outsourcing definitions

all you need to know about outsourcing


Outsourcing Defined

OK, so you want to know what is outsourcing? In the broadest sense, almost everything in business is outsourced. Think about it. When a company buys parts from a supplier to build its own products, it is Outsourcing. When it hires a cleaning crew to clean its offices, it is out sourcing that service. When a construction firm hires a subcontractor, it is Outsourcing. When a corporation hires an executive search firm, it is Outsourcing that responsibility. Accounting, security services, advertising, IT networking, payroll services, legal counseling, market research, manufacturing (Apple doesn’t even build its own computers. That task is outsourced to a company you’ve never heard of.), insurance, landscaping, engineering and customer service—the list of Outsourcing is never ending.

So what constitutes Outsourcing? Well, that depends on your point of view. To help structure our understanding of Outsourcing, here are three different definitions to consider:


Basic Definition:

Outsourcing is the transfer of any business function or service to external vendors, suppliers or consultants that was previously or potentially performed in-house.

“The company’s entire business model was based on Outsourcing all of its operations to a variety of service providers.”


Tactical Definition:

Outsourcing is a business tactic to reduce long-term costs, liability and overhead by contracting out business processes to a specialized third-party.

“The corporation is determined that Outsourcing its entire R&D department, it could save millions of dollars.”


Political Definition:

The collective Outsourcing of jobs overseas to offshore countries as a result of rising labor costs and the long-term legacy costs associated with economic and market factors.

“U.S. companies have been Outsourcing IT jobs to India and China for the last ten years at the expense of customer service.”


Outsourcing: Glossary of Terms

Application Development

An IT outsourcing function most frequently sent offshore, which involves a process of writing and maintaining computer source code.

Application Hosting

Provided by an ASP (Application Service Provider) and specializes in electronic distribution of mission critical business applications.

Application Maintenance

An IT outsourcing function most frequently sent offshore, which involves the modification of an application after delivery to correct faults, to improve performance or other attributes.

Application Outsourcing

An outsourcing arrangement for a wide variety of application services including new development, legacy systems maintenance, offshore programming, management of packaged applications and staff augmentation.

Application Service Provider (ASP)

A vendor that delivers application functionality and associated services across a network to multiple customers using a rental or usage-based transaction-pricing model.


Bringing functions that were outsourced back into an organization. Like outsourcing, backsourcing is expensive and should only be done when a full investigation of the alternatives has been undertaken and the decision to backsource is clearly the right one.

Business Process Outsourcing (BPO)

A subset of outsourcing that involves contracting operations and responsibilities of specific business functions (or processes to a third-party service provider).

Captive Service

A portion of business process outsourcing where an organization will use a wholly owned subsidiary instead of a Third Party Vendor. The benefit of doing such an arrangement would be to leverage the cost savings of using offshore resources, while maintaining complete control over process and delivery.

Comparative Advantage

The ability of an individual or group to carry out a particular economic activity (such as making a specific product) more efficiently than another activity.

Claims Processing Outsourcing

A type of outsourcing service, which involves a software feature that enables a system to act as a claims provider, claims requester, or claims-based application.

CRM Center

An interaction center for customer relationship management (CRM), in which agents are given powerful tools to seamlessly handle inbound or outbound communications.

Direct Foreign Investment

An ownership interest of 10% by a domestic organization in the business of a company in another country.

External Service Providers (ESPs)

Any internet based service externally sourced such as Yahoo!, live.com or Google mail.

Human Resources Outsourcing

Outsourcing to a third-party provider to manage certain HR services and functions.

Impersonal Services

Outsourcing services that can be easily sent and received electronically.

International Distribution Channel

The network of individuals and organizations involved in the process of moving a product or service from the producer to the end user internationally.

Information Technology Enabled Service

Information technology that enables the business by improving the quality of service.

Information Technology Outsourcing (ITO)

A company's outsourcing of computer or Internet related work, such as programming, to other companies; It is used in reference to business process outsourcing or BPO, which is the outsourcing of the work that does not require much of technical skills.


Opposite of outsourcing, which entails bringing processes handled by third-party firms in-house, and is sometimes accomplished through vertical integration.

Knowledge Process Outsourcing (KPO)

A form of outsourcing, in which knowledge-related and information-related work is carried out by a third party organization.

Legal Process Outsourcing (LPO)

A form of outsourcing that refers to the practice of a law firm or corporation obtaining legal support services from an outside law firm or legal support services company (LPO provider).

Managed Service Providers (MSPs)

Most often an information technology services provider that manages and assumes responsibility for providing a defined set of services to its clients either proactively or as the MSP (not the client) determines that services are needed.


A company that is headquartered in one country and that has established divisions of subsidiaries in a foreign country.


Using both internal and service provider staff – in order to speed up the time to launch.


The North American Free Trade Agreement entered into among the U.S., Canada, and Mexico that eliminated trade barriers and contributed to the outsourcing of manufacturing jobs.

Nearshore outsourcing

The transfer of business or IT processes to companies in a nearby country, often sharing a border with your country, where both parties expect to benefit.

Offshore Outsourcing

The shifting of jobs from wealthy nations to developing nations.

Operational outsourcing

Outsourcing operational tasks, which are the mission-critical activities and department processes that take precedence over all other department activities.


The purchase of inputs or services by one business/individual from another.

Personal Services

Services that require face-to-face contact or human interaction.

Process-Specific Outsourcing

Outsourcing service specific to a process or internal procedure or outsourcing a specific operation-related aspect to other companies or units that specialize in that specific service.

Project Outsourcing

When companies have trouble managing one of their projects or even completing a portion of a specific project they can outsource a part of a project or a whole project to a third party provider.

Reshore Outsourcing

The practice of bringing outsourced personnel and services back to the location from which they were originally offshored.

Service Level Agreement (SLA)

A record which defines a set amount of time for a task to reach a certain condition; If the task does not reach the condition by a set amount of time, it is breached.


World Trade Organization which is responsible for overseeing the agreements of the Uruguay Round of free trade talks.