Outsourcing
Outsourcing (or contracting out) may be defined as the delegation of non-core operations or jobs from internal production to an external entity (such as a subcontractor) that specialises in that operation. Outsourcing can be used for a variety of reasons: to save money, improve quality, or free up company resources for other activities.
Outsourcing should be distinguished from offshoring. While offshoring describes the relocation of production processes or services from one country to another, outsourcing is the movement of internal business processes to an external company. Outsourcing occurs when some economic activity ceases to be performed within the company and is instead purchased from another company. The key issue is whether the company obtains intermediary goods or services through hierarchical control within a single organisation or through the market.
Outsourcing may be profitable when inputs are standardised, when there are several competing suppliers, if there are economies of scale in the supply firms that are too large to be duplicated by the buyer, when there are economies of scope that would force the procuring firm into unrelated business, and when there are no specific investments on the part of either the buyer or seller.
Outsourcing became a popular concept in business and management in the 1990s. Since then, it represents a significant trend in work organisation, and to some extent the decline in manufacturing employment is due to the reclassification of economic activities that were previously done within a manufacturing company and which subsequently become outsourced to companies classified as being in the services sector.
Where outsourcing involves the transfer of an undertaking, it is subject to Council Directive 77/187 of 14 February 1977, on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of businesses (as amended by Directive 98/50/EC of 29 June 1998; consolidated in Directive 2001/23 of 12 March 2001). Under that directive, rights acquired by employees with the former employer are to be safeguarded when they, together with the undertaking in which they are employed, are transferred to another employer, i.e. the contractor. An example of a case involving such contracting-out was the decision of the European Court of Justice in Christel Schmidt v. Spar- und Leihkasse der früheren Ämter Bordesholm, Kiel und Cronshagen, Case C-392/92 [1994]. Although subsequent decisions have disputed whether a particular contracting-out exercise constituted a transfer of an undertaking (see, for example, Ayse Süzen v. Zehnacker Gebäudereinigung GmbH Krankenhausservice, Case C-13/95 [1997]), in principle, employees of an enterprise outsourcing part of its activities in which they are employed may benefit from the protection offered by the directive.
See also: Acquired Rights Directive; dismissal; restructuring.