Words Used in Outsourcing

Most of us are somewhat familiar with
outsourcing. It's simply when one company hires a separate company to
perform work that, in the past, it has done itself.
So instead of having a payroll department, an
organization may decide to outsource its payroll function to another
company that specializes in such work.
What are the key motivations and expected
benefits of outsourcing work versus doing it in-house?

Companies hope that the work will be done quicker, and more efficiently.
They hope it will decrease costs.
They expect that it will free resources that can be applied to
core competencies.

When outsourcing first became popular, there was
understandable resistance to it, particularly from the workers whose
jobs were replaced. In the 1980s and 1990s, outsourcing and
downsizing were often viewed as the same thing. The practice earned
a bad reputation, because it made people think of massive job
losses, and corporate greed.
Now, however, many see outsourcing as a valuable strategic choice.
It makes more efficient use of people, and financial resources. It
can be done on a very small scale, with one specific function – or
on a very large scale, where complete departments are outsourced.
Because the influence of outsourcing is felt across all industries,
and across companies of all sizes, the chances are that you'll
encounter outsourced work during your career.
This glossary explains outsourcing terms, helping you to understand the
circumstances and implications of outsourcing in your workplace. It covers the following terms:
Parties

Service provider/vendor.
Client.

Location of outsourced service providers

Onshore.
Near-shore.
Offshore.
On-site.
Off-site.

Outsourcing strategies

Sourcing strategy.
Delivery model.
Sourcing model.
Tactical sourcing.
Insourcing.
Core competences.
Outsourcing portfolio/outsourcing mix.
Contracting out.

Outsource contracting

RFI (request for information).
RFP (request for proposal).
Service level agreement.

Types of outsourcing

Hosting.
Managed services.
Business process outsourcing.
Multivendor sourcing.
Global sourcing.

Management

Vendor management.
Governance.

Glossary
Service Provider
Also known as the supplier, outsource service supplier (OSS), or
vendor.
This is the organization that provides outsourced services.
Client
Also known as the buyer or outsourcer.
This is the organization that buys outsourcing services from another
company.
Onshore
This is when the company that provides outsourcing services is
located in the same country as the client.
Near-shore
This is when the outsourcing service provider operates from a
different country, but that country is still close to the client.
For instance, this can be when a North American company outsources
to another company somewhere in North or Central America, or when a
European company outsources to a different country within the
European Union. With near-shore outsourcing, there are generally
fewer cultural issues or time zone differences.
Offshore
This is when the outsourcing service provider is in a country far
away from the client. Typically, the cultural and time zone
differences are significant. An Australian company outsourcing to a
provider in India is an example of offshore outsourcing.
On-site
This is when the outsourcing services are provided by staff who are
based at the client's site. For example, maintenance of IT equipment
usually involves on-site outsourcing.
Off-site
This occurs where the services are performed at the outsourcing
service provider's worksite. For example, customer service call
centers are typically set up off-site.
Sourcing strategy
This is the process of aligning a company's outsourcing practices
with internal strategic factors, and with the marketplace. A company
might ask these questions: What are our business goals? What
internal capabilities do we have? What capabilities are available in
the outsourcing market? And what sourcing model will best meet our
needs?
Delivery model
The type of business model used to structure the outsourcing
arrangement is called the "delivery model". The model chosen depends
on how deep a company's commitment to outsourcing is, the type of
outsourcing it wants, and where it outsources to. Some companies
decide to form joint ventures with suppliers. Other delivery models
include having more than one supplier; using offshore, near shore,
or on-site suppliers; and even subcontracting management of the
outsourcing function.
Sourcing model
This refers to the depth and scope of outsourcing activities within
a company. At the most basic level, an outsourcing supplier is used
to perform a specific area of work. But a client might enter into a
long-term contract with a supplier to source an entire business
process – for example, the IT function – where the supplier has
total responsibility for managing, operating, and developing that
function for the client.

Tactical sourcing
This is the use of outsourcing to ease a current business pressure,
or solve an immediate problem. This is a short-term approach to
outsourcing that focuses on getting the job done now, not on
building a long-term outsourcing relationship or strategy.
Insourcing
This involves performing work within the client company, with the
client's own staff, but organizing it similarly to previously
outsourced work. Insourcing typically involves setting up a
stand-alone unit that has one specific function, and is tightly
controlled. For insourcing to work well and be cost-effective, the
company needs appropriate physical, human, and management resources.
Core competences
Core competences are the unique set of skills and knowledge that
defines an organization and its capabilities. These competences are
what give the company its competitive advantage. Outsourcing is one
way to make sure the company's resources are dedicated to core
competence work – and not spread too thinly across activities that
don't create high value. Core competences generally should not be
outsourced, but the services that outsourcing suppliers provide
should be their own core competences. You can learn more about core
competences in our article on the subject.
Contracting out
This is often confused with outsourcing, but there's an important
difference: When a client contracts out work, the client keeps full
control of the process and tells the service provider what to do and
how to do it. Outsourcing usually assumes that the service provider
agrees to perform a service and keeps control of how the service is
delivered.
Outsourcing portfolio/outsourcing mix
This is the specific mix of outsourcing methods used in a client's
outsourcing strategy. It answers the questions: What does the
company outsource offshore and near shore? What does it do on-site
versus off-site? Does it contract out any work?
RFI (Request for Information)
This is the process by which a buyer asks for, and collects,
information about various suppliers' capabilities and experience.
This is a tool to evaluate which suppliers may be asked to go
further in the selection process, and submit an actual proposal.
RFP (Request for Proposal)
When clients are clear about exactly what they want, they send out
an RFP to ask for specific proposals from vendors. These include
deliverables, time frames, cost, and so on. The RFP is typically
quite unstructured – this allows the bidding companies to
demonstrate their understanding of the buyer's needs, and how best
to address those needs. From there, the buyer may ask for more
information to make a final decision on an outsourcing supplier.
Click here to learn more about RFP documents.
Service level agreement (SLA)
A part of the outsourcing contract, this defines the nature and
quality of the service to be delivered. It specifically transfers
responsibility for a particular function to the outsourcing
provider. These service expectations are negotiated up front, and
they're used as the primary tool to evaluate the success or failure
of the outsourcing relationship. SLAs generally outline the
performance metrics to be used.
Hosting
Also known as application service provision,
this is when a supplier hosts a major application, and several
clients then use that application on the supplier's servers – but
the host keeps all data from different clients separate. This model
allows smaller organizations to use sophisticated applications in a
cost-effective way.
Managed services
This is where management responsibility is transferred to an
outsourcing provider (or other third party). The supplier typically
uses its resources to maximize its ability to provide quality
services. The client then takes advantage of these capabilities, and
still maintains control for the overall level of service provided.
In the IT world, managed services allow buyers to access things like
high-quality services and cutting-edge technologies, without having
to develop them in-house.
Business process outsourcing (BPO)
This involves delegating a full business process or function to an
outsourcing service provider. For example, rather than outsource
just payroll responsibilities, a company may decide to outsource its
entire human resources department. Using BPO for information
technology outsourcing is very common, especially in large public
sector organizations. The proactive use of BPO allows companies to
concentrate more attention and resources on their core competences .
Multivendor sourcing
This is a sourcing strategy that uses a variety of outsourcing
providers to maximize the efficiencies of outsourcing. This approach
requires effective management of the various service providers, and
of the different service level agreements.
Global sourcing
This is a sourcing strategy that allows buyers to take advantage of
the global efficiencies offered in the marketplace. In particular,
European and North American companies often use cost-effective
services from companies in India and China. Global sourcing is a key
contributor to the global economy.
Vendor management
This is the process of overseeing and managing the details of the
outsourcing agreement. It includes negotiating the price, and
ensuring adherence to service level agreements. Outsourcing
management can be quite complex, especially when clients have a
variety of sourcing and delivery models, or when they work with more
than one service provider. Larger companies have dedicated vendor
management personnel.
Governance
Governance is the management of the outsourcing relationship. In
strategic outsourcing, this is critical. Outsourcing companies are
partners in service delivery, therefore they're important
stakeholders in the client's business. Governance goes beyond the
service level agreements and performance metrics – it ensures that
the overall relationship is monitored and managed for the benefit
both of the client and service provider.