Outsourcing Theory

Outsourcing Theory

You have probably heard or read a lot about outsourcing recently, but do you understand outsourcing theory? Businesses aren't just sending work to other companies or countries because it is the new popular management idea. Companies are outsourcing because of the smart principles of outsourcing theory.

What is Outsourcing?

Some people refer to outsourcing as any work done by someone not employed by the company offering the work. Under this definition, the work of freelancers or contractors would be considered outsourcing. While this broad definition is part of outsourcing theory, it is not true outsourcing. The difference between subcontracting work and outsourcing is that outsourcing involves moving substantial resources or parts of a company.

Outsourcing Theory Ideas

There are many reasons about why outsourcing theory works.

Focus on What a Company Does Best

Every company has something it does well enough in order to compete in the marketplace. It can be manufacturing products, providing services at a low cost, offering the best customer service or thinking of ideas. Exactly what the company does well is not important. The point is that just because a company manufactures computers, for example, better than the competition, doesn't mean this same company will also be better at handling other business functions.

Letting someone else operate certain parts of your business recognizes that, in some cases, other companies can perform a service more effectively and efficiently. If all companies practiced outsourcing in this manner, it would allow every organization to perform the tasks it does best. This is the main idea behind outsourcing theory, and the other benefits of outsourcing all flow from this principle.

Reduce Costs

When a company is doing something it is not skilled at, often the costs will be high. This is because of lack of knowledge usually leads to inefficiency. Other times, it is economies of scales that are the problem. Take, for example, customer service jobs in a call center. It is often thought that the only reason these jobs are sent overseas is the lower wages that can be paid. While this is one of the reasons, outsourcing theory suggest it is not the only reason.

A call center requires many personnel with various skills and abilities. In addition to the people answering the phones, you also need supervisors and managers. The employees need training and training materials. In addition, the call center operation needs technical supervisors and computer network administrators as well. This can end up being a costly endeavor for a company. It is often cheaper, then, for a company to outsource the customer service function to a company that specializes in customer service.

Optimize Human Capital

People are usually happiest when they have jobs that match their education and skill levels. Companies want employees who are the right fit for the jobs they offer as well. The problem is that many countries don't have the correct mix of appropriately skilled workers.

When you consider the work of manufacturing clothes, for example, not many people in developed nations want those jobs. This is because in general the education and skill levels are higher in developed nations than in developing ones. However, the same skills needed to manufacture clothes may be considered a challenge, and therefore more satisfying work, to someone in a developing nation. This is the theory, at least. It is a debatable topic because of sweatshops.

In other situations, a developed nation may not be producing enough skilled labor for certain kinds of work. Take computer engineering as an example. There are not enough skilled programmers and engineers that are American citizens. To solve this problem, companies turn to people in countries like India, which have more engineers than they need to fill the shortage.


Outsourcing is often portrayed negatively in the media. There is no doubt some people are hurt by outsourcing. The outsourcing theory, however, is intended to be positive, especially in the long term, as it allows companies and people to focus on what they do best.

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