Companies have different reasons to outsource work to third-party suppliers:

• Cost benefits
• Access to new technologies and expertise
• Flexibility
• Prediction of costs
• Regular cash flow

Cost benefits

One of the mayor reasons to outsource is the reduction of costs. Due to the economies of scale or a focus strategy, even being located in a low wage or cost country, a supplier can offer its services or products against lower cost compared to the outsourcer. This is one of the major reasons for outsourcing activities.

Access to new technologies and expertise

The lack of resources or specific expertise enables outsourcing parties to gain access to new technologies and expertise. In case of software development, there are specialised companies with certain expertise and skills and focus on certain type of software development. These companies stay up-to-date with the latest developments and technologies, in order to maintain their competitive position. The outsourcer gets indirectly access to this knowledge. Thereby it enables itself to increase the quality of its services. Moreover it is often not cost beneficial to obtain certain knowledge internally.

Flexibility

The market is constantly changing and influences the variation in demand and offer in products and services. This has its effects on the internal resources. Especially demand fluctuations are influenced by the economic conjuncture. For instance in times of recession it is not cost-effective to keep large quantities of stock. By making use of external providers, you are able to be more flexible to demand changes.

Prediction of costs

Within companies it is normal to work with yearly budgets. The budgets are most of the time exceeded. However by contracting a provider and making agreements on prices, you are able to predict the yearly costs of certain business activities and processes.

Regular cash flow

The cash flow of the outsourcing party will improve since the third-party supplier makes the investments for the outsourced activities. This results that the cash flows become more evenly. Of course the supplier will transfer some of the investments to its clients.