Outsourcing Agreement

Outsourcing agreement is an agreement between a business and a service provider in which the service provider promises to provide necessary services. It is a practice usually undertaken by companies as a cost-cutting measure. So, outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity that is or could be done internally, and sometimes involves transferring employees and assets from one firm to another. This term primarily for use in relation to the outsourcing of IT or IT-enabled business process services where the services are being outsourced for the first time on a long-term basis. Such services include data processing and information management, using its own staff and equipment, and usually at its own facilities. The outsourcing provider will instead provide those services using their own personnel and, often, facilities. It can be cost-effective, as you only pay for what you need, and you can recruit niche talent too. One of the main reasons for outsourcing may be expanding the business for a temporary period which demands more staff or resources.

Outsourcing agreement is an agreement between a business and a service provider in which the service provider promises to provide necessary services. The term outsourcing, which came from the phrase outside resourcing, originated no later than 1981. The concept, which The Economist says “made its presence felt since the time of the Second World War”, often involves the contracting of a business process (e.g., payroll processing, claims to process), operational, and/or non-core functions, such as manufacturing, facility management, call center/call center support).

Companies use outsourcing to cut labor costs, including salaries for its personnel, overhead, equipment, and technology. The practice of handing over control of public services to private enterprises, even if on a short-term limited basis, may also be described as “outsourcing”. By outsourcing to a third party, the business can focus on the best core activities and gain a competitive edge in the marketplace.

Outsourcing can help businesses reduce labor costs significantly. Outsourcing includes both foreign and domestic contracting, and sometimes includes offshoring (relocating a business function to a distant country) or nearshoring (transferring a business process to a nearby country). When a company uses outsourcing, it enlists the help of outside organizations not affiliated with the company to complete certain tasks. Further, the skills required for that particular job may not be available locally.

Business process outsourcing (BPO) a practice of contracting a specific work process or processes to an external service provider. The BPO industry is divided into three categories, based on the location of the vendor i.e

  • Offshore vendors are located outside of the company’s own country
  • Nearshore vendors are located in countries that neighbor the contracting company’s country
  • Onshore vendors operate within the same country as the contractor, although they may be located in a different city or state.

Offshoring and outsourcing are not mutually inclusive: there can be one without the other. They can be intertwined (Offshore outsourcing), and can be individually or jointly, partially or completely reversed, involving terms such as reshoring, inshoring, and insourcing. The service provider/vendor to take the responsibility of making payments to its staff periodically and regularly.