. In the IT world, managed services allow buyers to access things like high-quality services and cutting-edge technologies, without having to develop them in-house.
This involves delegating a full business process or function to an outsourcing service provider. For example, rather than outsource just payroll responsibilities, a company may decide to outsource its entire human resources department. Using BPO for information technology outsourcing is very common, especially in large public sector organizations. The proactive use of BPO allows companies to concentrate more attention and resources on their core competences.
This is a sourcing strategy that uses a variety of outsourcing providers to maximize the efficiencies of outsourcing. This approach requires effective management of the various service providers, and of the different service level agreements.
This is a sourcing strategy that allows buyers to take advantage of the global efficiencies offered in the marketplace. In particular, European and North American companies often use cost-effective services from companies in India and China. Global sourcing is a key contributor to the global economy.
This is the process of overseeing and managing the details of the outsourcing agreement. It includes negotiating the price, and ensuring adherence to service level agreements. Outsourcing management can be quite complex, especially when clients have a variety of sourcing and delivery models, or when they work with more than one service provider. Larger companies have dedicated vendor management personnel.
Governance is the management of the outsourcing relationship. In strategic outsourcing, this is critical. Outsourcing companies are partners in service delivery, therefore they're important stakeholders in the client's business. Governance goes beyond the service level agreements and performance metrics – it ensures that the overall relationship is monitored and managed for the benefit both of the client and service provider.