Literally speaking, outsourcing is sourcing from outside. A simplest outsourcing definition would be – to contract with another person or company to carry out some function. The idea of procuring a product or a service rather than producing or doing it oneself is outsourcing. One can outsource a process, a service, or a product. Businesses of all sizes are using outsourcing in various forms depending on their business needs.

Computer manufacturers often outsource computer components from some other manufacturers – some even outsource their customer support departments. Pharmaceutical companies make extensive use of outsourcing when they contract manufacture of their products. Automobile companies outsource a lot of their components, rather than making them in-house.  Public entities, such as municipalities frequently outsource activities like parking meter enforcement, library management, legal services, pest control, etc.

The vendors providing the outsourcing services are generally referred to as “service providers” or “third-party providers”. Generally these companies specialize and focus in their respective area of operation, so they offer superior quality. Attracted by quality and cost saving, more and more companies are outsourcing their general business functions, like data entry, billing and payroll. Service providers carry out these functions more efficiently using their specially trained manpower and at lower cost. So, cost effectiveness is an essential ingredient of the outsourcing definition.

Typically, the outsourced function is a supportive non-core operation of a company. For example, a manufacturing company might outsource its payroll or landscaping operation to outside companies, since they are not related to their main operation. When you outsource supportive functions, you can concentrate better on your core business. Your work force also becomes leaner. When you hire people, you need to provide all the necessary facilities like office space, salaries and benefits. So, outsourcing provides you peace of mind and reduced liabilities, and yet quality output.

Many companies, particularly the big ones, often prefer to outsource complete set of operations to another capable company. They prefer it over outsourcing several diverse functions to many different vendors. This type of outsourcing is popularly called Business Process Outsourcing (BPO) or Information Technology Outsourcing (ITO) depending upon the nature of activities. In fact, most of this work is going to offshore places like India and Philippines where salaries are much cheaper.

Some of the common functions performed by the BPOs include: customer support; call center and telemarketing, payroll maintenance, back office operations, human resources, finance and accounting, medical transcription, etc. ITO activities involve IT related functions, like software development, data center management, testing, quality assurance, etc. Some of the well known companies active in the BPO or ITO field are IMB, Accenture, HP, Genpact, Infosys and TCS.

Quite in contrast to these mega outsourcing activities, outsourcing can be done at micro levels too. For instance, if you like, instead of hiring an office assistant, outsource it to a worker who operates from home, so you now have a virtual assistant. In fact, you can outsource any work that involves computers or telephones. Remember that the ideas of cost savings and quality are inherent in the outsourcing definition.