Definition of outsourcing

The contracting out of work to an outside supplier.

Source: Financial Times

Outsourcing can be defined as turning over all or part of an activity to a supplier. While outsourcing was originally restricted to basic activities, it currently pervades the management of many companies.

Outsourcing is generally considered a very powerful tool to cut costs and improve service quality because it enables companies to take advantage of specialised suppliers. It can also help firms focus on their core business by transferring non-core activities to suppliers. 

For instance, Apple outsources the manufacturing of products such as notebooks, the iPod and iPhone to reduce costs. This leaves Apple free to focus on the design and the functional capabilities that are crucial in making their computers and consumer electronics more competitive.

Outsourcing also has disadvantages that include losing control over the outsourced activity or even exposing clients to the potential opportunism of suppliers.

For instance, suppliers may charge excess fees for services that are not included in the contract. They may also make promises knowing well that they will break these in an instant, should the benefits from breaking these promises exceed the costs or disadvantages.

Example
Boeing had always designed and built its planes in-house, but the company made the decision to outsource most of the 787 Dreamliner’s manufacturing to a global network of over 50 suppliers. The original idea was both to save money and to increase flexibility by shifting risks to suppliers.  Only the final assembly would be performed by Boeing using modules provided by the suppliers.

By mid-2009, the project was two years behind schedule. A major reason for the delay is that Boeing did somehow lose control over its suppliers. The underlying rationale is that the company did not necessarily have the required expertise to manage a network of suppliers.  In addition, some suppliers were unable to live up to the expectations of Boeing. As a result, Boeing brought back major production lines in-house and hired engineers to oversee its suppliers.

Source: Jérôme Barthélemy, professor of management, Essec Business School