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Outsourcing

The process of employing outside contractors to perform tasks which although are not core activities of the organisation, were previously performed in-house; or the act of moving a firm’s internal activities and decision making responsibilities to outside providers. Outsourcing manufacturing – for example – may be used: when there are parts of a product that the business is not able to produce efficiently, or it does not have the specialist knowledge or equipment; when a firm is already operating at maximum capacity; to cope with seasonal demand – saves the business having to expand; to cope with ‘one-off’ peaks in demand, take on extra orders. When deciding whether or not to outsource or between activities that should or should not be outsourced, management guru Charles Coates advocates that business organisations should classify activities into critical (or core) activities, and non-critical activities. Critical activities are the key to a firm’s competitive advantage and they must remain in-house. Non critical activities are support activities which are not the source of competitive advantage. Coates advocates that the organisation focuses on the critical activities and, provided outside providers have a cost advantage, outsources the non critical ones. Obviously, if no outsider can perform the task more cheaply, then it should remain in house, but the organisation should always be ready to switch to outsourcing if a lower cost specialist emerges.

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