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In the contemporary business environment, the outsourcing is widely-spread, especially among companies operating internationally. The use of the outsourcing contributes to the improvement of the organizational performance through the optimization of organizational expenses and cost saving. On the other hand, the outsourcing can raise a number of important social issues. In this respect, the risk of job cuts and increasing unemployment is particularly significant issue, which affects not only employees, but also labor unions and the entire organization (Greider, 1997). As the matter of fact, the outsourcing may be profitable and economically justified for the company but, simultaneously, it increases the risk of internal conflicts within the organization because of the increasing opposition from the part of employees and their uncertainty in their future in the company. As a result, along with positive effects, such as cost saving, the outsourcing can raise significant problems, such as internal conflicts and deterioration of productivity and efficiency of work of employees (Orphanides el.al, 2002).
In order to understand effects of the outsourcing on the organizational performance and social issues raised by the outsourcing, such as job cuts, it is necessary to dwell upon the essence of outsourcing in the context of the organizational performance. The outsourcing of organizational resources and function produces a profound impact on the organizational structure. Traditionally, the outsourcing is introduced to save costs of an organization, but, at the same time, the outsourcing leads to the restructuring of organizations (Kaldor, 2003). For instance, when an organization outsources certain function, it does not need a unit which performed this function before outsourcing. As a result, the organization needs either to transfer the personnel of the unit to the company which provides this function in terms of outsourcing, or to cut jobs. The latter means the loss of professionals working within the organization and naturally this implies restructuring. Many companies attempt to preserve the most efficient professionals and transfer them to other units from those which become useless after outsourcing (Held and McGrew, 2002).
In such a situation, the organizational structure undergoes considerable changes, which do not always produce a positive impact on the performance of the organization. Hence, it is possible to speak about negative effects of outsourcing, which sometimes can outweigh benefits of outsourcing, such as saving costs. Nevertheless, outsourcing grows more and more popular today, especially among companies operating worldwide, which tend to outsource some services and functions to developing countries where they can save costs due to lower price of local labor force. In this respect, the process of outsourcing contributes consistently to the wide spread of outsourcing in the contemporary business environment (Lane et. al, 2006).
In such a context, the outsourcing can lead to job cuts which may have a dubious effect on the development of business and organizational performance. From the business point of view the problem of job cuts or unemployment may be caused by objective factors, including the necessity to reduce costs of production and implement cost saving policies, the prospect of entering new markets or expanding international market share through outsourcing of jobs abroad, where the labor force is cheaper, and other factors. Obviously, the outsourcing of jobs is beneficial for the development of business because the company outsourcing jobs can employ professionals who receive lower wages and, thus, the company is saving costs, which it can invest into the development of business, extensions its market share, etc (Prigoff, 2000). In addition, outsourcing of jobs leads to the movement of the labor force capital from a country or region with a higher cost of the labor force to a country with a lower cost of the labor force that allows the company to take a competitive advantage because the decrease of costs of production allow the company to reduce the price of its products or services. Nevertheless, the outsourcing leads to job cuts in a country or region, which jobs are outsourced from. Positive effects of the outsourcing of jobs outweigh its negative effects for business (Greider, 1997). This is why the company can settle the case with employees who are supposed to lose their jobs through the implementation of compensations to these employees or their transfer to other units of the company, where they are needed.
On the other hand, a leader of labor union can oppose to outsourcing of jobs. The labor union leader is a representative of workers working in the company and as a stakeholder, who is interested in the positive marketing performance of the company, which can contribute to the improvement of conditions of work of employees and increase their wages. As a result, from the standpoint of the labor union leader, the outsourcing of job means job cuts that are a direct threat to interests of employees (Lechner and Boli, 2005). The unemployment is the most dangerous issue employees can face and the outsourcing of jobs leads to job cuts. The labor union leader is supposed to protect interests of employees. This is why the labor union leader can offer an alternative solution to the problem of job cuts. To put it more precisely, the labor union leader can offer to refuse from job cuts but, instead, to reduce working hours and establish the minimal wages for employees to ensure that employees will earn enough for living (Reisch, 1998).
Obviously, in case of outsourcing, job cuts are the logical decision that is normally taken by companies. However, it is obvious that this decision rather provokes a serious social problem - unemployment - than prevents it. In such a situation, the parties involved should look for a compromise because job cuts may lead to the deterioration of the public image of the company (Iriye, 2002). At any rate, this decision will contradict to the social responsibility principle which is extremely important in the contemporary business environment for the positive image of the company. On the other hand, if a company takes decision to outsource jobs, than it is forced to cut jobs. In such a situation, the company should to minimize the negative impact of the outsourcing of jobs on employees who are supposed to lose their jobs. In fact, the company can transfer a part of these employees to the company where jobs are outsourced to (Gates, 2006). In such a way, some employees will have an opportunity to stay at work and earn for living. In addition, the company may follow in a way the solution suggested by the labor union leader but the company should not reduce working hours, but transfer employees to different positions within the company. In such a way, the company will retain well-qualified professionals, who may work efficiently and productively in new positions. Moreover, if the company refuses from the outsourcing of jobs in the future, it will have an opportunity to restore the unit from which jobs have been outsourced (Kennedy, 2006). As a result, the company will be flexible enough to respond fast on changes in the business environment. For instance, if the outsourcing of jobs fails, the company can transfer the employees back and resume their work as if nothing has happened. This solution can be backed up with financial compensations as it was originally offered by the company. In this respect, it is possible to use retirement plans to cover expenses of the company on compensations.
Thus, the outsourcing of jobs can raise serious social issues, namely job cuts that may lead to the increase of unemployment among workers. In this respect, companies conducting outsourcing of jobs should develop a plan of outsourcing which can minimize negative social effects of the outsourcing. To put it more precisely, it is necessary to minimize the risk of unemployment in the result of job cuts. The latter can be achieved through transfer of employees to the target company where jobs are supposed to be outsourced. In addition, it is possible to transfer employees within the company that will preserve well-qualified professionals, who can return to their job in case of the failure of the outsourcing. In such a way, interests of both business and labor union will meet, at least partially (Mishkin & Frederic, 1999).
Negative effects of outsourcing
In order to understand negative effects of outsourcing, it is possible to refer to the documentary "Roger and Me" by Michael Moore. The modern world is progress rapidly and traditional values, ethical norms and the lifestyle of people changes dramatically. Such changes are in the focus of attention of Michael Moore "Roger and Me", where the filmmaker explores the negative impact of the current policy of GM, especially outsourcing, on the life of people in Flint.
Basically, the film depicts a dramatic change in the life of people who lived their entire life in Flint and worked on plants belonging to GM. However, in terms of the current policy of the company and in the result of the growing outsourcing the company decided to close the plants situated in the city. At first glance the decision of GM seems to be economically motivated but, in actuality, it costs the local population 30,000 working places while the economic and social life in the city is devastating (Midgley, 2006).
In such a situation, ethical issues arise since such a decision proves to be absolutely amoral as the film shows the entire story of the local people. As the matter of fact, people living in Flint and working for GM, they did their best to improve the performance of the company, which actually betray them and, instead of reward for the hard work, GM fires all these people, even though the company cannot be ignorant of the fact that the life of the city is totally dependent on the plants which are closed (Midgley, 2004).
Obviously, Roger Moore is simply appalled and feels indignation because of such an attitude of GM and its chairman Roger Smith whom he attempts to talk with but in vain. Thus, Roger Moore attempts to view this dramatic situation with irony and sarcasm to criticize the unethical actions of GM. It proves beyond a doubt that the case of GM and the outsourcing policy conducted by the company affects dramatically employees in the US. In fact, they have lost their jobs because GM moved the production facility from the US to other countries, outsourcing various services and supplies of various parts. The situation described in the documentary is typical and reveals the full extent to which outsourcing is dangerous for national economies, especially economies of developed countries (Midgley, 2006).
However, at this point, it is important to understand that outsourcing has a negative impact not on companies or business development in developed countries but outsourcing mainly affects local employees. What is meant here is the fact that employees, as a rule workers employed in car assembling, and other manufacturing processes which do not need the higher education and high professional skills, lose their jobs because employers attempt to save costs and cut jobs if they can outsource the supply of certain products and services from other companies. In this regard, companies located in developing countries are particularly attracting to companies located in developed countries, which to outsource the supply of certain products or services (Omhae, 1996). Obviously, outsourcing decreases costs of production consistently. On the other hand, the question concerning the quality of outsourced products and services arises. In this respect, many companies face a problem of the loss of the high quality standards which persisted before the use of outsourcing. In fact, many companies, being in pursuit of minimization of costs and cutting their spending, attempt to outsource the supply of products and services that means that they shut down their own units which used to supply these products and services. As a rule, companies had an effective system of quality control at all stages of the production of commodities or services. When companies decide to outsource the supply of products or services, their ability to control the quality of the supplied or outsourced products and services decreases substantially. The companies supplying products and services in terms of outsourcing have their own quality standards, their norms and rules and the company that uses these products and services in terms of outsourcing cannot always control them because every company protects its intellectual property and control systems from intrusion of third parties. As a result, outsourcing may lead to the deterioration of the quality of the final product or service (Robertson, 1992).
Outsourcing: past and future
Today, outsourcing becomes one of the major trends in the development of the modern economy at the international level. The process of globalization makes outsourcing extremely attracting to companies, especially if they operate internationally. In the past, the situation was quite different. In the past, governments conducted protectionist policies based on Keynesian principles and conservative approaches to the regulation of the development of national economies. Governments were concerned with the protection of national economies and, to meet this goal, they raised fiscal barriers. In such a way, domestic companies turned out to be in an advantageous position compared to the rivals from abroad (Luttwak, 1999).
In such a situation, outsourcing was unreasonable and unnecessary because governments did not stimulate free trade, free movement of the labor force and capital. As a result, companies were interested in the investment into the domestic economy, while the employment of the local labor force were economically more profitable for companies than outsourcing because of high fiscal barriers and consistent restrictions of the movement of capital and labor force. The limited movement of the labor force prevented companies from transferring their experienced employees and managers from country to country spreading the corporate knowledge and experience in all units of the companies (Held, 2004).
At first glance, such policies raised consistently the cost of the labor force and existing barriers prevented not only outsourcing but also faster economic development and business development. On the other hand, such a situation had significant advantages compared to the current situation when outsourcing has virtually become a norm for the modern business. In this respect, it should be said that the business developed strategies and technologies which could save the intellectual property and innovations of each company because they were not interested in sharing knowledge as is the case of outsourcing, which welcomes sharing knowledge and experience between different units of the company and different companies as well (Kristol and Kagan, 2000). The latter means that, when companies outsource some services, for instance call-centers in India being outsourced by American or European companies, like HSBC, they share knowledge, information and important data as well as innovations with companies they outsource to. Hence, the HSBC, being based in the UK, expanded its business internationally to such countries as India, where the information obtained from the mother company was misused that provoked a serious scandal. This scandal has actually revealed the vulnerability of outsourcing to misuse of information and relativity of the privacy and intellectual property rights in the globalized economy where outsourcing emerges. Obviously, such a situation was impossible in the past, before the emergence of outsourcing en masse because companies kept information in secret and had well-developed security systems (Lal, 2006) & (Mishra, 2007).
The weakness of outsourcing made clients of companies vulnerable to such problems as identity theft, information breaches, and others. Nevertheless, outsourcing keeps progressing because costs of outsourcing are lower compared to investments of companies in the development of their own production facilities or services. Therefore, companies often prefer outsourcing because benefits of outsourcing outweigh its drawbacks, at least for business, whereas it is employees and clients, who lose.
Thus, outsourcing brings a number of problems as well as benefits. Outsourcing decreases costs of production, contributes to the localization of the production, and expansion of business worldwide. On the other hand, it raises such social problems as unemployment, low wage rates, and others.