What does outsourcing mean?

Definition: Outsourcing is the outsourcing of work processes or steps to suppliers or specialized service providers. Examples are component production, logistics, bookkeeping or the support of the IT infrastructure by independent, external partners. Outsourcing mainly concerns support processes. By outsourcing them, the commissioning company can focus on its core business.

The newly created word outsourcing is made up of the anglicisms outside, resources and using. The use of external resources or sources can therefore be spoken of in German. Occasionally there is also talk of the "extended workbench".

Outsourcing is the concept that frees employees' heads and hands for the company's core tasks. In outsourcing, individual tasks, complete business processes or parts of the company are outsourced.

Outsourcing is one of the corporate strategies, because value-added activities are shifted to suppliers. This shortens the value chain and reduces the company's depth of service.

How does outsourcing work?

In outsourcing, external, specialized service providers are integrated into the process organization of the commissioning company (see also: process map). This enables them to take over individual business processes such as component production or the activities of entire departments such as accounting or IT operations and maintenance. It is also possible to outsource product development or product-related services to external, specialized suppliers. But almost always only secondary functions, i.e. support processes, are outsourced. In other words, tasks that are necessary to keep the core business running. The core competencies and key technologies should always remain in the actual company.

In the age of digitization and automation of supply chains, outsourcing is gaining in importance, as the technology makes the integration of external service providers easier and transparent.

Which areas are outsourced?

Outsourcing is almost limitless today: Thanks to digital technologies, the range of services and possible uses of outsourcing is constantly increasing. To name just a few examples: Some companies - for example in the automotive sector - use external logistics service providers for just-in-time deliveries of supplier parts and integrate the contractors into their value chain (supply chain management). Many companies outsource the entire IT infrastructure. Despite the almost infinite range of possible uses, there are some very typical outsourcing areas:

• Accounting, tax advice
• Field service, customer service
• Marketing and media creation, for example advertising copy, graphic and web design, social media marketing
• IT operation and support
• Catering / canteen, utilities
• Logistics, vehicle fleet, travel management

Who are outsourcing service providers?

Classic outsourcing providers are specialized SMEs such as tax consultants, advertising agencies or freelancers in areas such as IT, marketing or creation. The latter earn a large part of their income from outsourcing jobs such as blog support / content creation, website maintenance / SEO measures or maintenance of the electronic networks.

Due to digital communication technologies, outsourcing is increasingly being taken over by globally distributed, location-independent providers for whom terms such as digital nomads have established themselves. However, digitalization is also intensifying competition - be it through cheaper foreign service providers in low-wage countries or through platforms that market their services at minimal rates.

What types of outsourcing are there?

The best known form of outsourcing is the outsourcing of previously internally provided services to external, independent service providers. This process is called business process outsourcing or business process outsourcing. In the case of in-house outsourcing, subsidiaries or start-ups are created in a group of companies to take over the outsourcing activities. Knowledge process outsourcing is used when unplanned, highly complex, previously unneeded processes are needed (e.g. for expansion or product diversification), which can only be outsourced to specialists in terms of time and personnel due to a lack of in-house resources. Offshore outsourcing, or offshoring for short, refers to the outsourcing of activities - to mostly cheaper service providers. Finally, outservicing describes the outsourcing of customer service, for example to call centers, service licensees or freelance sales representatives.

What does outsourcing cost? When is it worth it?

By concentrating on the core activities, cost advantages are to be achieved and the operational and strategic market position of a company optimized. As a rule of thumb, whether outsourcing is financially worthwhile is that it must save at least 20% of the costs incurred. Otherwise the outsourcing turns out to be unnecessary and inefficient. In addition, there should be a qualitative advantage. Many outsourcing clients test their service providers before placing orders and possibly concluding long-term work or supply contracts.

What are the advantages of outsourcing?

Ideally, outsourcing results in a win-win situation for both sides. The contractor generates income - and the client saves time and money and benefits from the quality of the external service.

Successful outsourcing means cost optimization and streamlining of processes (similar to lean management). In addition, highly specialized suppliers can often work faster and more cost-effectively than internal employees thanks to their prior knowledge and access to specialist sources.

Outsourcing companies increase their efficiency and clout and gain time and manpower with which they can concentrate more on areas of their core business.

Time savings also result from the fact that your own employees do not have to familiarize themselves with highly complex specialist matters.

Outsourcing can accelerate growth because it allows additional tasks to be taken over immediately without looking for and hiring personnel.

Outsourcing serves to increase quality, because the suppliers are usually highly specialized in their field.

Outsourcing offers flexibility because external workers have neither employment contracts nor notice periods. They can be booked depending on the order situation.

What are the disadvantages of outsourcing?

Outsourcing and the integration of service providers in the value creation process can lead to key technologies and parts of the core competencies, possibly also business secrets, getting into the hands of third parties. Some of the consequences are loss of control and loss of privacy.

Outsourcing can lead to dependency on the supplier - especially with long-term contracts.

There is always the risk of “getting into” the “second best” rather than the best service provider. This can lead to a loss of quality.

Outsourcing sometimes generates increased communication effort - especially if the external service provider is less involved in the process architecture. Then, if necessary, all tasks must be discussed in detail and services approved and corrected.

Offshore outsourcing can fail due to linguistic and cultural barriers, mentalities and a strange work ethic. 'Made Worldwide' is not automatically 'Made in Germany'.

One problem with offshoring is the time difference. A service provider in China, Thailand or Australia is difficult to reach for the clarification of urgent questions or Skype conferences.

Is there also outsourcing in franchising?

“Internal outsourcing” could be seen as an integral part of franchise systems because there is a division of labor in franchising. Unlike in business process outsourcing, this does not mean the outsourcing of activities to external third-party companies. Rather, it is about outsourcing the partner company to the respective system headquarters.

Even in the run-up to the start-up, the franchisee receives the support of the system center in setting up a business - among other things. through financing concepts, bank contacts, business plan creation, induction or joint search for a location.

After the franchise partners commence business, the franchise system center takes on a large part of its administrative tasks - for example:

• Staff training
• Purchasing (including securing purchasing benefits)
• Marketing & Advertising
• Support through organizational / administrative activities (e.g. partial bookkeeping)
• Acquisition, measures for customer acquisition (partly, e.g. central acquisition of major customers, call center)
• Controlling, benchmarking
• Organization of experience / partner meetings and network activities

Due to the franchise-specific synergies between system headquarters and partner companies, franchisees do not have to develop into all-rounders who know and can do everything themselves. Clever outsourcing is one of the most important components of franchise success.

But franchisors also rely on outsourcing to reduce the workload of their own system headquarters. The development of franchise agreements and other legal documents is outsourced to specialized lawyers from the start. The same applies in most centers for accounting and tax documents, which are passed on to external specialists. Sometimes marketing measures are passed on to advertising agencies, public relations work to PR agencies, lead acquisition to experienced brokers or partner acquisition to qualified recruiters.

The involvement of external service providers gives franchisors the freedom they need to concentrate on the fundamentals for the economic expansion of their network and the business success of their franchisees. It is controversial how far system centers can go when outsourcing tasks without endangering their own identity and independence. The internal core competence around the sales function as well as the control of quality standards must be guaranteed in any case.