Outsourcing is subcontracting a service, such as product design or manufacturing, to a third-party company. The decision whether to outsource or to keep the task in-house is often based upon achieving a lower production cost, making better use of available resources, focusing energy on the core competencies of a particular business, or just making more efficient use of labor, capital, information technology, or land resources. It is essentially a division of labor.

The "do what you do best and outsource the rest" concept has accelerated outsourcing of non-core functions

• Outsourcing brings flexibility for international expansion
• In Europe, the outsourcing wave spreads from north-west to south east

Reasons for outsourcing

Cost savings. The lowering of the overall cost of the service to the business. This will involve reducing the scope, defining quality levels, repricing. Accessing lower-cost economies through offshoring, known as "labor arbitrage," generated by the wage gap between industrialized and developing nations.

Focus on core business. Resources (for example investment, people, infrastructure) are focused on developing the core business. For example, organizations often outsource their IT support to specialized IT services providers.

Cost restructuring. Operating leverage is a measure that compares fixed costs to variable costs. Outsourcing changes the balance of this ratio by offering a move from fixed to variable costs and also by making variable costs more predictable.

Scalability. The outsourced company will usually be prepared to manage a temporary or permanent increase or decrease in production.

Operational expertise. Access to operational best practice that would be too difficult or time consuming to develop in-house.