Outsourcing and its Types
Outsourcing is to obtain the service or product of another company or individual. It means that you are contracting work outside of your company. Its main purpose is to lessen the burden of work of a company so that they can focus on what they think is the most important segment of production.
An example of this is that manufacturing companies send some parts of their products to factories abroad. This helps lower the cost of production thus maintaining a competitive price for their product. The lower cost of labor due to low wages in other countries is quite enticing for many corporations to pass up.
The company can now focus on developing product design and selling those products without having to think about the issues that can be encountered during mass production as the outsourced factory is tasked to maintain quality during that part of the production process.
Outsourcing Based on the Type of Service it Offers
Business Process Outsourcing (BPO)
Business Process Outsourcing addresses a company’s business processes such as product sales, customer support, marketing, manufacturing and other business-oriented tasks.
Banks, internet service providers, and tech manufacturers hire companies and factories to carry out a part of their production which may be due to several reasons such as lower wages or the need for specialized production methods.
Examples of this are the call center companies located in India and the Philippines which focus on customer service and product sales. These countries are haven for customer service centers due to low cost of wages compared to other countries and both countries have a large English-speaking population.
Another example, the Taiwan Semiconductor Manufacturing Company is one of the largest companies that outsource production of semiconductor chips to some of their big clients such as Apple, Intel, Qualcomm, AMD and Nvidia. Their fabrication facilities are highly specialized and very crucial to the production of microchips. Though the companies that outsource to them can build their own facilities, building semiconductor fabrication facilities is a huge undertaking. It is hard to build a gigantic sterile facility and it would cost billions just to build one, outsourcing alleviates these problems with minor negative effect to profits.
Knowledge Process Outsourcing (KPO)
KPOs, on the other hand, focus on tasks that require a high level of technical knowledge such as research, information analysis and legal services.
Some of its examples are consulting firms, legal firms, freelance work, medical research, survey companies and other companies that provide services by helping a company to research and analyze data.
Type of Outsourcing Based on Distance Between Two Companies
Offshoring
Obtaining the service of one company to another company whose distance is too great. The two countries may be on different continents or separated by an ocean.
An example of this are companies from the United States and in Europe would hire and outsource companies from Asian countries such as India and the Philippines.
Nearshoring
Refers to obtaining a service from a company in a neighboring country.
Its purpose is to avoid the problems associated with offshoring such as language barriers and some management disagreement due to cultural differences. It is expected that the neighboring country from which the service is sourced has a similar language and culture of the country that benefits from its service.
Onshoring
Also called domestic outsourcing, which means getting a service from a company also from within the country which results in much lower operating costs.
