What is outsourcing used for?

Outsourcing

The term outsourcing describes the outsourcing or outsourcing of services from your own company to a partner company. The term outsourcing is mostly used to describe outsourced production, but other processes such as warehousing, customer service or IT management and many other work processes can also be outsourced.

In this article you will learn something about the advantages and disadvantages of outsourcing, about the differences between external and internal outsourcing and about the integration of work processes. At the end of the lesson, you will find some practice questions that you can use to test your knowledge.

What is outsourcing for?

  • to cut costs
    The furniture manufacturer Holzheim also needs wooden dowels for production. Up to now, this has been manufactured in-house, but this process is now to be outsourced to a partner company that produces dowels in mass production. The unit price is therefore significantly lower. Holzheim is therefore discontinuing its own production and has the dowels delivered for less money.
  • Benefit from external expertise
    At the furniture manufacturer Holzheim, many processes are computer-aided. Accounting, personnel management and the management level are also dependent on functioning computer systems. In order to guarantee this, an IT company is commissioned to maintain the servers, correct system errors, etc.
  • Less training required for your own employees
    If the Holzheim company outsources dowel production and the IT area, no employees need to be trained for these areas. That also saves time and money.
  • Specialization in one area of ​​work
    The more processes are outsourced to specialized companies, the more capacities are freed up for optimizing internal company processes. If, for example, the Holzheim company outsources marketing, warehousing and customer service, the company can concentrate even more on furniture production. This can be beneficial to the quality or the quantity of production.
  • Own production capacities are fully utilized
    If the Holzheim company suddenly becomes very well known and many large furniture stores place orders with Holzheim, the production capacities may quickly be full. So that all of the orders can be processed, not only dowel production but also painting will have to be outsourced to another company in the future.

Disadvantages of outsourcing

  • Addiction
    When important work steps are outsourced, the company depends on its service providers. It can no longer survive on its own and is dependent on outside help. If the cooperation with a service provider is ended, another partner has to be found quickly. If the provision of the service is delayed, this can slow down all further processes.
  • Loss of know-how
    Also an indicator of the dependency on other companies. The specialist knowledge remains with external service providers, which is why the company continues to rely on them.
  • Deterioration of the working atmosphere
    The process of outsourcing often goes hand in hand with job losses. If employees are laid off, the working atmosphere deteriorates and employees are dissatisfied or have the feeling that their job is not safe.
  • Privacy issues
    If third companies are involved, some trade secrets have to be disclosed and the secrecy and protection of your own data is no longer exclusively in the hands of your own company.
  • Downsizing of jobs
    If a work process that was previously carried out by one's own company is transferred to another company, employees have to be retrained or dismissed. This leads to dissatisfaction among the employees, and it is not uncommon for the public image of the company to suffer as a result of this step - especially when work areas are outsourced abroad.

Internal and external outsourcing

The above examples relate to that external outsourcing, in which a work process is outsourced to another company.

In contrast, that is internal outsourcing. This process involves processes Subsidiary or profit center transfer. This is referred to as outsourcing instead of outsourcing.

Example of internal outsourcing:

The Holzheim company founds a subsidiary called Holzhalle. This company specializes in the storage and transport of wood products. The warehouse and logistics of the Holzheim company will now be taken over by Holzhalle.

Integration of work processes

The opposite of outsourcing is integration. If work steps or areas that were previously taken over by external service providers are now carried out or managed by your own company, this is referred to as integration.

Make or Buy?

When deciding whether to outsource or integrate work steps or areas, one speaks of a "Make or Buy"-Decision.

(Also called depth of service) The integration of work processes also increases the depth of production. This describes the percentage of production within the company.

A vertical range of manufacture of 100% means that every step from the extraction of all materials required for production to the end product is carried out by the company itself.

A vertical range of manufacture of 0% means that no production step is carried out within the company. The company only takes care of sales.

Reasons for integrating work processes:

  • If your own production facilities are not being used to full capacity, some production processes can be integrated.
  • In-house production can, for example, save transport costs and thus reduce capital expenditure.
  • The dependence on other companies is reduced.
  • There are no suitable suppliers, service providers or other partner companies.
  • Nondisclosure reasons
  • Securing know-how

Practice questions