“Do what you do best and outsource the rest.” So said management guru Peter Drucker in the 1980s, and since then, the business world has witnessed the growth of all manner of outsourcing—from offshore manufacturing to managed services to staff augmentation.
Long seen as a cost-reduction strategy, outsourcing has assumed a higher value proposition over time, involving more collaborative partnerships that leverage contractors’ specialized skills, purpose-built facilities, and advanced technologies. At the same time, outsourcing has migrated from the back office and the strategic periphery to the front lines of fulfilling core business objectives at many companies. This article examines 14 types of outsourcing and the benefits they bring.
What Are Outsourcing Types?
Outsourcing can be divided into 14 common types, including business process outsourcing (BPO), IT outsourcing, onshore outsourcing, and offshore outsourcing. In arrangements like these, a company hires a third party to perform a specific task, manage a project, handle end-to-end operations, or otherwise fulfill functions that would normally require in-house staffing—all solutions that free the company to focus on its core business.
Regardless of type, technology is redefining outsourcing across the board. For one thing, cloud computing, ERP systems, and specialized software in areas like procurement make it easier to manage outsourcing relationships and processes. For another, companies are using advanced technologies and automation platforms to displace outsourcing altogether in some cases. At the same time, outsourcing providers are using industrial robotics in their production facilities, AI for analytics, robotic process automation for business process outsourcing, and other innovations to elevate their own service offerings in an ongoing transformation of outsourcing.
Key Takeaways
- Outsourcing has evolved beyond simple cost-cutting to become a strategic business approach for accessing specialized skills, advanced technology, and innovation.
- Categorized by operation, location, and scope, a wide variety of outsourcing models exists to fill businesses’ specific needs.
- Successful outsourcing hinges on communications and collaboration.
- Best practices include careful planning, diligent partner selection, clear contractual agreements, and ongoing management of performance.
The Different Types of Outsourcing Explained
The types of outsourcing generally can be organized into two categories: operation/function and location. Outsourcing types organized by operation include BPO, manufacturing outsourcing, professional outsourcing, and project outsourcing. The location category includes offshoring, nearshoring, onshoring, and onsite outsourcing.
Within these categories, the extent and range of what a business chooses to outsource can vary significantly. That is, the scope of an outsourcing engagement may be project-specific, such as hiring a specialist for a single, defined task that has an end date; process-specific, to handle an ongoing business process, such as payroll; or more broadly operational, incorporating multiple interconnected processes in areas like supply chain management. Companies often run multiple types of outsourcing engagements concurrently.
Outsourcing Types Organized by Operation
The choice of outsourcing type depends on a company’s specific operational needs, goals, budget, and the nature of the tasks being outsourced. Many companies use a combination of the following types to achieve their strategic objectives.
1. Manufacturing Outsourcing
Manufacturers are big outsourcers, with many hiring contract manufacturers to make their components or products, and even more relying on third-party logistics providers to store and distribute them. Manufacturing companies increasingly view their outsourcing partners as close collaborators—not just suppliers—involving them in cooperative innovation, product development, creative problem-solving, and continuous improvement.
Outsourcing production can significantly lower operational costs because it allows companies to leverage contract manufacturers’ economies of scale instead of investing in infrastructure. Companies can also rely on their outsourcing partners’ factories to scale production up or down to reflect changing demand. Moreover, they can tap into contract manufacturers’ expertise and technologies for automation, quality assurance, and other operational advantages.
2. Professional Outsourcing
Companies across all industries rely on specialized professional services, such as accounting, legal counsel, and engineering. For example, outsourced accounting services can assist companies that face growing financial complexity. A typical engagement might transfer day-to-day accounting responsibilities to an external team of experienced finance professionals that uses the latest methodologies and technologies. Benefits include giving internal finance managers more time to focus on higher-value work, such as analysis, forecasting, and long-term planning.
Despite such benefits—and regardless of a persistent shortage of finance talent—a 2025 CFO Magazine survey showed a double-digit annual decrease in outsourced accounting. In fact, nearly one-quarter of survey respondents said AI has reduced the accounting department’s outsourcing needs.
3. IT Outsourcing
IT is one of the most commonly outsourced functions across all industries. Companies contract out a long list of IT work, including software development, application maintenance, infrastructure management, cybersecurity, data center operations, helpdesk services, and data analytics. As with professional outsourcing, contracting a third party for IT services provides access to specialized skills, advanced technologies, and scalability. Cost-cutting is often a driver, as is the global IT talent shortage.
In the manufacturing industry, for instance, about 70% of survey respondents reported moderate to significant challenges in hiring skilled IT workers, according to Deloitte, with a similar percentage outsourcing many technology roles.
4. Operational Outsourcing
Contracting out entire business operations can improve efficiency and service, while also delivering classic outsourcing benefits, such as reduced costs and increased business focus. Order fulfillment, in particular, is an operation that’s often outsourced. Most ecommerce retailers, for example, are ill-equipped to handle all the logistics involved in filling the many parts of customer orders, ranging from inventory management and shipping to returns and exchanges. In a 2024 Forrester survey, US companies reported substantial benefits from working with third-party logistics providers, such as a 29% improvement in on-time delivery and a 28% reduction in cost per order.
5. Project Outsourcing
The temporary outsourcing of projects is often distinguished from ongoing operational outsourcing in that the project at hand has a defined scope, specific objectives, a set timeline, and a predetermined budget. Outsourcing a project can work better than managing it in-house for many reasons. For one, using a third party eliminates the need to hire staff or divert in-house employees from their core responsibilities. And outside, specialized teams can also deliver faster turnaround and access to new perspectives, technologies, and other catalysts for innovation.
For example, branding and other marketing projects are often outsourced to specialized agencies that engage knowledgeable teams of brand strategists, market researchers, copywriters, graphic designers, and digital branding experts. The multibillion-dollar global business of marketing consulting is experiencing significant growth, according to industry reports. Other examples of project outsourcing run the gamut from product prototyping and tax preparation to cybersecurity audits and application development.
6. Business Process Outsourcing (BPO)
While businesses have always contracted out services like legal counsel and IT, BPO emerged as a recognized business strategy toward the end of the last century. Initially associated primarily with offshoring hubs, such as India, as providers of low-cost IT project outsourcing, BPO has broadened its scope in terms of its services, geographic locations, and value proposition to become a source of specialized talent at scale. The labor cost savings that drove BPO in the early days remains important, but mature BPO also provides process improvements, analytics, and other strategic contributions.
Consider customer service operations, which are often outsourced to resolve in-house challenges pertaining to high turnover, rising costs, and long response times. Companies must manage a great volume and diversity of customer care—24/7/365—including call centers, help desks, emails, live chat, social media interactions, and other aspects of CRM. According to a 2024 McKinsey report, 55% of companies say they already outsource at least part of their customer care operations, with 47% expecting to increase their outsourcing in the coming years. Their motivations are clear: For one, they expect call volumes to increase by as much as one-fifth during the next two years, McKinsey reported. For another, companies need access to the new AI-based customer care tools used by outsourcing partners to remain responsive and competitive amid rising customer expectations.
7. Knowledge Process Outsourcing (KPO)
Knowledge process outsourcing takes BPO to the next level. That is, where BPO focuses mainly on standardized, day-to-day tasks, KPO involves outsourcing high-level, knowledge-based tasks that require advanced analytical skills, domain expertise, and professional judgment. Examples include complex financial modeling for strategic planning, specialized engineering and design services for product innovation, and in-depth data analytics to support business decision-making.
For example, manufacturers work with specialized firms in product design and development to cultivate outsourcing arrangements. In doing so, these manufacturers gain access to engineers proficient in computer-aided design to create detailed 3D models of new components or produce technical assembly drawings. Outsourcing partnerships like these are deepening with the rise of new smart manufacturing technologies, such as digital twins, which are virtual replicas of physical production systems. Implementing and using digital twins requires substantial engineering and data expertise that a manufacturer might not have in-house. Instead, outside specialists assist manufacturers in using digital twins for simulation, testing, and process optimization before any costly physical changes are implemented on the factory floor.
8. Recruitment Process Outsourcing
Recruiting new management and staff takes a lot of time and effort, leading many companies to outsource all or part of their talent acquisition process. From finding and screening candidates to scheduling interviews and managing job offers, recruitment process outsourcing (RPO) aims to improve hiring efficiency and quality while containing costs.
RPO engagements are usually designed as long-term, strategic relationships, replacing traditional recruiting tactics, such as job board postings or reliance on ad hoc executive search firms, as vacancies occur. RPO providers offer access to global talent pools around the world, HR expertise, and technologies, including AI-driven analytics and recruitment automation tools to better identify, assess, and engage qualified candidates. Reports show that demand for RPO is currently experiencing significant growth in a talent market characterized by skill shortages, remote work, and shifting international compliance requirements.
9. Legal Process Outsourcing
This specialized sub-sector of KPO focuses on such legal and paralegal services as research, document review, contract writing, and patent application drafting. Companies may use legal process outsourcing (LPO) to reduce costs, free up in-house legal teams to focus on legal strategy, or acquire specialized legal knowledge and skills that are unavailable in-house.
For instance, a company involved in merger negotiations might outsource the review of myriad legal documents, such as contracts, service agreements, and intellectual property filings, as part of its due diligence process. LPO firms employ attorneys, paralegals, and other staff trained in the legal systems of the relevant jurisdiction, even if the LPO is located offshore. They are also often equipped with e-discovery tools and contract analysis software.
10. Multisource Outsourcing
With so many types of outsourcing, it’s not surprising that many companies engage in multisource outsourcing that encompasses different functions. Yet, some companies also opt to outsource parts of the same business process to multiple sources as part of a risk management strategy that seeks to circumvent single points of failure.
Some companies have lately been diversifying the geographic location of their outsourcing partners, especially in manufacturing, due to shifting global trade and tariff policies. A Bain & Co. report shows fashion and footwear brands diversifying outsourced production away from China, for example, where the sector spends an average of 33% today, compared to 43% three years ago.
Another reason for establishing multiple outsourcing partnerships is to access best-of-breed expertise for any particular need or its component parts. For instance, instead of relying on a single IT outsourcing provider, a company might choose one provider for its software application development, another for its cloud infrastructure, and yet another for cybersecurity.
Outsourcing Types Organized by Location
Companies are facing mounting uncertainty, largely because of fluctuations occurring on the global map of trade policies and tariffs, which could potentially raise outsourcing costs and prompt reevaluation of where they outsource. More than three-quarters of US manufacturers cited trade uncertainties as their top business challenge in the second quarter of 2025, according to the National Association of Manufacturers. The situation has driven some of them to rebalance their production outsourcing contracts among offshore, nearshore, and onshore sites.
11. Offshore Outsourcing
Offshore outsourcing arose in the mid-to-late 20th century as a way to reduce labor costs by delegating manufacturing operations to overseas producers. The practice has since evolved to include low-skill business functions, such as call centers, and then higher-skilled services like IT.
Though cost reduction remains part of the rationale for offshoring, companies have needed to reevaluate their overseas locations as wages have risen in some countries while volatile fuel rates and supply chain disruptions have exacted other costs. Meanwhile, trade tensions and rising tariffs are accelerating shifts from offshoring to nearshoring and onshoring, though to what degree remains to be seen.
12. Nearshore Outsourcing
Nearshore outsourcing involves working with a contract manufacturer or service provider located in a nearby country, rather than in an offshore location halfway around the world. For example, a US company might nearshore to Mexico, while a Western European business might look to Eastern Europe. This model seeks to strike a balance between the cost savings of offshoring and the convenience of onshoring, in terms of such factors as time zones, cultural familiarity, and supply chain efficiency.
Nearshoring has been gaining momentum as rising labor costs and tariffs have lessened China’s attractiveness as a primary global manufacturing center. Many US businesses, though retaining some Asian production, are adopting nearshoring within broader multisourcing and multishoring strategies to manage risk, according to the US Chamber of Commerce.
13. Onshore Outsourcing
Onshore outsourcing refers to companies that engage in production and services arrangements with suppliers in their own country—in some cases, “reshoring” such activities from abroad. In the US, for instance, government leaders are encouraging companies to pursue onshore manufacturing by imposing tariffs on imported production inputs and launching targeted initiatives, such as “Make Onshoring Great Again,” a portal that connects small businesses with verified US partners.
Opinions differ on the merits of onshoring, with proponents pointing to benefits like greater supply chain resilience and national job creation, while critics cite higher costs, skills shortages, and other downsides. In the Bain & Co. report, 80% of apparel brands said onshoring any portion of their operations would be very difficult.
14. Onsite Outsourcing
Onsite outsourcing embeds an outsourced team into a company’s own physical environment. Also known as staff augmentation, onsite outsourcing facilitates closer collaboration, more immediate problem-solving, training opportunities, and access to work performed on the outsourcing client’s existing and often specialized infrastructure.
For example, outside personnel can manage internal logistics within a factory, including warehousing, inventory control, and parts delivery to assembly lines. In the finance office, a company might bring in a specialized accounting firm to work with its accountants as it prepares for an audit.
Key Considerations When Choosing an Outsourcing Strategy
Companies take great care in deciding what to outsource and to whom, with KPMG estimating that the RFP process for a multiyear engagement can take six months to a year or more. Bain & Co. suggests that companies start by pinpointing what not to outsource—specifically, their competitive differentiators. For example, a company might retain product engineering as a unique value proposition and outsource product support to a lower-cost provider.
The focus then turns to selecting the right partner, evaluated on the basis of its track record, technological prowess, financial stability, cultural fit, and other attributes. Outsourcing partners should be flexible, with the ability to implement new technologies, scale up production, and otherwise adapt to changing market conditions.
But even the best laid plans can go awry. In fact, 70% of organizations surveyed by Deloitte in 2024 had selectively insourced portions of their previously outsourced scope over the past five years, in many cases to improve service quality, regain control, and eliminate vendor markups. Also represented in this finding is the natural rebalancing of outsourced and in-house functions over time, according to Deloitte. For instance, even organizations that have reported high satisfaction with their outsourcing relationships have brought outsourced functions in-house in order to grow their own strategic capabilities. Below are the most common factors to consider when formulating an outsourcing strategy.
Cost
The cost of outsourcing is typically lower than performing the same function in-house, thanks to lower labor, infrastructure, and technology costs, but outsourcing rates have been rising. The trend has been especially clear in offshore manufacturing, as wages first rose in Chinese factories and then, after much nearshoring activity had moved to Mexico, skills shortages there began to drive up labor costs, as well.
Costs can also balloon during the course of any given outsourcing relationship. Companies need to determine the total cost of the engagement and establish controls from the outset. In addition to service fees, there may be charges for setup, transition, training, software licenses, technology upgrades, reporting, and account management. To avoid out-of-scope charges, the statement of work should detail what is and isn’t included in terms of tasks, responsibilities, deliverables, processes, service levels, and expected outcomes. Even then, the engagement needs to be closely managed to avoid scope creep, which can lead to cost overruns as staff request unanticipated services.
Security and Compliance Requirements
Outsourcing arrangements entrust third parties with client data, intellectual property (IP), and access to enterprise IT, calling for contractual and process controls that safeguard security and data privacy. For instance, partners should agree to adhere to clear protocols for data transfer, encryption, access controls, and other aspects of data handling.
Cybercrime presents another risk, with bad actors often seeking to exploit third-party arrangements as a weak link. Companies’ due diligence in selecting outsourcing providers should give priority to candidates with strong cybersecurity procedures.
Quality Control
Successful outsourcing hinges on quality control. In the Deloitte survey, the top reason for bringing outsourced functions and projects back in-house was to regain control over quality and performance. Companies must establish strong control procedures, including precise specifications, inspections, and testing. Quality controls should be monitored, including regular facility audits of outsourcing partners.
Legal and Regulatory
Companies can’t outsource their regulatory responsibilities, even if a third-party is performing services on their behalf. Instead, their outsourcing contracts must incorporate compliance with local and international regulations, such as labor laws and customs controls. Overlooking these responsibilities can lead to business disruptions, financial penalties, and reputational damage.
Contracts should also cover important legal matters, such as IP. Specific clauses should aim to protect trade secrets, patents, and other brand assets that are shared during an engagement and to clearly define ownership of any assets created by the partners.
Contractual Responsibilities
The outsourcing contract is the foundational document governing the entire relationship between a company and its chosen provider. To avoid misunderstandings, it should clearly state roles, responsibilities, deliverables, timetables, and conflict resolution procedures. The contract is also the repository for the legal and regulatory controls described above. Once signed, the contract should not merely sit on a shelf, but provide the basis for rigorous performance management.
Measuring Performance
Companies should retain the in-house expertise needed to manage their outsourced service providers and track performance. Regular reporting, review meetings, and ongoing communications provide the means for monitoring performance, identifying areas for improvement, and keeping the outsourcing partnership aligned with a business’s evolving goals.
While providers may want to favor their standard procedures and metrics, companies need to insist on their own key performance indicators. Typical outsourcing performance metrics include turnaround times, uptime, quality measures, and cost management results, such as adherence to the budget. All of this should be defined up front in the outsourcing contract and its service level agreements.
Company Goals and Objectives
A company’s goals and objectives should govern its outsourcing relationships, guiding decisions about what to outsource, which partners to engage, and how success will be measured. Then, to promote alignment and accountability, the company must establish a clear, shared understanding of these objectives with its outsourcing partners through open communication, service level agreements, and mutually agreed-upon performance metrics. This shared clarity helps prevent misalignment and scope creep and also fosters collaboration, trust, and long-term strategic value.
Because a company’s goals and objectives naturally evolve, management should strive to establish flexible, responsive outsourcing relationships capable of adapting to new expectations or expanded scopes of work.
Time Zones and Collaboration Needs
Collaboration and effective communications are essential to the success of any outsourcing effort. As such, managing time zones is a nontrivial requirement of offshore outsourcing, as is the need to overcome the cultural and language differences involved.
Time zone differences can offer advantages like round-the-clock productivity, but they can also delay responses, limit real-time interaction, and make it difficult to schedule meetings and approvals processes. Misunderstandings due to translation issues, meanwhile, can impact everything from daily workflow to overall project momentum if not addressed beforehand.
Barriers like these can be lowered by putting in place explicit communication procedures and encouraging cultural awareness. For instance, outsourcing contracts should clearly define expectations for communication windows, response times, and overlapping working hours. Cultural differences in communication and decision-making should be addressed using shared project management tools, providing cultural orientation, agreeing on communication protocols, and encouraging an open environment.
Optimize Your Operations With NetSuite for Manufacturing
NetSuite’s cloud-based ERP system incorporates features designed to help companies optimize their outsourcing engagements. Through its outsourced manufacturing functionality, for example, companies can proactively manage third-party production with visibility and accuracy at each step of the process. Dashboards provide company decision-makers with a centralized view of outsourced operations, supplier performance, contract status, cost trends, and production timelines. The software also facilitates communication, coordination, and collaboration with outsourcing providers. Ultimately, NetSuite ERP for manufacturing supports companies in managing the risk and achieving success in outsourcing.
Outsourcing has evolved from its origins as a simple cost-reduction tactic into a multifaceted strategic tool available to businesses of all sizes and types. Thanks to an array of options—including offshore production, BPO, project support, or any other of the many types of outsourcing used today—companies can tailor these third-party engagements to access specialized skills, enhance operational efficiency, and spur innovation.
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Types of Outsourcing FAQs
What are the three most important factors for successful outsourcing?
The three most important factors for successful outsourcing are careful strategic planning, a diligent partner selection process, and clear contractual agreements that define responsibilities and performance.
What are the different types of outsourcing?
The wide variety of outsourcing options can be organized into two general categories: operation and location. Outsourcing types organized by operation include manufacturing outsourcing, professional outsourcing, IT outsourcing, and business process outsourcing. Location categories include offshoring, nearshoring, onshoring, and onsite outsourcing.
What are three reasons why a company might outsource?
Companies often outsource to lower operational expenses related to labor, infrastructure, and technology. They also seek access to specialized skills and advanced technologies that may not be available in-house. Finally, outsourcing allows businesses to focus their internal resources and management attention on their core business functions and strategic objectives while outsourcing noncore activities.
