Outsourcing
Outsourcing is a business practice in which a company contracts with external providers to perform activities or functions that were previously handled internally, typically to reduce costs, access specialized expertise, or focus resources on core competencies (Lacity M.C., Willcocks L.P. 2012, p.8)[1]. The company's IT department struggled with a legacy system migration. They lacked the specialized skills. They hired a consulting firm that had done dozens of similar migrations. Nine months later—project complete. This is outsourcing at its best: accessing capabilities you don't have, for work you don't need to own permanently.
The practice exploded in the 1990s as companies discovered they could cut costs by moving functions offshore to lower-wage countries. India became the global center for IT services and business process outsourcing. The market has grown massive—IT outsourcing alone reached $512 billion in 2024, projected to hit $777 billion by 2028. But outsourcing involves tradeoffs. Cost savings come with risks: loss of control, security vulnerabilities, quality problems, and approximately 30% of outsourcing relationships failing within the first year.
Types of outsourcing
Different forms serve different purposes:
By function
IT outsourcing. Application development, infrastructure management, help desk, cloud services[2].
Business process outsourcing (BPO). Payroll, customer service, accounting, human resources.
Knowledge process outsourcing. Research, analytics, professional services requiring specialized expertise.
By location
Onshore. Outsourcing to providers within the same country.
Nearshore. Outsourcing to nearby countries with similar time zones[3].
Offshore. Outsourcing to distant countries, typically for cost advantages.
Strategic drivers
Why companies outsource:
Cost reduction
Labor arbitrage. Accessing lower-wage markets. Companies report 15-30% average savings; some McKinsey research shows up to 60% operational cost reduction[4].
Variable costs. Converting fixed labor costs to variable costs that scale with demand.
Capability access
Specialized expertise. Providers who focus on specific functions develop deeper expertise than generalist internal teams.
Technology. Access to capabilities and technologies without capital investment.
Focus
Core competencies. Outsourcing peripheral activities frees resources for strategic priorities[5].
Speed to market. Distributed work across time zones can accelerate project timelines.
Risks and challenges
Outsourcing introduces significant risks:
Quality and control
Loss of control. External providers may not deliver to expected standards. Oversight becomes indirect.
Quality variance. Outcomes depend on provider capability and commitment[6].
Security
Data protection. Sensitive information flows to external parties. Breaches can cause legal liability and reputational damage.
Compliance. Ensuring providers meet regulatory requirements.
Hidden costs
Management overhead. Contracts require negotiation, monitoring, and relationship management.
Transition costs. Moving work to providers involves knowledge transfer and temporary productivity loss[7].
Relationship failure
Cultural differences. Communication styles, work practices, and expectations may clash.
Dependency. Over-reliance on providers can leave organizations vulnerable if relationships end.
Best practices
Successful outsourcing requires:
Clear requirements. Well-defined scope, deliverables, and service levels.
Careful selection. Due diligence on provider capabilities, financial stability, and cultural fit[8].
Governance structure. Defined escalation paths, performance metrics, and review processes.
Relationship management. Treating outsourcing as partnership, not just procurement.
Risk management. Contingency plans, security protocols, and exit strategies.
| Outsourcing — recommended articles |
| Offshoring — Strategic management — Supply chain management — Operations management |
References
- Lacity M.C., Willcocks L.P. (2012), Advanced Outsourcing Practice, Palgrave Macmillan.
- Oshri I., Kotlarsky J., Willcocks L.P. (2015), The Handbook of Global Outsourcing and Offshoring, 3rd Edition, Palgrave Macmillan.
- Deloitte (2024), Global Outsourcing Survey.
- Statista (2024), IT Outsourcing Market Report.
Footnotes
- ↑ Lacity M.C., Willcocks L.P. (2012), Advanced Outsourcing Practice, p.8
- ↑ Oshri I. et al. (2015), Handbook of Global Outsourcing, pp.34-48
- ↑ Deloitte (2024), Global Outsourcing Survey
- ↑ Statista (2024), IT Outsourcing Market Report
- ↑ Lacity M.C., Willcocks L.P. (2012), Advanced Outsourcing Practice, pp.89-104
- ↑ Oshri I. et al. (2015), Handbook of Global Outsourcing, pp.134-148
- ↑ Deloitte (2024), Global Outsourcing Survey
- ↑ Statista (2024), IT Outsourcing Market Report
Author: Sławomir Wawak