Outsourcing is a practice of a firm hiring third-party labor to replace services previously performed in-house. Firms typically use outsourcing to significantly reduce labor costs by enlisting the help of an outside organization that has the capacity to perform the service or production of a good at a materially lower cost. Outsourcing can also help a business to focus more directly on its core operations.
For example, when Apple first started producing the iPhone, it initially sought to achieve a vertical integration of its supply chain. However, the firm soon realized that a more efficient approach to the production of the iPhone was to outsource production of various components such as computer chips and screens to third-party companies. This decision allowed Apple to reduce costs by sourcing the help of outside organizations that may have already achieved scale in the production of a component. It also enabled the firm to focus more directly on innovation related to the active improvement of its phone technology.