The Successful History of Outsourcing and How It All Started

Outsourcing has a longer history than many think, but it became a formal business strategy in the 1980s. By the 1990s and early 2000s, advances in internet technology quickly changed how companies operated worldwide.

The history of outsourcing shows how it’s become a key part of modern business operations. By 2019, the global outsourcing market hit $92.5 billion, with information technology leading the way. Companies use outsourcing mainly to cut costs, optimize resources, and focus on growth.

The COVID-19 pandemic only accelerated this trend, pushing businesses to adopt remote-first models and embrace independent, distributed teams. It’s more important than ever to understand outsourcing, including its benefits, challenges, and role in the future of work. This guide explains how outsourcing started, its impact on businesses worldwide, and what’s next for this growing strategy.

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Outsourcing vs. Remote Staffing

When talking about outsourcing, you’ll find terms that are used the same way but have different meanings. Before delving into the intricacies of outsourcing, it’s important to define a few key terms.

Outsourcing

Outsourcing is when a company hires someone else to do tasks that it usually does itself.

• • Onshore outsourcing is when a company hires someone locally, like a Canadian company hiring graphic designers in Canada.

    • • Nearshore outsourcing is when a company hires someone from a nearby country. For example, a New York company might work with Mexico.

    • Offshore outsourcing is when a company hires someone in a distant country, like a UK company outsourcing to Vietnam.

Business Process Outsourcing

Business process outsourcing is when a company hires another company to handle tasks that aren’t their main focus. These are usually customer service or administrative tasks but may also include marketing, software development, recruitment, and other essential services.

 

 

Remote Staffing

Remote staffing is simply the process of hiring staff members who don’t work at an office. It is also the default work arrangement for remote-first companies. Unlike outsourced workers, who work through an outside provider, remote staff are part of your team and you manage them directly. The only difference between remote staff and in-office staff is that the former is location-independent.

 

Virtual Assistants

Virtual assistants or VAsare skilled individuals who provide a variety of business support services and work remotely. VAs are great for entrepreneurs who want to outsource tasks like customer care, data entry, or managing an online store. They’re also useful for business owners with creative or technical tasks such as app development or online marketing. Virtual assistants are either hired through a remote staffing provider or recruited through online direct sourcing platforms.

 

Telework

Telework or telecommuting is a work arrangement that enables employees to work from anywhere they want. Teleworkers or remote workers use computers, phones, and other tools to communicate and collaborate with coworkers and clients. This set-up is also known as work from home (WFH), remote work, and mobile work.

 

History of Outsourcing

Outsourcing is usually connected to computer work or special equipment, but it’s been used for centuries. It’s tough to say exactly when outsourcing started, but people have been handing off tasks to others for thousands of years.

Before there was outsourcing, individuals and families were essentially self-sufficient. They built their own homes, foraged their own food, and made their own clothing.

Eventually, villages began to spring up and people started to develop certain professions. When someone couldn’t do certain tasks, they had to outsource them to people who could. Think of the farmer hiring farmhands to help bring in the harvest or the ship captain hiring seafarers to crew a vessel.

The bartering system allowed these workers to receive compensation for the goods they produced or the services they rendered. Essentially, these individuals were doing outsourced work for others in the community.

Migration was another leading driver behind outsourcing. It gave industrial leaders a greater diversity of skills and labor rates with which to grow economies. But it wasn’t until the Industrial Revolution that outsourcing began to change the way companies did business.

The Industrial Revolution

Before the Industrial Revolution, companies were mostly independent. Business owners preferred to create and manage their own teams instead of bringing in outside experts. They employed workers for manufacturing, distribution, accounting, administrative work, and even for the construction of offices and factories.

During the Industrial Revolution, technological advancements allowed businesses to produce en masse. However, manufacturing large quantities of products also prompted labour costs to skyrocket.

To cut costs, business owners started outsourcing non-essential tasks instead of doing them in-house. This led to businesses like insurance companies, accounting firms, and distributors helping multiple clients in the same area. The invention of the telegraph made remote communication easier and paved the way for outsourcing across significant distances.

1970s to 1990s

The term “outsourcing” wasn’t used until the 1970s to describe hiring outside firms to handle non-essential business tasks. And it wasn’t until 1989 that outsourcing was recognized as a legitimate business strategy.

By this point, companies weren’t just outsourcing for business processes that they had no internal competency for. Big companies trying to compete globally saw the value in outsourcing production to countries with cheaper labor. Manufacturers began sending basic items, like clothes, toys, and accessories, to the East for production. They also sent tech products, such as electronics and appliances.

Offshoring was made possible by massive improvements in infrastructure, which drove transportation costs down. Governments in developing countries started investing in education and training, making sure workers could offer good services. American enterprises were also drawn by lower labor costs and more lenient rules regarding employee wages and benefits.

As outsourcing grew, companies moved from offshoring production to outsourcing basic support services. They hired service providers for important functions like billing, HR, taxes, mail, word processing, and database management. Outsourcing production and routine tasks let companies focus on key goals like customer service and branding.

The tech industry was one of the first to outsource services like payroll, data transcription, and customer service. This happened as developing countries opened their economies, the internet grew, and more was invested in IT infrastructure.

Since the 1990s, countries like India and the Philippines have attracted companies. These countries have many English speakers who are mostly college-educated. Companies want to save money by moving to these places. As of 2019, India still holds the top spot in the list of digital nations compiled yearly by Tholons. Brazil, the Philippines, and Mexico have also consistently placed in the top 10.

The Evolution of Outsourcing

The outsourcing industry has grown and evolved rapidly, creating new areas of opportunity for organizations around the world. The evolution of outsourcing can be divided into three key levels:

Tactical Outsourcing

In tactical outsourcing, companies outsource non-essential tasks to save money and increase profits. It started in the 1980s when businesses began outsourcing tasks, and many still do it today.

Tactical outsourcing companies are typically those suffering from a shortage of funds, trouble finding needed talent, or managerial incompetence. The objectives are straightforward at this level. Outsourcing suppliers help businesses save costs quickly, avoid staffing issues, and reduce management time.

Strategic Outsourcing

Over time, corporations began to rethink and seek more from their outsourcing relationships. Strategic outsourcing, common in the 1990s and 2000s, was about outsourcing important tasks that helped a company’s growth.

In this second stage, the focus wasn’t simply cost optimization. Strategic outsourcing also gave companies access to external resources to complement internal proficiencies. This allowed businesses to improve internal processes and gave them a strategic advantage.

At this level of outsourcing, the company and the service provider work more like partners, not just buyer and seller. The two become strategic partners, forming a long-term business relationship that is mutua lly beneficial to both.

Transformational Outsourcing

Although the third stage focused on redefining the company’s relationship with service providers, strategic outsourcing was more comprehensive. In The Black Book of Outsourcing, Douglas Brown and Scott Wilson discuss transformational outsourcing. This type of outsourcing aims to change the company itself.

In the 2000s, the global economy forced companies to realize they needed a new business model to survive. Transformational outsourcing became the answer.

Business leaders began to see that outsourcing experts could bring new skills and ideas to improve their companies. This expertise helped them meet changing needs, improve operations, and stay competitive.

In this stage, outsourced service providers aren’t just valued in terms of cost savings and efficiency. They are viewed as powerful forces that offer new and improved approaches that can revolutionize a corporation. The goals of transformational outsourcing include higher revenue, increased customer satisfaction, improved staff performance, faster speed to market, and lower operational costs.

The State of Outsourcing Today

Aside from enabling companies to drastically reduce operational costs, outsourcing remote staff also allows them to:

• Gain access to a global talent pool of skilled professionals
• Reallocate available internal resources to where they’re most urgently needed
• Improve efficiency, operations, and cycle times
• Focus on business development and core functions
• Share risks with a strategic partner
• Improve customer service
• Accelerate organizational transformation

According to a 2016 global outsourcing survey by Deloitte, 59% of companies who outsource use it as a cost-cutting tool. 47% outsource in order to address capacity concerns, while 57% do so in order to concentrate on their core business.

Most of those who participated in the survey represented companies in the information technology, finance, and HR sectors. 67% of respondents were from IT companies, reflecting data that shows most outsourced jobs are in information technology. In 2019, the outsourcing industry earned $92.5 billion worldwide, with $26 billion from business tasks and $66.52 billion from IT services.

Apart from IT and business processes, other prominent segments in the global outsourcing industry include healthcare, media, travel, energy, retail, transport, and telecommunications. Outsourcing is also prevalent in the banking industry. According to Credit Donkey, banks outsource almost 40% of help desk jobs and over a third of payroll and benefits jobs.

The United States is currently the biggest contractor in the global outsourcing market. In 2017, most outsourcing deals a whopping 84.2%, came from the US. To give you an idea, the United Kingdom is the second largest contributor. It made up only 5.2% of the total market. Apart from the US and the UK, Spain and Australia are also considered major outsourcing markets.

In 2017, the US and Canada used the most outsourced services. This was in the areas of government and defense. This trend was seen in North America. According to KPMG, 39% of outsourcing deals that year came from defense, and 29% came from the government.

While outsourcing from the United States has increased, jobs are also being brought into the US from other countries. The Bureau of Economic Analysis reports that 6.8 million American workers were employed by foreign-owned companies in 2015. The Pew Research Center says this was a 22% increase since 2007, which is much more than the 3.6% growth in US private jobs over the same time.

The average annualized contract value (ACV) in the global outsourcing industry was $32.6 million in 2017. This was a 53% increase from the average ACV of $21.3 million in 2016. Despite these figures, outsourcing isn’t limited to large firms and government offices. According to a 2018 survey by Clutch, more than a third (37%) of small businesses were already outsourcing a business process. The survey also found that more than half (52%) intended to outsource in 2019.

Survey respondents said that they outsource to increase efficiency, get help from outside experts, and increase flexibility. The most commonly outsourced duties were accounting and finance, IT services, and digital marketing. The best results are obtained by small firms when they outsource highly creative or technical jobs that are not part of their core operations.

The Future of Outsourcing

Outsourcing has reshaped the global economy and will continue to do so. Companies will always be on a quest to reduce expenses, maximize revenue, and stay competitive. Outsourcing is a cost-effective and time-tested way to achieve all this.

As cloud computing and AI become increasingly prevalent, companies will increasingly rely on outsourcing providers to adopt new technologies and address challenges effectively.

 

So How Do Businesses Feel About Their Outsourcing Providers?

Based on surveys conducted over the last decade, organizations that outsource intend to continue doing so. In the Deloitte survey, 78% of respondents said that they felt positive about their relationship with outsourcing service providers. In a 2016 study, 65% of companies that outsource app hosting said that they plan on increasing the amount of work that they outsource.

Following the Great Recession, only about 9% of businesses stopped their outsourcing activities. During the crisis, 57% of companies increased their outsourcing activities, demonstrating the strength of outsourcing as a business model.

Business owners can no longer ignore the fact that outsourcing is more than just a fad. This business model is crucial for companies to remain competitive globally and afloat in challenging times.

Studies indicate that despite concerns about the impact of automation on outsourcing, it remains an attractive business strategy. Some jobs simply can’t be automated and are better outsourced. The industry is expected to tackle the threat of automation by enhancing the quality of its outsourcing workforce. As a result, there will also be an increase in the number of higher-level tasks that are outsourced.

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Conclusion

In the 21st century, almost every product or service has benefited from outsourcing at some stage of its production. What once was a business tactic is now an economic necessity and a cultural phenomenon. While some criticize offshoring, it’s clear that it has become one of the best ways to drive business growth.

Outsourcing, especially offshore outsourcing, has helped businesses cross borders and tap into a wide range of talent. Outsourcing not only helps businesses and economies grow, but it also connects people from around the world.

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