In business, outsourcing is “an agreement in which one company contracts-out a part of existing internal activity to another company”. It involves the contracting out of a business process (e.g. payroll processing, claims processing) and operational, and/or non-core functions (e.g. manufacturing, facility management, call center support) to another party (see also business process outsourcing). The concept “outsourcing” came from the American Glossary ‘outside resourcing’ and it dates back to at least 1981. Outsourcing sometimes, though not always, involves transferring employees and assets from one firm to another. Outsourcing is also the practice of handing over control of public services to private enterprise.
Outsourcing includes both foreign and domestic contracting, and sometimes includes offshoring (relocating a business function to a distant country) or nearshoring (transferring a business process to a nearby country). Outsourcing is often confused with offshoring, however, they can be distinguished: a company can outsource (work with a service provider) and not offshore to a distant country. For example, in 2003 Procter & Gamble outsourced their facilities’ management support, but it did not involve offshoring. Financial savings from lower international labor rates can provide a major motivation for outsourcing or offshoring. There can be tremendous savings from lower international labor rates when offshoring.
In contrast, insourcing entails bringing processes handled by third-party firms in-house, and is sometimes accomplished via vertical integration. However, a business can provide a contract service to another organization without necessarily insourcing that business process.