Definition
The term outsourcing refers to the practice of filling a job function, or assigning a project, to a person or department in another company. Outsourcing is the opposite of insourcing, which is the practice of assigning work traditionally completed by an external service provider to internal resources.
Explanation
If a company cannot achieve economies of scale, or do not believe a function is one of their core competencies, they may outsource that work to an external service provider. For example, a startup company may decide to outsource back-office functions such as accounting, billing, payroll, and collections. Startup failure statistics in 2022 indicate 66% of small businesses outsource tasks to other small businesses.
Generally, companies will not outsource functions that may touch processes a business feels are trade secrets or provides the outsourcer with access to sensitive information. For example, a soft drink company may consider the recipe a trade secret, and keep the manufacturing process in-house. In the same way, a company with relatively few, but large, customers may decide to retain their sales and billing functions.
Outsourcing is sometimes confused with the term offshoring, which is the practice of sending work to countries overseas. While outsourcing can involve a service provider in a foreign country, the work may also be outsourced to a domestic service provider.
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