Debitoor Dictionary

Accounting terms explained in a simple way

Over 150 Articles for Founders and Small Enterpreneurs

  1. Accountancy
  2. Expense

Outsourcing - What is outsourcing?

Outsourcing is when a company transfers work to a company or individual to reduce costs of doing the same work internally

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Outsourcing is a pretty straightforward term. It involves a business looking to outside sources to provide products or components needed to complete its own production or service.

What can be outsourced?

Today, it is relatively easy to outsource certain processes, tasks, or production due to the high numbers of independent contractors and the ease of connecting through online networking sites designed for this type of collaboration.

There is no real limit to what can be outsourced. Traditionally, we may think of call centres outside of the country, but outsourcing includes something as simple as hiring an external tax consultant.

Some of the most popular outsourced services today include human resource management, content creation, research, legal and accounting professionals, and graphic design creatives.

Outsourced production of goods or partial components of goods are also common.

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For example:

Jim’s company builds rechargeable solar batteries for mobile phones. The company does not have the resources to create the solar glass, so it is outsourced to a specialised company.

Jim’s company then uses the glass from the outsourced company to build the complete batteries and sell the final product.

It would be too expensive and time consuming for Jim’s company to produce the glass themselves, but by outsourcing, it saves on time and costs.

The upsides of outsourcing

Aside from the main reasons for outsourcing - to save on costs and to purchase products or services that a company may not be able to produce themselves, there are several other positives to outsourcing.

By outsourcing, it is possible to find experts in a specialised field or product, thereby providing your business with a higher quality final outcome.

This, in turn, can make your business more competitive in its market and improve the overall performance of your company.

The downsides of outsourcing

While outsourcing can be a great resource, it does not come without its potential complications. By working with an outside company, paperwork is often required in the form of contracts. This can take time and involve legal fees.

It also requires a high amount of trust put in the company handling the outsourced product or service, especially if it has a significant impact on the timing or quality of your company’s performance or reliability.

The best way to prevent this is to do your research thoroughly and ensure the company you are working with is reliable in both production and quality.

How does outsourcing work?

A company seeking to outsource a particular part of their business will find a company to produce that particular product or service (or portion thereof).

The company performing the outsourcing work acts as a supplier, providing the original company with the parts necessary to run their business.

The original company has a contract with the company performing the outsourced work, and records the costs of all outsourced work as a business expense.

Outsourcing and Debitoor

Debitoor allows you to keep track of all expenses incurred by your business. Quickly categorise them to keep any work done for your business by external companies organised and stay on top of payments.