A company like Apple can afford to buy these facilities itself, but for firms with limited capital, it can be a significant advantage as it allows them access to equipment, they would otherwise be unable to afford.
When a business outsources its production, the other firm will have many other customers so significantly benefits from economies of scale in that field. Lloyds Bank itself does not function in the technology sector, so its scale is limited to its own business.
At the same time, outsourcing to third parties in countries such as India and China can save significant amounts due to lower labour costs.
The firm also benefits as it is able to set up in those markets relatively easily through outsourcing with a local supplier. When outsourcing, the firm essentially loses control over what is being produced and its quality. How can it ensure that the 1, units it receives are of the highest quality? At the same time, the firm is at the mercy of its outsourcing partner. If a key part of the business is outsourced, the firm has little negotiating power to move — largely due to the significant impact a move may have.
Larger firms like Nike and Apple may have greater power over their outsourcing partners, but smaller firms may find it more difficult. This is particularly true when the firm is trying to outsource new products from their partner. They may want the partner to develop a new product, but due to their size, are unable to. By extension of loss of control, there is the potential for a lower quality output.
As the firm has no direct control over what goods or services are being produced, they may suffer from a sub-par standard. Firms may outsource to partners outside the country, or even in different regions of the same country. What can result are language and cultural barriers.
Some firms may have a relaxed and laid back culture — which may not be conducive to a firm that is very strict and demanding. This may be cultural, or structural to the business, but can create significant friction between firms that can impact on the final product. Outsourcing is generally viewed unfavourably by the public as it is perceived that jobs are being lost abroad. In fact, this was one of the main drivers that won Donald Trump the presidency in Subsequently, firms that engage in outsourcing, particularly abroad, have started to develop a bad reputation.
Part of the public opinion battle is the fact that firms are outsourcing abroad the take advantage of cheap labour. At the same time, firms have gone too far, noting the Nike sweatshop scandal in , where child labour was used. When outsourcing key aspects of the business abroad, there is a potential risk to intellectual property rights and other aspects of security.
When outsourcing, the partner firm will have many other clients to service. So although a fast turnaround time is crucial, it is also important for the other clients. This can lead to increased pressure on the partner firm to meet stricter deadlines which it is unable to do, due to other commitments.
If it does not have sufficient capacity, it is likely to lead to slow turnaround times. Examples of outsourcing include: call centers, manufacturing, IT, pensions, and finance, among many more. Outsourcing can help companies reduce costs significantly and frees up resources to allow them to focus on their core operations. However, poor quality outsourcing partners could provide a bad service and damage the firms overall reputation. The two main reasons for outsourcing is firstly to reduce costs, and secondly, to allow it to focus on its core operations.
Marginal Revenue Definition Read More ». Barriers to Entry Definition Read More ». Skip to content Home Microeconomics Outsourcing Definition. Outsourcing Definition Advantages, Disadvantages, and Examples. Measure content performance. Develop and improve products. List of Partners vendors. Your Money. Personal Finance. Your Practice. Popular Courses. Business Business Essentials.
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Key Takeaways Companies use outsourcing to cut labor costs, including salaries for their personnel, overhead, equipment, and technology. Outsourcing is also used by companies to dial down and focus on the core aspects of the business, spinning off the less critical operations to outside organizations.
On the downside , communication between the company and outside providers can be hard, and security threats can amp up when multiple parties can access sensitive data. What Is an Example of Outsourcing? What Are the Disadvantages of Outsourcing? Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate.
You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. What You Need to Know About In-House Activities In-house refers to conducting an activity or operation within a company, instead of relying on outsourcing.
How Business Process Redesign BPR Works A business process redesign is an overhaul of a company's central business processes to effect substantial changes. What Are Factors of Production? Factors of production are the inputs needed for the creation of a good or service, these include labor, entrepreneurship, and capital. Outsourcing by U. This investment helps boost those countries' economies by improving their standards of living and providing jobs for the unemployed.
With these economic improvements in foreign countries, this allows them to be a part of the global market by enabling them to buy more exports from the U. Economic developments in this country have a major influence on production, employment, and prices beyond our borders; at the same time, developments abroad significantly affect our economy. Further, because of the enormous size of the U. Reserve Bank of NY, Jan. This results in U. When U. Foreign investors pull in other outside investment as the foreign economy grows.
This benefits U. For example, the U. Components of these aircraft are outsourced to manufacturers in Italy and Switzerland to boost these economies and to aid U. The value to the U. Whether through an offset program or as a stand-alone import of goods, outsourcing tends to allow the U. Cost of labor in the U. Outsourcing promotes globalization, which is a new source of growth for U. These figures are based on the U. Bureau Labor Statistics hourly direct pay data, www. One of the most pointed-out arguments against outsourcing is the concern of jobs being lost in the U.
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