Why Do It?
There are a number of reasons that drive companies to outsource some or many of the work activities. The list of reasons include
Lower costs (or lower total costs). Sometimes achieved through lower wages costs, but also through economies of scale by providing the same service to multiple companies.
Improve service. Often, better educated or skilled people perform the task, and thus perform it better.
Obtain expert skills. An outsource firm is allegedly an expert in that particular activity, and thus should be able to do it better than the customer.
Improve processes. Given that outsourcers are very experienced at a particular set of processes, they can help the customer to improve their processes.
Improve focus on core activities. Outsourcing frees management from having to worry about the inner-workings of a non-core activity. The customer focuses on their core competence, the outsourcer focuses on theirs.
Outsourcers often can gain economies of scale. For example, it doesn't make sense for 500 companies to have expertise in the new tax laws for 401(k). The outsourcing company can have 3-4 people focused on it, and leverage the knowledge over those 500 companies. This is an important point because costs aren't just getting re-categorized or shuffled around—there is overall new efficiency in the supply chainMake no mistake about it. Except for two or three very specific examples, the number one reason that companies outsource is to reduce their costs for the same or better service or product.
Why Not Do It?
Outsourcing is not right for every company.
The company may be too small to effectively outsource (although a concept called "shared services" could be right for such a company).
The company's culture may not appropriate for outsourcing.
There may be customer reasons that limit or prevent the company's ability to outsource.
Some government agencies do not allow their contractors to outsource anything to an offshore location.
Outsourcing takes a type of management leadership that may be different than that which exists within the company today.