Transferring of activities and decision rights to another entity by contract with specific performance measures, related rewards and penalties, exit clauses.

• Improve company focus
• Gain access to world-class capabilities
• Accelerate re-engineering benefits
• Share risks
• Free resources for other purposes
• Make capital funds available
• Reduce and control operating costs
• Take advantage of resources not available internally
• Handle a function that is difficult to manage or out of control

Outsourcing is not just a quick fix, but should be an integral part of a long-term strategy. An organizations should analyze its core competencies and consider outsourcing everything else. With talent tough to come by, outsourcing may be the only way to obtain talented, limited resources. When people are overworked and overqualified, outsourcing may be a great way to retain employees by not requiring them to perform work for which they are overqualified. Outsourcing could be used to increase morale and thus productivity.

Outsourcing may make sense when customer requirements exceed the providers ability to meet and exceed those requirements. It could reduce the hassle of providing a non-core service. Or when an organization wants to minimize risk while still achieving its growth goals. Outsourcing may make sense as protection against natural disasters.

Before outsourcing the total cost of a service must be determined. This means all functions that are involved with performing activities that relate to a particular service. These activities include upfront purchasing , maintenance and operating, disaster recovery, research of new technologies, as well as disposal activities. According to the Executive Director of the outsourcing Institute, "it is not uncommon for a company to estimate the total cost of a function...for $10 million a year." only to have the outsourcer come back and say" you are doing it for $14 million.

Fixed price deals do not make sense. If certain events occur, (e.g. change in technology) the deal might be renegotiated. It is best to track performance monthly, as least in the beginning. The deal should consider hidden costs like long-distance calls, meetings with senior management, space issues, performance during the transition, monitoring the contract, synchronizing applications, and fees.

Outsourcing Institute says watch closely:

• Agreement terms
• Minimum service levels
• Data ownership and confidentiality
• Warranty and increase of requirements
• Exhibits
• Incentives as guaranteed savings
• Shared benefits and risks
• Teaming 
• Cross-marketing opportunities
• Disclaimers
• Bankruptcy
• Acts of God
• Performance measures
• Anticipate change