Outsourcing
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Outsourcing (or contracting out) is often defined as the delegation of non-core operations or jobs from internal production to an external entity (such as a subcontractor) that specializes in that operation. Outsourcing is a business decision that can be made for quality or financial reasons. A subset of the term (offshoring) also implies transfering jobs to another country, either by hiring local subcontractors or building a facility in an area where labor is cheap. It became a popular buzzword in business and management in the 1990s.
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Overview
Outsourcing is defined as the management and/or day-to-day execution of an entire business function by a third party service provider.
Outsourcing and out-tasking involve transferring a significant amount of management control to the supplier. Buying products from another entity is not outsourcing or out-tasking, but merely a vendor relationship. Likewise, buying services from a provider is not necessarily outsourcing or out-tasking. Outsourcing always involves a considerable degree of two-way information exchange, co-ordination, and trust.
Organizations that deliver such services feel that outsourcing requires the turning over of management responsibility for running a segment of business. In theory, this business segment should not be mission-critical, but practice often dictates otherwise. Outsourcing business is characterized by expertise not inherent to the core of the client organization.
A related term is out-tasking: turning over a narrowly-defined segment of business to another business, typically on an annual contract, or sometimes a shorter one. This usually involves continued direct or indirect management and decision-making by the client of the out-tasking business.
The international context
With the rise of globalization, many companies are turning to either offshoring, offshore outsourcing or Global Sourcing. Offshore outsourcing more and more takes the shape of Business Process Outsourcing, where whole business processes (such as support and development) are outsourced. The client is usually free to choose who provides the outsourced business processes, while stock markets press the company to do more for less. This requires that managers search out the cheapest sources they can find. In countries like India and China (primarily cities like Bangalore and Chennai in India), companies like IBM, Microsoft, Hewlett Packard, and Novell choose to get services from sub-contractors in these countries or move many development and support jobs there. Smaller businesses can also take advantage of freelancing on the Internet to get smaller projects done by offshore developers at minimum cost.
This practice became even more popular after the dot-com crash of the early 21st century. As many businesses struggled with cash-flow problems, many investors were leery of investing money in high-tech companies, which many felt were still vulnerable to the dot-com effect. Struggling to do more with less, companies looked for less expensive avenues of development and support. For the United States, India seemed like a perfect resource for these needs since many nationals spoke English—a side-effect of several decades of British colonial rule. A company can hire an engineer in India, for example, for USD$10,000 a year whereas an equally qualified engineer in the U.S. could cost $60,000-$90,000 a year.
A side effect of this practice led to the domestic unemployability of thousands of high-tech professionals, many of whom were new college graduates. Many of these new graduates studied high-tech fields specifically because a few years earlier, they were told there was an earnest need for people with the skills they actively acquired. Many companies required their employees to train their off-shore replacements, after which they were downsized (laid off).
In practice, this trend has experienced mixed results. Some companies, which were required to hire off-shore talent by investors, reported communication barriers and high foreign personnel turnover rates. They would often ask for one thing, but be delivered a different item. Communication between onsite and offshore teams is a must. Attrition in the offshore company is another issue. One company in Pleasanton, California in the U.S. specializes in fixing jobs that were botched due to offshoring.
Some companies report favorable results . One company said that the low cost of his Indian development team allows him to hire higher-paid American lead developers. Major companies doing outsourcing include Microsoft, Cisco Systems and IBM to name a few.
Outsourcing, especially BPO (Business Process Outsourcing), has long been a factor in American business, but the trend is beginning to reach Europe. More outsourcing deals were signed there last quarter than in any single quarter since 2000. Most economists feel that it will inevitably remain a part of global trade.
Outsourcing is not just related to the services sector. A lot of manufacturing of products is also outsourced to countries like China and Taiwan. Consumer products including clothes and computer hardware are manufactured in these countries due to cheap labor. These products in turn lead to a cheaper prices in the consuming nations.
Politics
Outsourcing is an effect of globalisation. In the beginning of globalisation, many western businesses introduced their products in the eastern countries and reaped a lot of profit. The resource re-allocation which happens by outsourcing is a further consequence of globalisation.
Countries that offer high-quality, yet cheaper labour include China, India, Russia and other eastern Europe and Asian countries. A much higher turn out of qualified engineers than their western counterparts in the recent past has aided these countries in providing a high-quality labour force.
The Governor of the state of California in the U.S., Arnold Schwarzenegger, vetoed a bill that would have barred state contractors or agencies from outsourcing jobs offshore. United States Democratic Party Presidential candidate John Kerry, who had earlier denounced as "traitors" CEOs of US companies outsourcing to countries like India and China, acknowledged that the practice is here to stay but promised a level-playing field for the American worker. Politicians still currently debate whether outsourcing is a positive or negative phenomenon for the United States economy, as it can cause job loss, but also decrease the costs of products to American consumers. Harvard economist Mankiw recently advised the Bush administration regarding outsourcing.
Research
Milken Institute
From: The Milken Institute Review - December 2004
We looked into what happens to a dollar of U.S. corporate spending when a company moves a service job to India. We found that, far from being a zero-sum game, offshoring is a story of mutual gain, benefiting both countries.
The receiving economy (India) captures 33 cents, in the form of wages paid to local workers, profits earned by local outsourcing providers and their suppliers, and taxes collected from second- and third-tier suppliers to the outsourcing companies.
But the gains to the U.S. economy are much larger. The most obvious source of value is the cost savings enjoyed by U.S. companies. Thus, far from being bad for the United States, offshoring creates net value for the economy – to the tune of $1.12 to $1.14 for every dollar that goes abroad.
See also
Lists
External links
- Software stays put (http://www.legadoassociates.com/softwareoutsource.htm) - by Wynn Quon, National Post. Why software outsourcing is not a long-term threat to the North American software industry.
- The New Face of the Silicon Age (http://www.wired.com/wired/archive/12.02/india.html) - by Daniel H. Pink Wired Magazine
- Indian outsourcing: an alternative view (http://www.theage.com.au/news/Soapbox/Indian-outsourcing-an-alternative-view/2004/12/21/1103391741596.html) by Sam Varghese. Dispels common myths about Indian outsourcingbe:Аўтсорсынґ
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