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, or 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 carried out 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 2001/23/EC of 12 March 2001 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 undertakings or businesses. Under this 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. The aim of this Directive is to ensure, as far as possible, that the employment relation continues unchanged with the transferee and that the workers are not placed in a less favourable position solely as a result of the transfer. It does, however, allow Member States to introduce more employee-favourable provisions than those of the Directive if they wish. As a result, the protection of employees’ rights in these situations may differ amongst the Member States. However, the European Court of Justice has delivered many decisions related to the interpretation of the Directive whereby the substantive provisions have often been given an extensive and flexible interpretation.
Outsourcing and subcontracting practices have become complex in some industries, such as construction and road haulage, leading to long and complex subcontracting chains. Trade unions fear that this is detrimental to the rights of workers in the subcontracting companies in terms of adherence to statutory and collectively-agreed workers’ rights. The ETUC is pressing for the EU to examine the issue of long supply chains and complex outsourcing arrangements, which it fears can lead to a deterioration in pay and working conditions for workers. It is calling for the EU and national governments to introduce mandatory supply chain liability, which would make the main contractor liable for the wages and social contributions of subcontractors if the subcontractor does not meet these obligations.
The view of employer organisation BusinessEurope is that all subcontractors should comply with relevant labour legislation, but that mandatory supply chain liability would not be an effective solution. In a 2009 letter to the European Parliament, BusinessEurope stated that 'Companies cannot and should not assume responsibilities of public authorities to verify the application of labour laws by other companies. The main contractor is not in a position to monitor compliance in practice. It is the duty of all sub-contractors to ensure compliance with relevant labour laws when dealing with their employees. Where this is not the case, labour inspectorates and/or other appropriate public bodies should be responsible for enforcing compliance in practice.'
Issues related to liability in subcontracting chains and national rules in this area are discussed in a report issued by the European Parliament in July 2017.