A History of Outsourcing

In the 1800s and early 1900s, companies were vertically integrated organisations that would handle every element of taking their product or service to market. That would often involve manufacturing from raw materials to finished products, shipping, marketing and often selling the goods in their own retail outlets. They would also handle the human resourcing, legal and accounting responsibilities in house as well. These organisations were very unwieldy to run and therefore cost-inefficient, and so it is understandable that their structure would change as more focus was put on the efficient management of company resources.

Over the second part of the 20th Century, manufacturers began contracting out the production of components to smaller, specialised suppliers and this trend continued over the 1970s and 1980s when accounting services, payroll, billing, and word processing all began to be outsourced by Western organisations. At the turn of the millennium, with improvements in technology and the ability to communicate quickly and easily over vast distances information technology, design engineering and call center operations became the latest candidates to be outsourced.

Recently, outsourcing has often been used interchangeably with offshoring, although the two are actually distinct processes. Outsourcing always involves sub-contracting work to a third party company, which may or may not be located in the same country or region. Offshoring is the process of moving work to a foreign country to take advantage of lower labour costs. This might involve the work being outsourced, but just as often the company will continue to carry out the work in-house.

Below are some of the reasons that might prompt a company to choose to outsource. Some of these are outright benefits, whilst others are ways of overcoming certain problems that might be experienced by the company.

Benefits of outsourcing

* Improved quality: Contracting out a service with a new SLA (Service level agreement) can lead to quality improvements

* Knowledge: Wider experience, knowledge and even intellectual property can be accessed through contracting to third parties

* Contract: Financial rebates or legal redress are possible where standards of work and other criteria are not met

* Change agent: An outsourcing agreement can be used as a catalyst for major step change that would not be possible otherwise.

* Reduced time to market: Development or production of a particular product can be accelerated by bringing in third party capacity

Overcoming problems by outsourcing

* Cost savings: Often achieved by exploiting the differential in wages in different countries (off-shoring), but also through increased efficiency due to specialisation available in the outsourcer.

* Staffing issues: outsourcing allows access to a larger pool of talent, and therefore the ability to sustain vital skills

* Capacity management: where peaks are experienced in demand for goods or services, outsourcing allows the risk to be borne by the supplier

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