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Outsourcing: definition, examples, advantages & disadvantages

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Companies don't have to do everything themselves. Sometimes it is wiser and cheaper to outsource areas or individual tasks. Outsourcing is a success factor for corporations, small businesses and the self-employed. Parts of production, IT tasks, accounting, personnel management or recruiting - a lot can be outsourced to experts. The question is: When does outsourcing make sense? To do this, you have to weigh the advantages and disadvantages against each other. We explain what outsourcing is, how different forms work and what you need to know ...

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Definition: what is outsourcing?

The term outsourcing is made up of the parts “outside”, “resource” and “using”. With outsourcing, external service providers are commissioned to outsource certain tasks or structures that require expertise that is not (yet) available internally or is too expensive. Instead of continuing to provide a service yourself, it is brought into the company by a service provider. Classic areas for outsourcing are customer service, accounting and tax advice, IT or marketing.

Outsourcing example

You want to set up an online shop because you have a good business idea, are familiar with web design and want to build a second mainstay. You can also do the marketing yourself. However, there is much more to such an online shop than a website. You need a customer center for complaints. The goods must be sent to the customer. The sales of goods must be documented and payments controlled. So you need a kind of call center, a logistics service provider and accounting - legal services and a tax advisor too, of course.

By outsourcing all of these areas, you can focus on the core of your business - web design and marketing.

Well-known examples of outsourcing can also be found in large corporations. IKEA relies heavily on outsourcing tasks. The Swedish furniture manufacturer uses several thousand external production forms and logistics chains, and assembly at the customer's site is also carried out by outsourced service providers.

Reasons for Outsourcing

Outsourcing seems to be a comparatively large expense. Find service providers, negotiate conditions, conclude contracts, control quality ... So why outsource? Self-employed or small businesses could acquire the necessary skills themselves or hire a qualified employee. And large corporations have the financial means to set up their own department that provides the required services internally.

Even so, outsourcing pays off compared to these options. The costs for an employee or even an entire department are often in no relation to the financing of an outsourcing. The same applies to the quality of the service. Nobody can be good at anything. In order to achieve the best possible result, outsourcing to an expert can make sense.

Forms of outsourcing

There are also numerous forms of outsourcing - sub-forms and combinations of individual areas. These are the most important at a glance:

Application Service Providing (ASP)

The term refers to the so-called application service providers who provide a company with software services with an external data center. In this way, clients can use certain software without having to install it on their own computers. Maintenance, processing and data backup are also regulated externally.

Business Process Outsourcing (BBO)

With this service, a company can outsource certain business processes and their control, for example finance and accounting, human resources and recruiting, logistics and technical documentation. This form of outsourcing outsources an entire branch.

Business Transformation Outsourcing (BTO)

If a business has to be transformed by introducing an innovative process or a new business model, those responsible use a combination of outsourcing and management consulting. The external service provider takes over the business process with the aim of transformation and optimization.

Complete outsourcing

This is a comprehensive outsourcing of entire company areas, mostly with the staff, for example the EDP area to an IT service provider.

Managed Services

Managed service providers take over the entire information and communication areas of the company. You should be able to react quickly, especially in the case of ad hoc measures, for example in a company crisis.

Offshore outsourcing (offshoring)

One speaks of offshoring when the company's processes are relocated abroad. This promises lower production costs and lower wages for highly qualified employees (for example in the IT area).


Out-servicing is the outsourcing of your own customer service to external service providers. Special call centers or maintenance centers are commissioned for this. For companies, this can be cheaper and easier than running an in-house customer service.


With this form of outsourcing, individual tasks, i.e. individual and clearly defined tasks, are transferred to external providers. There are many examples: the web design of a homepage, software development, the digitization of information or the printing of a template.

Transitional Outsourcing

If an area has to be converted to a new technology, it is temporarily idle - but hardly any company can afford that. The interim solution: An external provider will take over the affected processes for the time of the changeover. The losses are reduced before the service can be provided again.

Outsourcing advantages and disadvantages

Outsourcing is particularly useful when a company is still in its infancy and its growth is difficult to assess. But even established companies can resort to outsourcing after years or decades of successful growth. You almost always use these advantages:

Outsourcing advantages

  • Cost reduction
    Specialized service providers or suppliers can often take advantage of economies of scale. That makes production cheaper - especially in globalized markets. In addition, you only need certain services - for example tax advice - a few times a year. Having your own permanent employee is much more expensive. As a rule of thumb, the estimated savings through outsourcing should be at least 20 percent.
  • Risk minimization
    The workforce remains more flexible in the event of economic fluctuations. Outsourcing some areas reduces the risk when things are not going well for a company.
  • Time savings
    For the self-employed and small companies in particular, it takes a long time to learn a new area. You have to get used to it and spend a lot of time - instead of worrying about main tasks. This time can be saved and invested in other areas.
  • Quality improvement
    Outsourcing to a specialist has a positive effect on quality. In production, outsourcing can produce a better end product.
  • Core competencies
    The company can use the resources freed up for its core business. This also improves quality and effectiveness in this area.

Outsourcing disadvantages

The disadvantages of outsourcing are not always obvious at first glance - but they still have to be taken into account. This is the only way to assess whether outsourcing makes sense in a situation.

  • Addiction
    Companies can become dependent on suppliers or service providers. If the external company gets into trouble, this can result in delays, production downtimes and considerable costs. The dependent company can also be blackmailed if the service provider suddenly demands other conditions.
  • Binding contract
    Long-term contracts with long notice periods prevent short-term changes to a better or cheaper provider. Those who commit too long may be stuck in a contract that has more disadvantages than advantages.
  • privacy
    When it comes to outsourcing, we work very closely together, with a whole range of internal information having to be passed on. These are not intended for the public and certainly not for the competition. A privacy mishap can have serious consequences.
  • work atmosphere
    Employees rightly expect appreciation from a company. Outsourcing, on the other hand, signals that external staff is preferred. Employee satisfaction, motivation and loyalty suffer.
  • Loss of knowledge
    The expertise of its own employees is not promoted. Outsourcing deprives the staff of the opportunity to further their education and to improve their qualifications internally. If the provider changes, a lot of experience is also lost - for example in external sales.
  • Communication effort
    Wishes, problems and suggestions for improvement must be communicated regularly. Communication with an external provider is often more complex and slower. Clear agreements about communication channels and regular exchange are required.

Outsourcing mistake

Outsourcing does not always go according to plan. The fault is often mistakes that make the project fail. These are the most common mistakes made when outsourcing:

  • Wrong selection of an outsourcing offer.
    There are many providers in the large outsourcing fields - some large agencies, some freelancers and self-employed who offer a service. Cooperation is only successful if the right partner is carefully selected.
  • Arbitrary outsourcing of some areas.
    “We just outsource that…” Outsourcing is not a method just to save yourself work. Thorough analysis and weighing of the advantages, disadvantages, costs and effects are required. Unfortunately, hasty or poorly thought-out decisions are a common outsourcing mistake.
  • Unclear agreements both internally and externally.
    What exactly is being outsourced? To what extent is the service provided? Which criteria are set? How does the check take place? Inaccurate agreements lead to misunderstandings, problems and additional costs.
  • Bad contracts between the outsourcing partners.
    The outsourcing contract must clearly regulate the obligations of both parties. No open questions must remain unanswered.
  • Wrong ideas about outsourcing.
    Naivety makes outsourcing fail. Anyone who ignores the disadvantages, risks and possible costs is approaching the project with the wrong idea. The self-employed and companies need to know the facts in order to make an objective decision.

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