outsourcing

Contracting, sub-contracting, or 'externalizing' non-core activities to free up cash, personnel, time, and facilities for activities where the firm holds competitive advantage. Firms having strengths in other areas may contract-out data processing, legal, manufacturing, marketing, payroll accounting, or other aspects of their businesses to concentrate on what they do best and thus reduce average unit cost. Outsourcing is often an integral part of downsizing or reengineering. Also called contracting out.

Outsourcing will continue to grow in popularity over the long term. As transaction costs approach (but never reach) zero, every entity benefits by focusing on their core competencies; that is, whatever they do relatively best. This is analogous to countries which are trading partners and import and export goods based on which goods are cheaper or more expensive for them on a relative basis.

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