Outsourcing

Outsourcing is the delegation of tasks or jobs from internal production to an external entity; this practice is used by different companies to reduce costs, by transferring significant portions of work to outside suppliers. Most recently, it has come to mean the elimination of native staff and the hirer of overseas staff, where salaries are marked notably lower. So, the question then becomes what is the major reason that companies are going to outsourcing rather than hiring people within their own country? The driving force behind every company in the world, which is whatever, can increase production, lower costs resulting in higher profits. Just like any other business venture outsourcing comes with risks, but it has its benefits as well. Obtaining services or products from outside sources can be very beneficial, considering the alternative that the company would have to produce themselves. On the other hand, one main risk that seems to occur when outsourcing is that the supply of that product of service is put in the hands of a separate party whom often times they can’t control as opposed to controlling their own supply. Many different issues and concerns come up when the topic of out sourcing is raised. This paper will discuss the ins and outs of outsourcing, how it works, who benefits from it and who doesn’t, the pros, the cons, the effects of it on the economy and many other aspects and opinions concerning outsourcing. I chose to look into outsourcing because it is something that is becoming more and more prominent in today’s society and personally I have never paid too much attention to it.
Becoming one of the most controversial (and least understood) issues in business and politics is outsourcing. Why, you might ask and it’s simply because politicians condemn it and businessmen defend it. Rarely does anyone look at it from a neutral point of view, to really understand why it’s a growing phenomenon. What is it that is enticing over half of tech executives (just one example) to put more of their operations in the hands of overseas workers? What are the solid major reasons that companies are intrigued by the idea of outsourcing?
The first and foremost compelling financial incentive to outsource operations is lower wages. Simply put, the average United States employee in just about any field earns more per hour (or in yearly salary) than their Third World counterparts. IndustryWeek.com, for instance, reports that “even after doubling between 2002 and 2005″, the average wage for a manufacturing worker in China was still “only 60 U.S. cents an hour.” Earning a slightly higher (but still paltry by American standards) wage is the average Mexican manufacturing worker, at $2.46 an hour. Needless to say, an executive whose primary obligation is delivering maximum return to his shareholders is strongly motivated to outsource such operations as can be outsourced without unacceptable losses in quality.
Next there’s the incentive to outsource because of the high regulatory cost of employing a United States worker versus a foreign worker. Social Security, Medicare, FICA, OSHA regulations, unemployment insurance and a whole host of other government-imposed costs make employing local workers less attractive in light of overseas talent, for whom none of these costs must be paid. In the book Bringing The Jobs Home, economist Todd Buchholz argues convincingly that occupational licensure laws also drive up the cost of American workers in licensed industries – without commensurate social or safety benefits. Everyone knows outsourced workers command lower wages, but it is worth remembering that American workers are generally still more expensive even if the wage discrepancy is ignored.
Then of course, the desire to minimize corporate income taxes is an undeniable momentum to outsource. Overseas countries are aware of this desire and offer generous tax incentives to companies that outsource their operations there. Whether in the form of regional tax benefits or reduced income taxes, such incentives are difficult for companies to ignore in their hiring decisions. Companies with entire offshore subsidiaries benefit even more from what is known as “un-repatriated earnings”, or revenues that remain in the outsourced country. The TechPolicy Blog quoted a bipartisan Congressional Research Service report claiming that un-repatriated earnings “had increased to $639 billion in 2002 from $403 billion in 1999.”
One of the biggest driving forces behind outsourcing is the desire to avoid damaging lawsuits. As the Dallas-Business Journal noted in 2007, employee lawsuits against employers are and have been rising. One of the factors at work here, according to the Journal, is that “employees are becoming more educated about employment law.” This makes life difficult for executives as regards downsizing, which is virtually never popular but is sometimes necessary from a strictly business perspective. Rather than reacting to market forces as they deem appropriate, some companies avoid downsizing due to fear of employee lawsuits. Therefore, a major financial advantage of outsourcing is the ability to upsize or downsize at will.
A common view of outsourcing holds that the work performed is obviously lower in quality than U.S. workers, but this is justified by lower costs. While this is sometimes true, it is by no means clear that it is always true. In a survey of companies that outsource, InformationWeek found that 20% of those surveyed named improved IT performance as a major reason they outsource. Many of us who have had frustrating phone calls with overseas support staffs might disagree, but the data is clear. It goes without saying that improved performance often lowers costs and/or raises revenues, creating yet another financial incentive to outsource.
An unspoken assumption in many critiques of outsourcing is that the savings are simply gobbled up the CEO or shareholders. However, perhaps just as often, the savings freed up by outsourcing are devoted to the company’s core activities – such as, what they do best and most profitably. From an executive’s point of view, there is no reason for let’s say, McDonalds to spend priceless capital doing its payroll when the savings from outsourcing can buy more advertising, furnish new equipment or finance a new product launch. Far from simply enriching the company’s owners, savings from outsourcing often goes toward shoring up the company in other areas.
Another financial edge offered by outsourcing is risk management. As HorizonTech.com states, outsourcing” enables management to turn over to its suppliers certain classes of risks – such as demand variability and capital investments.” Such risk transference is made difficult or impossible by working with contracted or salaried U.S. employees. For instance, if a company wants to launch a new product, it can either hire new employees in-house or utilize outsourced talent to get the job done. The in-house employees are now on payroll, and will need to be paid regardless of whether the new product sells. Ditto for their Social Security, FICA and the other government costs discussed earlier. Outsourced talent, on the other hand, can be dropped in a heartbeat if product sales do not justify continuing to pay them. This is just one example of how companies use outsourcing as a risk management tool.
One of the oldest saying in business is “time is money.” What this means from an outsourcing perspective is that just because a company could do something in-house, it does not follow that they should do it. Nor are immediate monetary savings the only issue. Let’s say a startup wants to expand, but now needs a professional accounting or logistics system to do so. It can take a considerable amount of time to get these systems up and running in-house, between recruiting, interviewing and training the required personnel. In the meantime, the needed functions are not being performed and the company is worse off. Outsourcing sometimes offers a way out of this inconvenient corporate problem by offering faster turnaround times than establishing new, in-house departments or systems.
A 2008 InformationWeek survey found that 25% of financial officers polled listed “uncertainty about the political and business climates” as a reason they outsource. Justified or not, fears about higher taxes, more regulation, unstable currency and political interference in business activity are demonstrably affecting how companies make their hiring decisions. Beyond the immediate cost savings, executives are increasingly looking years (even decades) into the future and outsourcing their operations as a hedge against potentially adverse political changes in the U.S.
A timeless business proverb is that the first to market often claims most of the market share. This explains yet another financial incentive to outsource: accelerated time to market. By offering access to workers who are already trained, experienced and ready to perform the exact tasks you need, outsourcing can help companies release new products faster than if it relied exclusively on in-house talent. With so much long and short-term profit riding on time to market, any advantage in this regard looms large in corporate decision making.
General assumptions about outsourcing usually involve huge, household-name companies laying people off to save money. But these cases aside, it should be noted that small businesses are increasingly turning to outsourcing as well. A major reason involves “co modification”, or the ability (made possible largely by low-cost outsourced vendors) of smaller businesses to pay incrementally for services previously available only to larger businesses. In these cases, outsourcing is used not for immediate savings, but to grow at a more rapid pace than prior eras allowed. SmallBizTrends.com discusses this and other items in its article “The Top 10 Outsourcing Trends by Small Businesses in 2009.”
Finally, outsourcing also offers peace of mind when contracts are entered into by the company and the outsourced provider. Rather than being limited to firing or disciplining ineffective employees in-house, outsourced providers can be made to compensate the company for its negligence, poor performance or failure to finish a job. A legally binding contract specifies the precise nature of the work, its timeline for completion and any other loose ends that may exist, but are routinely obscured or unaccounted for when working with in-house employees.
On the flip side there are risks to outsourcing for example, the biggest risk with offshore outsourcing has nothing to do with outsourcing, it involves the expectations the internal organization has about how much the savings from offshore will be. Unfortunately, many executives assume that labor arbitrage will yield savings comparable to person-to-person comparison (e.g., a full-time equivalent in India will cost 40% less) without regard for the hidden costs and differences in operating models. In reality, most IT organizations save 15%-25% during the first year; by the third year, cost savings often reach 35%-40% as companies “go up the learning curve” for offshore outsourcing and modify operations to align to an offshore model.
Businesses considering outsourcing IT services must investigate whether the managing company employs security measures as robust as their own. This is especially important when dealing with offshore companies run from a foreign country. While these often have impressive security protocols, a risk of one of the outsourcing company employees breaching security always exists. Since the foreign country may not have laws protecting intellectual property or other private data, businesses may find it difficult to prosecute such illegal activity.
An in-house network administrator becomes intimately familiar with the eccentricities and unique characteristics of the network he manages. Because of this, he is able to deliver results more efficiently, quickly and personally. IT outsourcing can never provide a personal touch that comes close to that of an in-house IT specialist. Many managers reject the thought of giving this up, even though they can save money by outsourcing.
These days, much of software and IT related work is outsourced to countries such as India, Singapore and China. This is mainly due to the fact that the workers there deliver good quality work at a lower price. Thus many companies are benefiting from this outsourcing work. As many as 400 companies outsource their work regularly to China and India. The main outsourcing countries are UK and other European countries apart from USA. Call centers have mushroomed in India, the Caribbean and Philippines. Many banks in the US have outsourced their work to other countries. The call centers in these countries handle telemarketing work and sell credit cards, insurance and also provide 24/7 customer support services.

When it comes to manufacturing, auto components, textiles are the most outsourced items. Many companies outsource more than 50% of their work essentially due to low labor cost in the other country. For ex: a company like BMW outsources its component requirements to India basically to cut down its costs. In addition, if a company has to manufacture on its own, it has to incur a huge capital expenditure also on the machinery. Therefore, they resort to outsourcing the work to competent companies based in the countries where the cost of labor is quite low.

Outsourcing has become a standard way of doing business in this global economy. Many people will argue that it 's not fair to outsource jobs to foreign countries. What these people don 't understand the fact that our economy is global and if a country 's companies cannot compete on a global basis by employing the most economical resources than the jobs lost to outsourcing will eventually be lost anyway. In the second scenario, however, the entire company is lost.
Probably the most thought about question that people want to know is how many U.S. jobs have been lost to outsourcing? According to Techsunite.org, over 500,000 jobs have been outsourced since the year 2000. There have also been over 250,000 additional jobs lost due to outsourcing. The biggest culprits of outsourcing are IT companies. According to Techsunite.org, the top 10 companies that have outsourced the most jobs, along with the number outsourced are: IBM, 63,700; EDS, 22,400; Dell, 17,450; Cognizant, 15,000; Siemens, AG 15,000; General Electric, 14,250; Convergys, 14,000; Accenture, 13,000; Computer Sciences Corp., 10,800; Intel, 10,426.
As bad as these outsourcing numbers look, it is only the tip of the anticipated iceberg. According to the U.S. Department of Labor and Forrester Research, Inc, outsourcing is expected to expand in numbers and scope. According to the below projections, outsourcing is still has a long way to go. As technology increases and companies learn more about exporting, the numbers will begin to skyrocket. Which only leaves tons of laid off workers. So the question then becomes, what becomes of the laid off workers? The laid off workers are then forced to attempt to find other jobs to help them get by, which often times is way out of their career field. The there are the ones who can’t find a job and end up receiving government aid such as unemployment, food and cash benefits.
Number of U.S. Jobs Moving Offshore
Job Category 2000 2005 2010 2015
Management 0 37,477 117,835 288,281
Business 10,787 61,252 161,722 348,028
Computer 27,171 108,991 276,954 472,632
Architecture 3,498 32,302 83,237 184,347
Life Sciences 0 3,677 14,478 36,770
Legal 1,793 14,220 34,673 74,642
Art, design 818 5,576 13,846 29,639
Sales
4,619 29,064 97,321 226,564
Office 53,987 295,034 791,034 1,659,310
Total 102,674 587,592 1,591,101 3,320,213

In conclusion outsourcing has both it benefits and disadvantages; companies benefit while the economy tends to take a major hit. Personally I feel as though there should be stricter and/or modified laws concerning how outsourcing works. Outsourcing is not necessarily a bad thing however the effects of it can be a bit damaging. Outsourcing is a major part of global cultures and our ever growing global economy. The world seems to be getting smaller and functions majorly on a global scale, rather than just locally. In order for companies to truly be able to compete on that global level it’s almost imperative that they spread their resources and do what seems to benefit them most. However, many local individuals end up jobless; therefore they cannot contribute to the economy and also take away from the economy by becoming dependant on government aid. If somehow the government could find a way to better regulate the amount of jobs being sent overseas or the tax cuts that these companies receive, then maybe people will be more open and tolerant to the idea of outsourcing.

References
Tompkins, Jim. "Reasons for Outsourcing Are Nearly Universal; Reasons for Choosing LSPs Are Not So Universal." IndustryWeek Home Page. Industry Week, 13 Sept. 2012. Web. 01 Apr. 2013.
Mullerpattan, Amit. "Small Business Trends." Small Business Trends. Small Business Trends, 17 Feb. 2009. Web. 31 Mar. 2013.
"Techsunite.org." Techsunite.org. N.p., n.d. Web. 02 Apr. 2013. .

References: Tompkins, Jim. "Reasons for Outsourcing Are Nearly Universal; Reasons for Choosing LSPs Are Not So Universal." IndustryWeek Home Page. Industry Week, 13 Sept. 2012. Web. 01 Apr. 2013. Mullerpattan, Amit. "Small Business Trends." Small Business Trends. Small Business Trends, 17 Feb. 2009. Web. 31 Mar. 2013. "Techsunite.org." Techsunite.org. N.p., n.d. Web. 02 Apr. 2013. .