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Outsourcing

Outsourcing (wikt: outsourcing) often refers to the process of subcontracting to a third-party. While outsourcing may be viewed as a component to the growing division of labor encompassing all societies, the term did not enter the English language|English-speaking lexicon until the 1980s. Since the 1980s, transnational corporations have increased subcontracting across national boundaries. In the United States, outsourcing is a popular political issue, especially during election years.

Overview

A precise definition of outsourcing has yet to be agreed upon. Thus, the term is used inconsistently. However, outsourcing is often viewed as involving the contracting out of a business function to an external provider.Overby, S (2007) ABC: An Introduction to Outsourcing. CIO.com. In this sense, two organizations may enter a contractual agreement involving an exchange of services and payments. Of recent concern is the ability of businesses to outsource to suppliers outside the nation, sometimes referred to as offshoring or offshore outsourcing (which are odd terms because doing business with another country does not mean you have to go offshoreManning et al. (2008) A Dynamic Perspective on Next-Generation Offshoring: The Global Sourcing of Science and Engineering Talent Academy of Management Perspectives 22.3: 35-54.Norwood et al. (2006) Off-Shoring: An Elusive Phenomenon. National Academy of Public AdministrationBabu, M. (2005) Myth: All Outsourcing Is Offshoring www.computerworld.comMcCue, A. (2006) Indian outsourcers to launch European invasion www.silicon.com.Gibson (2006) India 2.0 Aims to Sustain Its Global IT Influence eWeek) In addition, several related terms have emerged to grasp various aspects of the complex relationship between economic organizations or networks, such as nearshoring, multisourcing(Q4 2006)Mandatory Multisourcing Discipline Business Trends Quarterly(2006) Mandatory Multisourcing Discipline and strategic outsourcingsee Holcomb & Hitt, 2007. Almost any conceivable business practice can be outsourced for any number of stated reasons. The implications of outsourcing objectively and subjectively vary across time and space.

Reasons

Organizations that outsource are seeking to realize benefits or address the following issues:Gareiss, R (2002, 18 Nov) ''Analyzing The Outsourcers''. Information Week.Daniel Drezner|Drezner, D.W. (2004) The Outsourcing Bogeyman www.foreignaffairs.orgEngardio, P. (2006) Outsourcing: Job Killer or Innovation Boost? Business Week"Is it Virtuous to be Virtual? The VC Viewpoint", Justin Chakma, Jeff L Calcagno, Ali Behbahani and Shawn Mojtahedian, ''Nature Biotechnology'' Volume 27, Number 10, October 2009.
- '''Cost savings'''. The lowering of the overall cost of the service to the business. This will involve reducing the scope, defining quality levels, re-pricing, re-negotiation, cost re-structuring. Access to lower cost economies through offshoring called "labor arbitrage" generated by the wage gap between industrialized and developing nations.Engardio, P. & Arndt, M. & Foust, D. (2006) The Future Of Outsourcing Business Week
- '''Focus on Core Business'''. Resources (for example investment, people, infrastructure) are focused on developing the core business. For example often organizations outsource their IT support to specialised IT services companies.
- '''Cost restructuring'''. Operating leverage is a measure that compares fixed costs to variable costs. Outsourcing changes the balance of this ratio by offering a move from fixed to variable cost and also by making variable costs more predictable.
- '''Improve quality'''. Achieve a step change in quality through contracting out the service with a new service level agreement.
- '''Knowledge'''. Access to intellectual property and wider experience and knowledge.Engardio, P. & Kripalani, M. (2006) The Rise Of India Business Week
- '''Contract'''. Services will be provided to a legally binding contract with financial penalties and legal redress. This is not the case with internal services.Rothman, J. (2003) 11 Steps to Successful Outsourcing: A Contrarian's View www.computerworld.com
- '''Operational expertise'''. Access to operational best practice that would be too difficult or time consuming to develop in-house.
- '''Access to talent'''. Access to a larger talent pool and a sustainable source of skills, in particular in science and engineering.Lewin, A.Y. & Couto, V. Next Generation Offshoring: The Globalization of Innovation Offshoring Research Network 2006 Survey Report
- '''Capacity management'''. An improved method of capacity management of services and technology where the risk in providing the excess capacity is borne by the supplier.
- '''Catalyst for change'''. An organization can use an outsourcing agreement as a catalyst for major step change that can not be achieved alone. The outsourcer becomes a Change agent in the process.
- '''Enhance capacity for innovation'''. Companies increasingly use external knowledge service providers to supplement limited in-house capacity for product innovation.Lewin, A.Y. & Couto, V. Next Generation Offshoring: The Globalization of Innovation Offshoring Research Network 2006 Survey ReportCouto et al. Offshoring 2.0: Contracting Knowledge and Innovation to Expand Global Capabilities Offshoring Research Network 2007 Service Provider Report
- '''Reduce time to market'''. The acceleration of the development or production of a product through the additional capability brought by the supplier.
- '''Commodification'''. The trend of standardizing business processes, IT Services, and application services which enable to buy at the right price, allows businesses access to services which were only available to large corporations.
- '''Risk management'''. An approach to risk management for some types of risks is to partner with an outsourcer who is better able to provide the mitigation.Roehrig, P (2006) Bet On Governance To Manage Outsourcing Risk. Business Trends Quarterly
- '''Venture Capital'''. Some countries match government funds venture capital with private venture capital for startups that start businesses in their country.http://venturebeat.com/2007/06/01/russia-finally-gets-serious-about-venture-capital/
- '''Tax Benefit'''. Countries offer tax incentives to move manufacturing operations to counter high corporate taxes within another country.
- '''Scalability'''. The outsourced company will usually be prepared to manage a temporary or permanent increase or decrease in production.
- '''Creating leisure time'''. Individuals may wish to outsource their work in order to optimise their work-leisure balance.

Specific examples of corporate outsourcing

There are situations when a firm may consider outsourcing some of its R&D work to a contract research organizations or universities. In this context, the two most populous countries in the world, China and India, provide huge pools from which to find talent. Both countries produce over 200,000 engineers and science graduates each year. Moreover both countries are low cost sourcing countries. Outsourcing in the information technology field has two meanings.Management Information Systems 5e, Oz - ©2006 Course Technology One is to commission the development of an application to another organization, usually a company that specializes in the development of this type of application. The other is to hire the services of another company to manage all or parts of the services that otherwise would be rendered by an IT unit of the organization. The latter concept might not include development of new applications.

Negative implications

Management, the corporation and consumers

Quality risk

Quality risk is the propensity for a product or service to be defective, due to operations-related issues. Quality risk in outsourcing is driven by a list of factors. One such factor is opportunism by suppliers due to misaligned incentives between buyer and supplier, information asymmetry, high asset specificity, or high supplier switching costs. Other factors contributing to quality risk in outsourcing are poor buyer-supplier communication, lack of supplier capabilities/resources/capacity, or buyer-supplier contract enforceability. Two main concepts must be considered when considering observability as it related to quality risks in outsourcing: the concepts of testability and criticality. Quality fade is the deliberate and secretive reduction in the quality of labor in order to widen profit margins. The downward changes in human capital are subtle but progressive, and usually unnoticeable by the out sourcer/customer. The initial interview meets requirements, however, with subsequent support, more and more of the support team are replaced with novice or less experienced workers. Some IT shops will continue to reduce the quality of human capital, under the pressure of drying up labor supply and upward trend of salary, pushing the quality limits. Such practices are hard to detect, as customers may just simply give up seeking help from the help desk. However, the overall customer satisfaction will be reduced greatly over time. Unless the company constantly conducts customer satisfaction surveys, they may eventually be caught in a surprise of customer churn, and when they find out the root cause, it could be too late. In such cases, it can be hard to dispute the legal contract with the outsourcing company, as their staff are now trained in the process and the original staff made redundant. In the end, the company that outsources may find that it is worse off than before it outsourced its workforce.

Quality of service

Quality of service is measured through a service level agreement (SLA) in the outsourcing contract. In poorly defined contracts there is no measure of quality or SLA defined. Even when an SLA exists it may not be to the same level as previously enjoyed. This may be due to the process of implementing proper objective measurement and reporting which is being done for the first time. It may also be lower quality through design to match the lower price. There are a number of Stakeholder (corporate)|stakeholders who are affected and there is no single view of quality. The CEO may view the lower quality acceptable to meet the business needs at the right price. The retained management team may view quality as slipping compared to what they previously achieved. The end consumer of the service may also receive a change in service that is within agreed SLAs but is still perceived as inadequate. The supplier may view quality in purely meeting the defined SLAs regardless of perception or ability to do better. Quality in terms of end-user-experience is best measured through customer satisfaction questionnaires which are professionally designed to capture an unbiased view of quality. Surveys can be one of researchMaddock, B. & Warren, C. & Worsley A. (2005) Survey of canteens and food services in Victorian schools. This allows quality to be tracked over time and also for corrective action to be identified and taken.

Productivity

Offshore outsourcing for the purpose of saving cost can often have a negative influence on the real productivity of a company. Rather than investing in technology to improve productivity, companies gain non-real productivity by hiring fewer people locally and outsourcing work to less productive facilities offshore that appear to be more productive simply because the workers are paid less. Sometimes, this can lead to strange contradictions where workers in a developing country using hand tools can appear to be more productive than a U.S. worker using advanced computer controlled machine tools, simply because their salary appears to be less in terms of U.S. dollars. In contrast, increases in real productivity are the result of more productive tools or methods of operating that make it possible for a worker to do more work. Non-real productivity gains are the result of shifting work to lower paid workers, often without regards to real productivity. The net result of choosing non-real over real productivity gain is that the company falls behind and obsoletes itself overtime rather than making investments in real productivity.

Staff turnover

The staff turnover of employee who originally transferred to the outsourcer is a concern for many companies. Turnover is higher under an outsourcer and key company skills may be lost with retention outside of the control of the company. In outsourcing offshore there is an issue of staff turnover in the outsourcer companies call centers. It is quite normal for such companies to replace its entire workforce each year in a call center.Kobayashi-Hillary, M. (2007) India faces battle for outsourcing news.bbc.co.uk This inhibits the build-up of employee knowledge and keeps quality at a low level.

Language skills

In the area of call centers end-user-experience is deemed to be of lower quality when a service is outsourced. This is exacerbated when outsourcing is combined with off-shoring to regions where the first language and culture are different. The questionable quality is particularly evident when call centers that service the public are outsourced and offshored. The public generally find linguistics|linguistic features such as accents, word use and phraseology different which may make call center agents difficult to understand. The visual clues that are present in face-to-face encounters are missing from the call center interactions and this also may lead to misunderstandings and difficulties.Alster, N (2005) Customer Disservice. www.CFO.com. In addition to language and accent differences, a lack of local social and geographic knowledge is often present, leading to misunderstandings or mis-communications.

Failure to deliver business transformation

Business transformation promised by outsourcing suppliers often fails to materialize. In a commoditised market where many service providers can offer savings of time and money, smart vendors have promised a second wave of benefits that will improve the client’s business outcomes. According to Vinay Couto of Booz & Company “Clients always use the service provider’s ability to achieve transformation as a key selection criterion. It’s always in the top three and sometimes number one.” While failure is sometimes attributed to vendors overstating their capabilities, Couto points out that clients are sometimes unwilling to invest in transformation once an outsourcing contract is in place.Bray, P (2009) Mutual aspiration. www.outsourcingandoffshoring.com

Security

Before outsourcing an organization is responsible for the actions of all their staff and liable for their actions. When these same people are transferred to an outsourcer they may not change desk but their legal status has changed. They no-longer are directly employed or responsible to the organization. This causes legal, security and compliance issues that need to be addressed through the contract between the client and the suppliers. This is one of the most complex areas of outsourcing and requires a specialist third party adviser. Fraud is a specific security issue that is criminal activity whether it is by employees or the supplier staff. However, it can be disputed that the fraud is more likely when outsourcers are involved, for example credit card theft when there is scope for fraud by credit card cloning. In April 2005, a high-profile case involving the theft of 0,000 from four Citibank customers occurred when call center workers 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.Ribeiro, J (2005) Indian call center workers charged with Citibank fraud. www.infoworld.com

Qualifications of outsourcers

The outsourcer may replace staff with less qualified people or with people with different non-equivalent qualifications.Stein, R (2005) Hospital Services Performed Overseas. www.washingtonpost.com In the engineering discipline there has been a debate about the number of engineers being produced by the major economies of the United States, India and China. The argument centers around the definition of an engineering graduate and also disputed numbers. The closest comparable numbers of annual graduates of four-year degrees are United States (137,437) India (112,000) and China (351,537).Wadhwa, V (2005) About That Engineering Gap. www.businessweek.comGereffi, G. & Wadhwa, V. Framing the Engineering Outsourcing Debate: Placing the United States on a Level Playing Field with China and India. Duke University.

Social responsibility

Outsourcing sends jobs to the lower-income areas where work is being outsourced to, which provides jobs in these areas and has a net equalizing effect on the overall distribution of wealth. Some argue that the outsourcing of jobs (particularly off-shore) exploits the lower paid workers. A contrary view is that more people are employed and benefit from paid work. Despite this argument, domestic workers displaced by such equalization are proportionately unable to outsource their own costs of housing, food and transportation. On the issue of high-skilled labor, such as computer programming, some argue that it is unfair to both the local and off-shore programmers to outsource the work simply because the foreign pay rate is lower. On the other hand, one can argue that paying the higher-rate for local programmers is wasteful, or charity, or simply overpayment. If the end goal of buyers is to pay less for what they buy, and for sellers it is to get a higher price for what they sell, there is nothing automatically unethical about choosing the cheaper of two products, services, or employees.Sara Baase, "A Gift of Fire: Social, Legal, and Ethical Issues for Computing and The Internet. Third Ed. 'Work'" (2008) Social responsibility is also reflected in the costs of benefits provided to workers. Companies outsourcing jobs effectively transfer the cost of retirement and medical benefits to the countries where the services are outsourced. This represents a significant reduction in total cost of labour for the outsourcing company. A side effect of this trend is the reduction in salaries and benefits at home in the occupations most directly impacted by outsourcing.

Company knowledge

Outsourcing could lead to communication problems with transferred employees. For example, before transfer staff have access to broadcast company e-mail informing them of new products, procedures etc. Once in the outsourcing organization the same access may not be available. Also to reduce costs, some outsource employees may not have access to e-mail, but any information which is new is delivered in team meetings.

Public opinion

There is a strong public opinion in the United States against outsourcing (especially when combined with offshoring), it leads to job displacement. It is difficult to dispute that outsourcing has a detrimental effect on individuals who face job disruption and employment insecurity; however, its supporters draw on mainstream economics to argue that outsourcing should bring down prices, providing greater economic benefit to all. There are legal protections in the European Union regulations called the Transfer of Undertakings (TUPE)|Transfer of Undertakings (Protection of Employment). Labor laws in the United States are not as protective as those in the European Union.Ganesh, S. (2007). '' Outsourcing as Symptomatic. Class visibility and ethnic scapegoating in the US IT sector.''. Journal of Communication Management, 11.1: 71-83. On June 26, 2009, Jeff Immelt, the CEO of General Electric, called for the United States to increase its manufacturing base employment to 20% of the workforce commenting that the U.S. has outsourced too much and can no longer rely on consumer spending to drive demand.Bailey, David and Soyoung Kim (June 26, 2009).GE's Immelt says U.S. economy needs industrial renewal.''UK Guardian.''. Retrieved on June 28, 2009.

Standpoint of labor

From the standpoint of labor outsourcing may represent a new threat, contributing to rampant worker insecurity, and reflective of the general process of globalization.Paul Krugman|Krugman, Paul (2006). "Feeling No Pain." ''New York Times'', March 6, 2006) While the "outsourcing" process may provide benefits in some form and to some degree it may undermine the ability of labor to resist unwanted changes in the workplace. For example, a corporation may outsource a division of the company to a service provider, that may retain the workforce on worse conditions or discharge them in the short term. The affected workers thus often feel they are being "sold down the river." Careers Impact
Industry Impact. Outsourcing is thus often criticized for violating the American Dream.

By Country

The U.S.

'Outsourcing' became a popular political issue in the United States during the United States presidential election, 2004|2004 U.S. presidential election. The political debate centered on outsourcing's consequences for the domestic U.S. workforce. United States Democratic Party|Democratic U.S. presidential candidate John Kerry criticized U.S. 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 conducted in August 2004 found that 71% of American voters believed that “outsourcing jobs overseas” hurt the economy while another 62% believed 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.Zogby International survey results online at zogby.com One given rationale is the extremely high corporate income tax rate in the U.S. relative to other OECD nations,Veronique de Rugy on Corporate Flight & Taxes on NRO FinancialThe Tax Foundation - U.S. Lagging Behind OECD Corporate Tax TrendsJohn Tamny on Hillary Clinton Economics on NRO Financial and the practice of taxing revenues earned outside of U.S. jurisdiction, a very uncommon practice. However, outsourcing is not solely a US phenomenon as corporations in various nations with low tax rates outsource as well, which means that high taxation can only partially, if at all, explain US outsourcing. For example, the amount of corporate outsourcing in 1950 would be considerably lower then today, yet the tax rate was actually higher in 1950.http://www.cbpp.org/files/10-16-03tax.pdf It is argued that lowering the corporate income tax and ending the double-taxation of foreign-derived revenue (taxed once in the nation where the revenue was raised, and once from the U.S.) will alleviate corporate outsourcing and make the U.S. more attractive to foreign companies. However, while the US has a high official tax rate, the actual taxes paid by US corporations may be considerably lower due the use of tax loopholes, tax havens and attempts to "game the system"http://www.smartmoney.com/investing/economy/high-corporate-tax-rate-is-misleading-22463/. Rather than avoiding taxes, outsourcing may be mostly driven by the desire to lower labor costs (see standpoint of labor above). Sarbanes-Oxley has also been cited as a factor for corporate flight from U.S. jurisdiction. Policy solutions to outsourcing are also criticized.

Outsourcing to the Philippines

Awarded as the top outsourcing destination for the years 2007 and 2009 http://theglobalemployer.com/resources/42-philippine-business-news/61-philippines-top-outsourcing-destination, the Philippine government has implemented several laws that will grant tax holidays and other benefits to multinational companies who wish to setup operations in the country. It has export processing zones all over the country and is currently the host of several manufacturing firms including Texas Instruments, MOOG and Microsoft. The country also boasts of a high literacy rate, thereby providing a large base of skilled workers. Also, most citizens are fluent in speaking English so foreigners do not have trouble communicating. Most outsourced work to the Philippines consists of customer support services, web development and website design.

References

External links

- At Mysore We are Running a US Law Firm by Shelley Singh (Economic Times)
- Chindia Sweeps the Sourcing Space - by Partha Iyengar and James Popkin (Q2 2007)
- Extreme Outsourcing
- Fortune 500 firms driving LPO industry by Praveen Bose (Business Standard)
- Free Trade Bulletin no. 10. Why We Have Nothing to Fear from Foreign Outsourcing
- Identifying, understanding and resolving legal and operational issues in outsourcing
- LPOs add more punch to India action by Sushmita Mohapatra & P P Thimmaya (The Economic Times)
- Nearshore outsourcing is more cost efficient than offshore outsourcing - by H.J.M. Boersen, W.G. van Gils and M. Zantinge.
- New York Firm Takes On India... "Very Nice!" by Heather Greenwood Davis (The Globe and Mail -- Lexpert Magazine)
- Now, for some LPO action by Sachin Malhan (The Hindu)
- Reasons Leading to the Ineffectiveness of Information Systems Outsourcing in Minimising Costs - by Petros Michaelides (2006)
- Towers Perrin HR Outsourcing Effectiveness Survey Report 2008
- U.S. corporates outsource legal work to India by Anjali Prayag (The Hindu Business Line)

Videos

- Trade and the Future of American Workers
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- Difference between Outsourcing and Worldsourcing Category:Business terms Category:International economics Category:Management Category:Offshoring Category:Outsourcing| Category:Telecommuting be-x-old:Аўтсорсынґ

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