Outsourcing is the process of contracting out to third parties the production of goods or services, or the undertaking of business processes that were typically done in-house. Outsourcing can refer to both domestic and foreign contracting.
When we think of outsourcing, we often thinking of offshoring. Offshoring is when a business contracts out or relocates business processes to foreign countries. These processes can be operational (such as the manufacturing of goods) or supporting (such as the provision of accounting services or after-sales customer support). Offshoring is usually driven by cheaper labour costs in foreign countries, such as Mexico, India and China.
Insourcing is the opposite of outsourcing and is a more recent term. Insourcing entails evaluating the goods and services that the firm purchases from third-parties and determining whether cost savings could come from producing the goods or services in-house.
Globalization and technology have been important drivers of outsourcing and offshoring. These factors have allowed companies to extend their supply chains to new places around the world. Outsourcing is often supported by shareholders when financial benefits exist, and managers recognize that outsourcing is an important cost minimization strategy in order for the firm to keep up with rivals. However, unions, workers and movements such as Occupy Wall Street are concerned that mass outsourcing is destroying middle class jobs in America. As a result, outsourcing is linked to important public policy considerations.