Outsourcing in the Business Environment
OUTSOURCING IN THE BUSINESS ENVIRONMENT
Outsourcing (or contracting out) is a procedure involving the delegation of noncore operations or jobs from internal production to an outside resource. Outsourcing is a business decision that is often made to focus on core competences. A subset of the term, offshoring, also implies transferring jobs to another country, either by hiring local subcontractors or building a facility in an area where labor is cheap.
At one time, companies used outsourcing as a way to solve problems of high costs, redundant positions, and poor job skills. In the 1990s the reasons for outsourcing changed. Companies started to outsource to gain an advantage over their competitors. They wanted to improve their processes and build long-term relationships with their overseas partners. Currently, many companies see outsourcing as an indispensable business practice engrained in their corporate philosophy. Research has found that the next wave of globalization will be focused on outsourcing information technology (IT) departments.
When an organization decides that more personnel are needed, it must consider whether to hire more employees, contract workers, or outsource the functions. The focus is on efficiency and cost-effectiveness when deciding whether to outsource. This decision-making process involves internal analysis and evaluation, needs assessment and vendor selection, and implementation and management.
The procurement of services or products from an outside supplier or manufacturer in order to cut costs, outsourcing is one of the hottest emerging trends in business. Public and private sector agencies, lacking a clear, accurate way to measure the number of jobs in the United States that have been lost to outsourcing, or how many might be lost in the future, have yet to agree on the number of jobs that have been or will be affected. According to the Center for American Progress in 2004, the variation in the estimates shows the uncertainty and the difficulty in measuring these numbers.
As white-collar jobs move away with increasing regularity, a debate that once focused on the loss of manufacturing to foreign outsourcing once again became rampant. As companies rush to shed costs, outsourcing remains one of the fastest-growing solutions. Start-ups, encouraged by
their venture investors, were turning to outsourcing just like some big multinational companies. While 15 percent of the 145 large companies surveyed by Forrester Research Inc. early in the twenty-first century revealed that outsourcing was a permanent part of the offshore strategy, an informal survey of venture capitalists suggested 20 to 25 percent of the companies invested had a comparable commitment.
The changing face of business and the need to stay ahead in the game forced companies to look for ways to reduce costs. As a result, outsourcing has become the solution for both the private and public sectors. The growing market and the globalization of business at the start of the twenty-first century have resulted in many changes for businesses all over the world. In 2004 Toyia Bulla wrote that the information age has created an increased level of competition in response to competitive pressures. Both private and public sector institutions have turned their attention to the core competencies relevant to their business or industry.
The reasons for outsourcing are more than just reducing costs. Bulla suggested that companies outsource in order to:
- improve company focus
- gain access to world-class capabilities
- manage difficult or out-of-control functions
- reduce or control operating costs
- gain resources not otherwise available
Of course, another reason is to free internal resources for other purposes. For example, Datasweep Inc. (which was acquired by Rockwell Automation in 2005), a company whose software helps manufacturers manage factories more efficiently, hired eight programmers in India and China to translate its product into Japanese and connect its programs with software from SAP, a German software maker. Many other companies are reaping the same benefits from outsourcing through the use of educated but lower paid overseas employees performing the routine business tasks. Companies are able to use their U.S.-based staff to focus on innovation.
ADVANTAGES OF OUTSOURCING
Outsourcing is one of the most popular trends in business today because of the benefits it offers. For the company sending work out, the consumer, the economy in general, and for the country and company receiving the work, the economic benefits are clearly seen. The benefits of free trade are enormous: Companies pay less for goods and services, creating more wealth for shareholders, and causing prices to go down or remain the same for consumers, raising the standard of living for the whole country. For the country receiving the work, there is higher employment, more competition for skilled employees, higher revenues for the government in the form of payroll taxes, and a higher standard of living overall.
Companies saving as much as 80 percent on salaries lead to more wealth going to shareholders. This frees up valuable resources to be used in more productive ways. The cost savings enabled by these moves lower prices for consumers, increasing their buying power. Many people are concerned about the future and current implications of outsourcing, as the results of the surveys show. In some cases jobs, estimated at around 2 percent so far, are actually lost. Thus, supporting proponents of outsourcing suggest that this process hardly contributes to the unemployment problems caused by a weak economy. The findings of the U.S. Bureau of Labor Statistics showed that, in the first quarter of 2004, 70 percent of all job losses were a result of internal company restructurings, such as bankruptcy, business ownership change, financial difficulty, and reorganization.
Next in the chain of benefits comes the company who contracts the work in a foreign country. The company benefits because it can increase its production, and hire more workers. The workers compete for higher paying jobs than they would have otherwise, raising their standard of living. The tremendous growth potential in some areas has the attention of PricewaterhouseCoopers, which pointed to the city of Coimbatore, India, as a center for growth because of its plan for a new IT park. The country and the city benefit from the new income, thus enabling improved infrastructure for the benefit of all.
One group of people often overlooked in this benefits discussion is the population of female workers with moderate education who are able to gain higher-paying positions because of the influx of business process outsourcing and IT-enabled services. This new ability has enabled a social empowerment previously denied young women, and eventually leads to a more equitable position in society.
DISADVANTAGES OF OUTSOURCING
Even though there are numerous advantages to outsourcing, there are just as many disadvantages. One main issue surrounding outsourcing is the number of American jobs being moved overseas. Another issue regarding outsourcing is the inefficiencies that it creates for businesses because of communication barriers. For example, customers may have a hard time getting their technical-support questions answered because of language differences. In some cases the vendor and customer are not available at the same time because of the difference in time zones. Unqualified employees and incompetent vendors are other problems that arise with outsourcing. Customers are not always satisfied with the quality or price of their services and companies can incur losses for their production and IT support. Outsourcing can cause a company to lose control of the part of the project that they have outsourced, especially if the company does not hire an experienced manager when outsourcing.
When IT security is outsourced, contractors overseas are given access to a company's business environment. Companies must control the level of access given to providers and verify that the employees hired overseas meet the company's screening standards. Companies that outsource must ensure that their data and networks are protected.
Outsourcing certain jobs in a business takes a great deal of time and planning and should be carefully evaluated. Eric Wahlgren found that the process of outsourcing can be burdensome for some small companies because they might "lack established processes that can be easily taught through a training manual" (2004, p. 41). The primary disadvantage of outsourcing for the countries overseas is the potential economic fallout of war. During the crisis between India and Pakistan in 2002, there was a decline in offshore contracts for several months.
Predictions made by Forrester Research in 2002 indicated that about 3.3 million U.S. service jobs would be moved offshore by 2015. By the use of outsourcing, it was believed that 516,000 software and service industry jobs would be created from 2004 to 2009. Of these jobs, 272,000 would be offshore and 244,000 would stay in the United States. If outsourcing were not used, only about 490,000 jobs would be created. The next wave of globalization will be focused on sending entire IT departments overseas.
At one time outsourcing was limited to such services as housekeeping, architectural design, food service, security, and relocation. Today, however, outsourcing has become a popular choice in business and industry. Although outsourcing began with small businesses, both large and small organizations are now outsourcing.
Outsourcing is no longer solely a domestic concern. Globally, organizations are considering and using outsourcing. With electronic commerce playing a significant role in the economy, outsourcing is expected to play a considerable role in the growth of electronic commerce.
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Carolyn H. Ashe