Outsourcing

Outsourcing entered the business lexicon in the 1980s and often refers to the delegation of non-core operations from internal production to an external entity specialising in the management of that operation. The decision to outsource is often made in the interest of lowering firm costs, redirecting or conserving energy directed at the competencies of a particular business, or to make more efficient use of worldwide labour, capital, technology and resources. Though often used interchangeably, outsourcing differs from offshoring in that outsourcing is relative to the restructuring of the firm while offshoring is relative to the nation (see below), though the two are not mutually exclusive, especially under conditions of globalization. Fundamentally and historically, outsourcing is a term relative to the organisation of labour within and between societies.

Overview

"Outsourcing" involves transferring or sharing management control and/or decision-making of a business function to an outside supplier, which involves a degree of two-way information exchange, coordination and trust between the outsourcer and its client. Such a relationship between economic entities is qualitatively different from traditional relationships between buyer and seller of services in that the involved economic entities in an "outsourcing" relationship dynamically integrate and share management control of the labour process rather than enter in contracting relationships where both entities remain separate in the coordination of the production of goods and services. Business segments typically outsourced include information technology, human resources, facilities and real estate management, and accounting. Many companies also outsource customer support and call center functions, manufacturing and engineering. Consequently, a debate has ensued concerning the benefits and costs of the practice as well as how to categorize it as a phenomenon.

Outsourcing and Offshoring: Compare and Contrast

Note that “outsourcing,” “offshore outsourcing,” and “offshoring” are used interchangeably in public discourse despite important technical differences. To be consistent, “outsourcing,” in a corporate context, represents an organizational practice that involves the transfer of an organizational function to a third party. When this third party is located in another country the term “offshore outsourcing” makes more sense. “Offshoring,” in contrast, represents the transfer of an organizational function to another country, regardless of whether the work stays in the corporation or not. In short, “outsourcing” means sharing organizational control with another organization, or a process of establishing network relations within an organizational field. "Offshoring,” on the other hand, represents a relocation of an organizational function to a foreign country, not necessarily a transformation of internal organizational control.

Benefits of outsourcing

It is apparent that many organizations today are making the decision to outsource. In today’s global marketplace outsourcing has made itself accessible to many organizations on a national and international level. Offshore outsourcing has provided many businesses with the opportunity to harvest the benefits of lower labor costs in developing countries with few workers rights laws and to exploit the value of artificially manipulated foreign currencies, where the exchange rate is intentionally undervalued. Through outsourcing, companies today have the ability to develop competitive strategies that will leverage their financial positions in the ever competitive global marketplace. Outsourcing is also successful in increasing product quality and/or substantially lowering firm and consumer costs (e.g., increases the quality to cost ratio). Because outsourcing allows for lower costs, even if quality reduces slightly or not at all, productivity increases, which benefits the economy in aggregate. Outsourcing can also present advantages to non-Western states. "Developing" countries, such as China or India, benefit from the patronage of companies that outsource to them - in terms of increased wages, job prestige, education, and quality of life.

Some of the major advantages that today’s organizations can expect to obtain through outsourcing include the ability to purchase intellectual capital, to focus on core competencies, to better anticipate future costs, to lower costs. Overall outsourcing is viewed by many organisations as a strong business tactic that ultimately is a superior economical approach to developing products and services.

Criticisms of outsourcing

Quality of service

Criticisms of outsourcing from both management and consumers often focus on a central question: is the performance or quality of the outsourced service, or new organisation of labor, on par with the expected standards of management and consumers - i.e. how does outsourcing a service affect its quality as opposed to "in-house" work (see [1], [2] and [3]for example)? Such judgements are reserved to prevailing cultural values that define what is and is not good service.

Work, labour, and economy

Outsourcing became a popular political issue during the 2004 U.S. presidential election. The political debate centered on outsourcing's consequences for the domestic workforce. Democratic U.S. presidential candidate John Kerry criticised firms that outsource jobs abroad or that incorporate overseas in tax havens to avoid paying their fair share of U.S. taxes during his 2004 campaign, calling such firms "Benedict Arnold corporations". Criticism of outsourcing, from the perspective of U.S. citizens, by-and-large, revolves around the costs associated with transferring control of the labor process to an external entity in another country. A Zogby International poll reports that 71% of American voters believe that “outsourcing jobs overseas” hurts the economy and another 62% believe that the U.S. government should impose some legislative action against companies that transfer domestic jobs overseas, possibly in the form of increased taxes on companies that outsource. The poll of over 1,000 Americans was conducted in August 2004.

Outsourcing appears to threaten the livelihood of domestic workforce and, in the United States, the American Dream. This is especially true for high-tech workers who were promised the “jobs of tomorrow”- a phrase Bill Clinton iterated in 1994 to justify his conservative position on the North American Free Trade Agreement (NAFTA). Outsourcing appears to work contrary to the claim that “free trade” will create the “jobs of tomorrow” in America when high-tech or high paying white-collar jobs are transferred to or created in foreign countries. Thus, outsourcing may be representative of a specific historical moment where the United States government fails to mediate business-labour relations in a way conducive to prevailing values that places the American middle class worker as a central priority. At a more general level it represents a new threat to labor, contributing to rampant worker insecurity, and reflective of the general process of globalisation culminating in Western societies as a whole (see Krugman, Paul (2006). "Feeling No Pain." New York Times, March 6, 2006).

Policy solutions to outsourcing are also criticised. One solution is retraining of domestic workers to new jobs in the form of the Trade Adjustment Assistance Act [4]. However, these policy recommendations do not adequately aid all displaced workers and do not provide security to this "flexible" labour market.

Security

There are also some security issues concerning companies giving outside access to sensitive customer information. In April of 2005, a high-profile case involving the theft of $350,000 from four Citibank customers occurred when Indian call centre workers in Pune, India, acquired the passwords to customer accounts and transferred the money to their own accounts opened under fictitious names. Citibank did not find out about the problem until the American customers noticed discrepancies with their accounts and notified the bank.

Outright fraud is also a concern. In 2005, Intel discovered and fired 250 employees after they faked their expense reports. The firings followed from Intel's internal Business Practice Excellence program of expenses claims. The report concluded that fraudulent practices such as "faking bills to claim your allowances like conveyance [and] drivers’ salaries" were some common malpractices in India. Intel would not put up with such fraud. NASSCOM, which is a forum of IT and ITeS companies, has attempted to address these fraud concerns in India by creating the National Skills Registry. That database contains personal and work-related information, enabling employers to verify a staff member's credentials and allowing police to track the background of workers.

An Outsourced project like US Payroll, where the Social Security Number of an US employee can be one of the vital factor which can be used for fraudulent activities. Hence it's very essential for a company to keep all the data intact, and ensure that no leakage of data is done. This will ensure total security and can avoid such cases of fraudulent activities.

Responses to criticism

Insourcing also occurs

Outsourcing, as the term is typically used in economics, is not necessarily a job destroyer but rather a process of job relocation and may not impact the net number of jobs in a nation or in the global economy. Contrary to the critics, rampant unemployment is not occuring, in the United States, according to official statistics, so outsourcing should not be associated with it at this present time. Logically, "outsourcing" cannot occur without a recipient that "insources" and, according to economists, "outsourcing" means an export in services which renders "insourcing" an import. Hence, economists insist on viewing the outsorucing/insourcing debate as a debate on trade, adequately analyzed with trade theory and recorded through offical national data. For example, Mary Amiti and Shang-Jin Wei claim more jobs are insourced, or imported, than outsourced, or exported, in the United States and the United Kingdom, as well as other industrialized nations. They report that the U.S. and the U.K. actually have the largest net trade surpluses in business services. However, some other countries, such as Indonesia, Germany and Ireland have a net deficit in business services. Similar reports state that "while [the U.S. is] exporting some jobs to other countries, the greatest beneficiary of outsourcing is the U.S. itself." .

Work, labour and economy

International outsourcing is a form of trade. As such, mainstream economists argue that the basic principles of comparative advantage and the gains from trade apply. The 'threat' to overall employment or the economy is thus no more valid than the so-called 'threats' from imports or migration.

Economist Thomas Sowell from the University of Chicago said “anything that increases economic efficiency--whether by outsourcing or a hundred other things--is likely to cost somebody's job. The automobile cost the jobs of people who took care of horses or made saddles, carriages, and horseshoes.” Walter Williams, another economist, said “we could probably think of hundreds of jobs that either don't exist or exist in far fewer numbers than in the past--jobs such as lift operator, TV repairman, and coal deliveryman. ‘Creative destruction’ is a discovery process where we find ways to produce goods and services more cheaply. That in turn makes us all richer.” Nationally, 70,000 computer programmers lost their jobs between 1999 and 2003, but more than 115,000 computer software engineers found higher-paying jobs during that same period.

Most economists do not view outsourcing as a threat to the economy[5]. Food malls (and even malls in general), for example, may cease to exist were it not for outsourcing. Capitalist trading often involves interactions among different people, which means often tasks and services are delegated to others. Lack of outsourcing may see deficiencies in specialisation and division of labor, important elements in the law of comparative advantage, which is seen by many as the basis for why capitalist free-markets are successful in generating economic growth.

Quality of service

One criticism of outsourcing is that product quality suffers. But the organization outsourcing a business process has the freedom to resume management control and/or decision making for that business process if quality is adversely affected. In fact, many American companies return previously outsourced functions "in-house" as a result of poor quality. The decision to outsource is like any other business investment decision in that there is risk. Critics of outsourcing often talk about outsourcing failures without mentioning instances of outsourcing success. The decision to outsource is like the decision to expand a business overseas, to incorporate computer technology, or to hire new workers. If the company does it correctly, it benefits from higher profits. Proponents of outsourcing believe that arguing that outsourcing leads to lower product quality is pointless because if it were true, consumer demand will force firms to shift back to producing the good or service in-firm rather than out-firm.

The ability to influence the quality of outsourced production depends on the relationship of power between consumers and producers. If producers have market power, e.g. if they are a monopoly they can reduce the quality of their good without suffering a major drop in sales. For example, many individuals do not make their own food. Instead, they outsource the task to restaurants and fast-food firms like McDonald's or Hungry Jacks. Suppose McDonald's and Hungry Jacks are the only fast-food firms. McDonald's competes with Hungry Jacks to win consumers in the fast-food market. However, if Hungry Jacks goes out of business, McDonald's is a monopoly and can reduce the quality of its food (e.g. to reduce costs) without suffering as high a drop in revenue because consumers now cannot switch to Hungry Jacks. Institutions are set up to promote competition. E.g. in Australia the ACCC (Australia Competition and Consumer Commission) regulates businesses to prevent abuse of market power and to promote competition. In the United States the FTC (Federal Trade Commission) takes on this role.

Sometimes poor quality goods and services must be accepted by consumers because accountability systems regarding consumer or user feedback are limited. In order to increase quality or maintain a high level of quality, many offshore outsource firms also employ quality management models, such as Taylor, Lean, and Six Sigma. Differing firms have varying levels of implementation success.

See also

Application Management Outsourcing Business process outsourcing Business process outsourcing in India Business process outsourcing in the Philippines Comparative advantage Compromise agreements Co-sourcing Crowdsourcing Farmshoring Freelancing on the Internet Homeshoring India Outsourcing

Information technology consulting Insourcing Knowledge process outsourcing (KPO) Legal Process Outsourcing (LPO)/ Legal outsourcing List of management topics List of outsourcing companies Lou Dobbs (CNN editor)- crusader against outsourcing Nearshoring Offshore Product Development Offshoring Offshoring IT Services

Open Outsourcing Portable Employer of Record Supply chain Supply Chain Management Vertical integration

Further reading

• Peter Bendor-Samuel (author), Turning Lead Into Gold: The Demystification of Outsourcing (2000), ISBN 1-890009-87-3
• A.D. Bardhan and C. Kroll, "The New Wave of Outsourcing" (2003)

http://repositories.cdlib.org/iber/fcreue/reports/1103/

• Peter Brudenall (editor), Technology and Offshore Outsourcing Strategies (2005), ISBN 1-4039-4619-1
• Lou Dobbs, Exporting America Why Corporate Greed is Shipping American Jobs Overseas, 2004 ISBN 0-446-57744-8
• Christopher M. England, Outsourcing the American Dream, October 2001, Writer's Club Press, ISBN 0-595-20148-2
• Georg Erber, Aida Sayed-Ahmed, Offshore Outsourcing - A Global Shift in the Present IT Industry , in: Intereconomics, Volume 40, Number 2, March 2005, S. 100 - 112, [6]
• Gary Gereffi and Vivek Wadhwa, "Framing the Engineering Outsourcing Debate: Placingthe United States on a Level Playing Field with India and China" (2006)

http://memp.pratt.duke.edu/outsourcing/

• Thomas L. Friedman, The World is Flat: A Brief History of the Twenty-First Century 2005 ISBN 0-374-29288-4
• Ron Hira and Anirl Hira, with forward by Lou Dobbs Outsourcing America, What's Behind our national crisis and how we can reclaim American Jobs 2005 ISBN 0-8144-0868-0
• Mark Kobayashi-Hillary. 2004. (2nd ed 2005) Outsourcing to India. ISBN 3-540-23943-X.
• William Lazonick, Globalization of the ICT Labor Force, in: The Oxford Handbook on ICTs, eds. Claudio Ciborra, Robin Mansell, Danny Quah, Roger Solverstone, Oxford University Press, (forthcoming)
• Baziotopoulos A. Leonidas (2006), "Logistics Innovation and Transportation", Work-in-Progress Conference paper, EuroCHRIE Thessaloniki, 2006.
• Catherine Mann, Accelerating the Globalisation of America: The Role for Information Technology, Institute for International Economics, Washington D.C., June 2006, [7], ISBN paper 0-88132-390-X
• Stephen Haag, Maeve Cummings, Donald J. McCubbrey, Alain Pinsonneault, Richard Donovan "Management Information Systems For The Information Age", 2006, McGraw-Hill Ryerson, ISBN 0-07-095569-7
• National Academy of Public Administration. (2006). "Off-Shoring: An Elusive Phenomenon". Report for the U.S. Congress and the Bureau of Economic Analysis: Washington.
• McDonald, SM and Jacobs, TJ (2005) ‘Brand Name ‘India’: The Rise of Outsourcing,’ Int. J. Management Practice, Vol. 1, No. 2, pp.152-174.

External links

Articles

• Why We Have Nothing to Fear from Foreign Outsourcing
• Job Losses and Trade: A Reality Check
• Outsourcing to India: Frequently Asked Questions
• GAO Report on Offshoring to Congress
• 15 Emerging Outsourcing Players worldwide based on the Gartner rating- BusinessWeek
• The Rise Of India An article published at NASSCOM site narrates the inside view of a typical outsourcing center in India
• Outsourcing the American Dream by George J. Bryjak
• Myth: All Outsourcing Is Offshoring Computerworld Magazine
• How changes in the outsourcing world will affect outsourcing in 2007
• The New Face of the Silicon Age - by Daniel H. Pink Wired Magazine
• Software stays put - by Wynn Quon, National Post
• GE Ex-CEO Blasts Outsourcing Opponents
• India 2.0 Aims to Sustain Its Global IT Influence by Stan Gibson for eWeek, explains how Indian IT industries are planing for new ways to dominate the global IT market
• Top Sources and Research on Outsourcing According to the "Economist"
• PBS on the "outsourcing debate"
• BusinessWeek online on "The Future Of Outsourcing"
• The Outsourcing Bogeyman - by Daniel W. Drezner foreignaffairs.org
• Outsourcing: Job Killer or Innovation Boost? by Pete Engardio (businessweek.com)
• Offshore IT Services: Damnation or Salvation? by Victor Molotov (ezinearticles.com)
• Dobbs fires away against outsourcing By Michael McCarthy, (USA TODAY)

Videos

• Outsourcing on Simpsons (YouTube)