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Offshore outsourcing became a significant phenomenon recently and draw significant attention from business managers, politicians and journalists. Nearly 400,000 jobs were moved out of the US in 2003 (Agrawal and Farell, 2003). This essay will briefly examine the definition of offshore outsourcing; then discuss the advantages and disadvantages of offshore outsourcing for companies and workforce of western and emerging market; in the end, the future of offshore outsourcing will be discussed as well as how companies and countries facing this situation.
For the purpose of the following discussion, restating the concept and reasons of offshore outsourcing is necessary. Hira,R, and Hira, A. (2005) defined offshore outsourcing as purchasing products or services from a supplier that operates overseas. He listed eight types of outsourcing in his book and suggested that there were differences between offshore outsourcing and offshore sourcing depending on whether or not the overseas supplier is a subsidiary of the company. However, when we focus on the impact to the workforce, both offshore sourcing and offshore outsourcing are important. According to this we prefer offshore sourcing in the discussion of the workforce instead of offshore outsourcing.
Bernan Assoc (2010) pointed out that outsourcing decisions were driven by three sets of drivers: external drivers, internal drivers and the availability of sourcing alternatives. The external drivers include the changes of business environment such as customers' demands, competitors, government regulations, and other structural industry changes. The internal drivers present the desire and willing of the management of a company. While availability of sourcing alternatives indicates the possibility of offshore outsourcing. For instants, the developments in information and communication technologies as well as the global and regional agreements such as WTO, North American Free Trade Agreement and the development of European market with a single currency, facilitated the development of trade on a global basis (Barrar, P. Gervais, R. 2006).
Based on the previous discussion, this essay will then looks into both advantages and disadvantages of offshore outsourcing for western and emerge market companies.
For both western and emerge market companies the benefit through outsourcing is that they could remain or gain competitive advantages, such as lower cost, higher quality, easier assess to talent, lower risk of capital, reducing lead time to the market and so on. Moreover, as we mentioned before, the driver of offshore outsourcing is not only the economic benefits, but more essentially a number of business environmental factors. In fact, the changes of the business environment, especially the customer demands, will effectively influence the companies' strategies. It is obviously that adapting to the environmental changes, satisfying the customer needs means life or death to any company. Although Donald A. Ball (2004) pointed out that 'the primary reason for outsourcing globally is to obtain lower price', he also emphasized that companies could then 'focus scarce resources on their core competencies and leverage the skills of other companies to reduce costs and capital investments, improve flexibility and speed of response, enhance quality, or provide other strategic benefits'. In addition, Saunders et al. (1997) found that the principal motives for outsourcing were 'technological and strategic and not cost reduction'. It also explains not only the western companies willing to outsourcing in developing countries for low cost or natural resources, but also emerge market companies outsourcing in developed countries for new technologies and design. Take the supplier of Wal-mart and Nike for examples. The suppliers of Wal-mart cutting the cost to offer cheaper products to their customer by offshore outsourcing in China. By saving money through outsourcing in china, Nike could concentrate on its core competitive advantage, spending more budge on branding and innovation.
However, outsourcing is associated with several important benefits, it also has risks. Grover et al. (1996) claimed that the acquisition of resources from outside may not guarantee competitive advantage to the firm. Problems such as on-time delivery, customer satisfaction, quality product or service may decline because of delays at third parties. More recently security related risks such as data security protection confidentiality issues have become more prominent (Evaristo et al., 2005). Tejaswini Herath and Rajiv Kishore (2009) developed the figure 1 to show the challenges which the companies will face in different outsourcing stages.
Figure 1. Map of outsourcing stages and related challenge areas.
Tejaswini Herath and Rajiv Kishore (2009)
Vishanth Weerakkody and Zahir Irani (2010) also identified 10 broad themes that influence the offshore outsourcing. These risks, and their fallouts, are clearly evident in the case of Dell.
After an onslaught of complaints, computer maker Dell stopped using a technical support center in India to handle calls from its corporate customers. Some U.S. customers complained that the Indian technical-support representatives were difficult to communicate with because of thick accents and scripted responses. Corporate customers account for about 85% of Dell's business, with only 15% coming from the consumer market.
CNN, November 25, 2003
In addition, for outsourcing suppliers which are usually located in the emerge market, there are findings suggest that 'although offshore outsourcing offers new business opportunities for vendors, much of the outsourced work continues to be in areas of low risk and low value to client businesses. (Weerakkody, V. et. Al. 2010). So the main challenge for outsourcing vendors is therefore to develop strategies that facilitate low cost, high value contracts, without incurring additional risk'.
Secondly, this essay will analysis the impacts to the workforce in both western and emerge market.
For the western countries, the workforce demand and unemployment rate are influenced by offshore outsourcing. The unemployment rate will raise as lots of manufacturing jobs are outsourcing in low labor cost counties. Figure 2 shows the path of US manufacturing employment. Moreover Farrell (2004) found that less than 11 per cent of Americans today are employed in manufacturing, and over 3.3 million service jobs will also be moved to low-cost countries by 2015..
Figure 2. Path of US manufacturing employment (1992-2005)
Source: Bureau of Labor Statistics, Current Employment Survey, January 1992 to May , Baily and Lawrence,2005.
However, N. regory Mankiwa and Phillip Swagelb (2006) argue that 'increased activity and employment by overseas affiliates of US multinationals is associated with increased employment and activity in the US-based parents'. While their argument could be explained by the shifts of workforce demand to high-skilled workers. Feenstra and Hanson (1996) have argued that outsourcing has contributed to an increase in the relative demand for skilled labor in the United States.
Being critical, for the emerge markets which usually be the host countries of outsourcing, advantages and disadvantages for workforce might be controversial. Offshore outsourcing from developed countries did Create employment opportunities to the emerge market workers. However the worker's living standard is still crucial. Low wages was paid to the workers, less protection in the risk environment, especially manufacturing industry. Accodrding to the report, 16 people had attempted to suicide by jumping off Foxconn's factory roofs (12 succeeded) by May 27 2010. As a supplier of Apple, 'Apple's Foxconn workers used to work longer hours, as much as 70 hours a week, making only 51 cents an hour'.(David Gewirtz 2010)
Apparently, it is necessary to set up regulation and pass laws to protect the works. But as Greg O'Leary (1998) argued, those merger market like China, 'the market reforms have not yet produced the democratic or liberal characteristics which have commonly been associated with western capitalism, though there is much discussion of this possibility.' He also indicated that labor market development and changing industrial relations will go through the process of conflict between labor and the state and the capital.
To conclusion, offshore outsourcing is a unavoidable trend in terms of globalization. For companies both in western and merger market, although there are risks, offshore outsourcing provides a way to obtain competitive advantages. For workforce, 'Outsourcing will create winners and losers, and the pain of dislocation will be real for workers and their families.' (Mankiwa, N. G. and Swagelb, P. 2006) Taken together, however, these conclusions suggest that offshore outsourcing is likely to be beneficial as a whole.