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Outsourcing Definition

Outsourcing is shifting a company’s essential operations to a third party vendor in order to gain various benefits including better services, low cost and speedy work. The company that chooses to outsource is known as the customer or buyer while the third party that provides outsourced services is known as the supplier or vendor.

The vendor may be a firm or a group of individuals, which is generally situated at a different physical location (sometimes even a different country). In outsourcing, the vendor has complete control over the process being outsourced as compared to contracting in which the customer has more control over the process being contracted.

Outsourcing has recently become a buzz-word due to its increasing prevalence in the services sector. However, the roots of outsourcing in the services sector can be drawn from outsourcing that occurred in the manufacturing sector during 1940’s to 1970’s to Japan. Later the high-tech manufacturing sector also witnessed outsourcing in the 1980’s, and countries such as Taiwan became the preferred offshore destinations for manufacturing.

In the 1990’s, with the advent of the Internet and advancements in the information and communication technology, outsourcing gained importance in the services sector as well, and both on-shore and off-shore outsourcing of services became prevalent. Companies are now outsourcing a variety of services including Information Technology (IT), customer services, telemarketing, human resources, finance and administration, market research, and even research and development.

According to the estimates of Datamonitor and Everest Group the global IT outsourcing market reached USD 163 billion in 2004 witnessing a growth of 37 percent over 2003.

On the other hand, IDC estimates the global Business Process Outsourcing (BPO) spending to reach USD 641.2 billion in 2009 from USD 382.5 billion in 2004, with a Cumulative Annual Growth Rate (CAGR) of 10.9 percent. These market sizes clearly indicate that outsourcing is a well established phenomenon.

Outsourcing is also becoming prominent in niche segments such as animation and processing services. According to Forrester research, the animation industry would witness outsourcing of labor costs worth USD 136.4 billion by 2015. IDC had estimated the market for processing services to be USD 14.9 billion in 2005 and is expected to grow at a CAGR of 11.4 percent from 2005-2009.

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