What is Outsourcing? – Advantages and More

Introduction

Outsourcing is the agreement between two employers that one of them (contractor or subcontractor) performs services for the other (principal or principal) at his own risk and with his workers. The contractor or subcontractor exercises its employees’ management, control, and supervision.

As is clear from the provisions of article 183-A of the Labor Code. Subcontract work is work carry out based on an employment contract by an employee on behalf of an employer, known as a contractor or subcontractor, who, base on a contract, performs work or services at his own risk and also with workers under his control, for a third natural or lawful person who owns the work, company or of the task, called the parent company, in which the services are develop, or the doings are carried out.

Advantages of Outsourcing

The main advantages of outsourcing are:

Cost

An outsourced company could offer lower prices than what it would price the company requesting their services if they did it themselves. This type of advantage occurs for various reasons, e.g., B. due to economies of scale or a certain degree of specialty in a particular production procedure (experience effect).

Volume Flexibility

The market changes occasionally, and the demand for a product or service increases. Companies can respond to this need, assuming the growth of orders themselves or resorting to outsourcing.

Process Flexibility

When it comes to outsourcing, companies have several options to choose from. Therefore, outsourced companies seek to improve their procedures and resources to differentiate themselves and grow by improving their factors of production.

Technical or Financial Capacity: Outsourced companies often can perform certain types of work that others cannot. This is either with knowledge of the production process or the resources necessary to deal with the activity.

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Legal and Tax Advantages

Companies can remain located in areas with different types of legislation that makes the development of specific activities more attractive. For example, we see in the products we consume daily that many of them are made in distant lands because brands outsource production services where they can get tax benefits and, therefore higher profit margins.

Disadvantages of Outsourcing

The main disadvantages of outsourcing are:

• Risk of choosing a lousy company: If the company providing the service is not well select, the image of the sponsoring company may suffer.
• Risk that the supplier becomes a contestant of the contractor: The subcontracting company could use the know-how of its client to become its competitor.
• Reduced costs may be minimal: the expected benefits of outsourcing, given what it would cost the business to undertake the activity itself, may not be as significant as expected.
• Jobs are lost: If we eliminate a division to outsource. Those jobs will be forfeit unless the outsource company hires them.

Characteristics of Outsourcing

The main characteristics of outsourcing are listed below:

• The period of the contract depends on the activities to be carry out or the parts of the project
• It is carry out by two entities the organization that contracts and the organization that is subcontract.
• It saves costs and accelerates the growth of the organization.
• It is use to contract activities that are not the organization’s main activities.
• Good communication between both parties is essential.
• It is employ in labor camps .
• It involves some type of remuneration that is stipulate in the contract.

Outsourcing Example

An example of subcontracting is smartphone manufacturing companies accountable for manufacturing and marketing. However, they represent the development and updating of their system and software to another company. As is the case with the Android system offer by Google.

So these smartphone companies are developing a product with a sound system that they couldn’t produce themselves because they don’t have the knowledge or the means to do so.

Conclusion

Outsourcing is an arrangement whereby one company hires another company to take responsibility for a plan or obtainable activity that is or could be perform in-house and occasionally involves the transfer of staff and assets from one firm to another.

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