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What is Outsourcing? - Definition & Benefits

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  • 0:01 What Is Outsourcing?
  • 0:17 Benefits
  • 2:11 Example
  • 2:59 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley
Outsourcing is a strategy that can benefit a company's bottom line. In this lesson, you'll learn what outsourcing is and some of its benefits as well as look at an example.

What Is Outsourcing?

Outsourcing occurs when a company retains another business to perform some of its work activities. These companies are usually located in foreign countries with lower labor costs and a less strict regulatory environment.

Benefits

Outsourcing can provide some significant benefits for companies.

Advantages of outsourcing include:

  • Lower labor costs. Companies typically outsource to businesses in developing countries where the cost of labor is significantly cheaper. Lower labor costs will improve the company's bottom line.
  • Less regulations. Developing countries often have a low level of regulatory restrictions, which can also reduce the cost of operations and increase productivity. For example, there may not be limits on overtime or on work, health, and safety issues.
  • Focus on core competencies. Companies that outsource lower-level work, or work the business is not optimized to perform, can then focus on the work activities at which they excel. This will increase productivity, efficiency, and effectiveness. For example, a tech company in Silicon Valley may be better off outsourcing its manufacturing operations to a company in China so it can focus on research and development.
  • Reduced overhead. Outsourcing can also reduce a company's overhead costs because the outsourcing company uses its own facilities, equipment, and personnel to perform the work. In fact, it's theoretically possible to engage in massive manufacturing ventures out of a room of your house if you outsource all the manufacturing to a factory overseas.
  • Flexibility. Outsourcing means that a company can stay lean and mean, which makes it easier to adapt to change. For example, companies don't have to invest a bunch of money and resources into a new plant and equipment that may become obsolete quickly. Instead, they can pass that risk off to the outsourcing firms.

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