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The term outsourcing is defined as the purchase of products or services from another company. The companies generally tend to buy the service or product instead of producing internally due to many reasons. Outsourcing is seen in day to day life such as having dinner out. Here, food is purchased from restaurants (external source) instead of making food at home.
When a company purchases a product or service from a supplier that operates overseas, the term offshore outsourcing is used. The geographical location of company is irrelevant. The work is given to the company on a contract basis and due deadline of the work is imposed on the supplier. The supplier gives the product or service to the company according to their terms. For example, Cognizant Technology Solutions an American service based company provides its services worldwide.
When companies bring in lower cost foreign labor, via guest worker visas such as H-1B or L-1, to complete work on-site in the United States, the term used is on-site offshore outsourcing. All of the work cannot be outsourced easily. The company requires the physical presence of the worker to understand the business model more closely. So, the company brings the foreign employees to its desired location to make the best use of its resources. Several major U.S. companies such as General Electric and Accenture hire foreign labor.
When a multinational company moves or expands some of its operations and jobs to overseas locations, this is referred to as offshore sourcing. Large corporations grow vigorously and need their operations worldwide. These companies maintain their offshore model to attain their global presence. Recently, JP Morgan Chase has started its offshore model in Hyderabad, India.
This paper primarily concentrates on offshore outsourcing that is the business given to the developing countries. Significant benefits and challenges of outsourcing are analyzed as a core competency for a business. The affect of outsourcing on economic conditions of developing countries and developed countries are also studied. Few challenges of U.S. economy are addressed through specific changes.
Outsourcing: An effective business approach
"Many CEOs are saying, 'Don't tell me how much I can save. Show me how we can grow by 40% without increasing our capacity in the U.S.," says Atul Vashistha, CEO of outsourcing consultant (NEO IT) and co-author of the book The Offshore Nation. Outsourcing is viewed as one of the core competencies in business. Top priority is given to outsourcing as companies strive to gain an edge over other business leaders. The efficient use of outsourcing will make companies grow in a profitable manner. Several major U.S. based employers who are currently outsourcing important scientific and engineering work to other developing countries at lower costs are identified in Table 1.
Table 1 identifies several major U.S. based employers who are currently outsourcing important scientific and engineering work to lower cost, offshore locations.
Table 1 - Major U.S. Exporters of Science and Engineering Jobs
Company Numbers of Workers and Country Types of Work
Accenture 5,000 to the Philippines by 2004 Accounting and software
General Electric 20,000 to India and China in 2003 Aircraft and Medical R&D
Intel 3,000 to India by 2006 Chip design, tech support
Microsoft 500 to India and China in 2003 Software design, IT support
Oracle 4,000 in India Software design and support
Phillips 700 in China Consumer electronics R&D
Source: Business Week
The main reasons of the company to develop the outsourcing strategies are below.
Cost and Salary differences: Profit is the main motive of all the companies. Outsourcing is gaining more advantage due to this reason. Firstly, highly skilled and educated labor is cheaper in many developing countries. There is approximately forty percent wage gap between western and developing countries. The second table shows annual salary requirements in few selected developing countries in comparison to developed countries. Secondly, employer does not provide benefits for outsourced employees. The employers usually attract employee with the help of benefit plans which are costlier. Finally, the employer need not maintain the payroll or any tax deductions of the outsourced employees. The process is streamlined as the employer simply pays amount agreed on the contract.
Focus on core business and flexibility: The employers are trying to give more importance on core business rather than supporting services. For example, the main line of company is manufacturing industry, the company tries to outsource its IT service to other specialized IT service companies which are more cheaper. Moreover, the employer needs other services for a specific time or specific project so the employer tends to maintain contracting rather than full time employees. It helps the employer to maintain flexibility.
Larger and unique talent pool: The employers have larger access to intellectual property overseas as there are abundant human resources available. The third table shows the number of science and engineer degree people available in developing countries. And the specialized companies train their employee specifically to achieve high quality.
Superior service: The service is made available throughout twenty-four hours a day making the best use of employees in different locations of the time on globe. If a Penske truck is held up at a weigh station because it lacks a certain permit, for example, the driver calls an 800 number. Genpact staff in India obtains the document over the Web. The weigh station is notified electronically, and the truck is back on the road within thirty minutes. Before, Penske thought minimum time taken would be at least two hours.
Shared Risk: New technologies are emerging day to day, investing in these technologies creates sufficient amount of risk for the businesses. Rather than putting up its own funds, it may make more sense for a business to use outsourcing to ensure that the technology available to them is always up to date and relevant to their needs.
Technological advancement: The internet has ruled out the problems of geographical location. The emergence of internet led to instant and less cost of communication making it economically feasible to outsource offshore. For example, when a customer calls a toll-free customer service telephone number, it is possible that the call will be routed to a foreign country such as India or Argentina. A technician in that country trained by the American company to answer questions will solve the customer's problem, often within a few minutes, and the customer will typically not have any idea where the call center is located. Increasingly, American companies are taking advantage of highly educated labor pools outside the United States where wages can be one-tenth of what these companies would pay employees within the United States.
Outsourcing has its downfalls too. The companies which aim high through outsourcing need to consider its disadvantages. Non-efficient management of outsourcing will lead to big loss of the company. Whenever company thinks to apply the strategy cost and risk analysis has to be done effectively for each line of functionality. The following are few disadvantages associated with outsourcing.
No direct control of management: The part of functionality is taken by other business or individual, so management cannot expect complete control of business. Few decisions are also taken by other businesses or individuals. They need to develop trust and approve their decisions for smooth running of businesses.
Loss of Jobs: When employees come to know that the company is planning to outsource certain functionality, they might feel unsecured. They might leave their job in search of other company which is not outsourcing its tasks. It also affects their morale and ends in less productivity. The employer needs to take care of this unusual behavior.
Losing customers: Company may lose its customer due to overseas operation. The problems due to outsourcing like different accent, high resolution time are matter of dissatisfaction for consumers. The people at overseas may speak good English but accent matters, which cannot be changed. This problem cannot be erased so easily. Secondly when the customer call goes to overseas there is sufficient time lag, so customer gets angry.
Security Problems: One of the critical issues faced by the employer is customer information. It is employer's responsibility to secure customer details. The employer has to rethink while outsourcing certain tasks involving the important information. This is really challenging to protect data which is in someone else's hands.
Low quality work: The quality of the work is always measured in terms of money. The more you pay the more you get. The workers who are highly talented and skilled would know their worth and negotiate their salaries. They may be in any part of the world, but they try to get the right amount. So, the employer needs to think about the quality also when they are paying low. Moreover, the employer has to think of the policies of the supplier as it tends different terms would render slow processes.
Outsourcing effect on Developing countries
In the new era of globalization jobs are being sent to offshore. Jobs include chip design, engineering, basic research, financial analysis, etc. According to reports, the global outsourcing market is projected to clock US$373 billion in total revenue by the end of 2009, growing 14.4 percent over 2008. India will account for 44.8 percent of the global market, while China will hold at 25.9 percent. The Philippines is projected to account for 6.9 percent of total offshore revenue in 2009, compared to 6.7 percent in 2008. The numbers are growing day by day; the projected figures are shown in fourth table.
Developing countries like India, China which are most populated countries have high unemployment rate. Even though people are talented at par with western countries, they are not employed because no jobs are available. When western companies started outsourcing their businesses the unemployment rate in these countries started to decrease.
The cash flow in the developing countries became steady. When western companies started their businesses they made huge investment in the developing countries, this created sufficient money in these countries. Moreover, people started to earn foreign currency and converted to their currency. So, developing countries good amount of foreign currency.
Outsourced jobs helped these countries not only to grow their economy but also create good relationship with the western countries. These countries wish to maintain relationship with western countries; outsourcing gives them opportunity to pave their way. The political relations are essential for economy in developing countries
As the developing countries had few advantages with outsourcing jobs they started to attract the western companies by finding the loopholes of western administration. They created few pro-active strategies for typically western employers. For example in India, tax rate for Indian Majors is less than half of the US Majors; it has set free trade zones where there is no duty on imported software.
Moreover, the countries have also developed their technological equipment as communication was important criteria for western countries. The significant step towards communication was setting up satellite based communications infrastructure, which increased the band-width availability and reduced the communication cost more than 40 percent.
However, the developing countries also face the problem of culture. The tradition and custom followed by the people are changing. The ancient culture is being washed away from the history. The outsourcing jobs tend to gain certain western culture. As people get holidays in accordance with western countries so they celebrate their festivals too. People are celebrating Valentine's Day, scraping on Orkut, watching the Idol series, Fear factor, the Indian version Big Brother.
The other drawback of the outsourcing in particular to developing countries is uneven distribution of geographical location of companies. Due to the large necessity of infrastructure, all the companies tend to be in the same location resulting in expanding urban area and urban population. As people move to urban area for their job, it gets more populated generating other problems. This causes disturbance in economic balance.
From past five years, India is known for top one outsourced (service-oriented) country. Before that India is supposed to have agricultural based economy. The priority of economy has changed just in few years. The agricultural land is wiped out for huge foreign currency. The rural areas are getting urbanized and depriving India from its old structure.
Outsourcing effect on Western countries economy (US)
Outsourcing is a great controversy in US. Supporters like businessman and political leaders say it has a positive effect on US economy. Outsourcing saves money, opens up other opportunities for entrepreneurship and leads Americans for higher skilled jobs. Opponents say that sudden loose of jobs of sub-skilled workers and low income people will suffer a lot. Secondly, the taxation based on outsourcing may decrease a corporation's tax debt and thus decrease federal spending.
The proponents of outsourcing say that lowering expenses of corporations will raise few jobs. The government agencies outsource their work so that they save more which effects directly on the US economy and on federal spending. When the agencies pay less for outsourced jobs, the agencies can hire more US people creating new projects.
Secondly, international trade of the US products can be increased. When the companies are expanded to other countries, the people also buy the US products. For example, American express card is used by many people in India usually the corporate companies make this card as primary business card.
Thirdly, good political relationships are promoted between two countries. First step for the positive political relationship is leading businesses on both sides by aggressive growth plans and investments in both countries. For example, McDonalds in India have announced plans to open as many as 190 new restaurants in the country while India's Essar Group from the steel industry earlier this year acquired US-based Trinity Coal operations. These type of cross border investments rise relationship beyond the existing foothold.
The opponents say that monetary loss of jobs will terminate the semi-skilled workersâ€¦ to be continued still
How these problems can be acknowledged
The problems faced by the developing and developed countries play a vital role in their respective economies. I have addressed these problems with few changes in the present trends.
In the developing countries, the culture and traditional dressing should not be forced. The traditional costume should be also considered as formal wear for the offices. Moreover, the comfort of employee plays an important role in representing body language. The supplying countries should not enforce people to work on their festival holidays and should give sufficient work when developed countries have holidays. Both the sides should be balanced.
The government of the developing countries should take care of geographical imbalance. They have to attract companies in all the areas for even development. The pro-active strategies should be more concerned towards overall development. Limiting the strategies to specific areas increases urban population and area.
As part of change in identity, it depends on the amount work done in that specific industry. As more outsourcing companies are coming and more jobs are created in service field. But for the nation growth only manufacturing industries are concerned. So, the government has to care of building other agricultural industry.
The US administration drafted a new way guidance defining the kind of work that must be done in-house and what can be done by contractors. It has basically concentrated on government jobs. â€¦.(to be continued still)