An organization (which is often a local authority and sometimes a corporation) may create a service provider by establishing a new company and transferring some of its staff and other assets into that new company. The new company will then provide services to it through contracts and service level agreements.

This is not outsourcing, for the following reasons.

Competition

There is no competition. The organization has no alternative service provider. In some cases, out of a feeling of loyalty towards its former staff, the organization may be reluctant to introduce competition.

Economy of scale

There is no economy of scale. The service provider may have no other customers than the original organization, so that it cannot achieve savings through spreading its overheads across a customer base.

Separation

There may be no true separation. In many instances, if the work performed by the service provider was transferred to individual contractors, then the Inland Revenue Department has the power to view such contractors as employees for tax purposes. If the contractors worked solely for the organization, on the organization's premises, then they could be regarded as de facto employees.