Advantages And Disadvantages of Offshore Outsourcing
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Published: Tue, 06 Jun 2017
The advantages and disadvantages of offshore outsourcing to the western countries (and workforce) and emerging-market countries(and workforce) is discussed based on the context of Western countries outsourcing a part of their business process to vendors primarily from developing countries like China, India, Indonesia, Philippines etc.
ADVANTAGES OF OFFSHORE OUTSOURCING TO WESTERN COMPANIES AND WORKFORCE IN WESTERN COUNTRIES
Offshore outsourcing benefits the outsourcer to have an edge over the other competitors in terms of cost reduction, increased productivity and profits by relegating some of its functions to other countries’ third part contractors and concentrating mainly on their core business (Bahrami 2009).
The exploiting of geographical location advantages such as low cost (lower prices for input), availability and quality of resources, larger pool of skilled labours, transportation costs, trade restrictions creates a repositories of valuable rents thus enhancing productivity(Bahrami 2009; Bunyaratavej 2008; Gereffi 2005; Prola 2004). Wells Fargo VISA,a US based company uses contact centres of Mahindra-Satyam, India to make marketing calls to their potential customers in Seattle due to availability of inexpensive labour, abundance of educated English-speaking workforce and government incentives. Philips, Dell, Motorola are buying digital device designs completely from Asian developers. Both these examples are in consistency with the RBV (Resource based view) which suggests that the competitive edge for the firm is gained through maximization of the long-term profits by developing and exploiting resources (Javalgi 2009).
The flexible labour laws and time zone difference in developing countries helps to speed up the business process by employees working round the clock in various shifts. The U.S companies like Dell, American Express and Eastman Kodak offer 24/7 customer care services by outsourcing such services to developing countries like India.
According to Edwards (1998), cited in Bahrami (2009), by offloading a part of the repetitive business processes to the emerging market workforce, the skilled labour in the western labour pool gets an opportunity to be innovative and hone managerial techniques which helps in productive utilisation of resources thus leading to the profitability of the company.
The workforce in western countries who would have lost their job to foreign vendors are trained and reallocated to an advanced level of working which in turn helps in developing new skills and techniques contributing to an improved set of domestic resources (Kedia and Mukherjee 2009).
DISADVANTAGES OF OFFSHORE OUTSOURCING TO WESTERN COMPANIES AND WORKFORCE IN WESTERN COUNTRIES
There is a misconception that offshore outsourcing to low wage countries reduce cost because of cheap labour. According to UNCTAD (2005),in some cases considering hidden costs like taxes, duties, management attention, communication and co-ordination expenses etc,the venture turns out to be expensive.
The geographical distance and cultural differences act as a barrier for clients to monitor the quality of suppliers’ work. This can be resolved to an extent if a manager from the western company keeps visiting the vendor location in person (Khan et al. 2003; UNCTAD 2005).
It has been recognised by Javalgi (2009) that the absence of global laws or enforcement about intellectual property rights and privacy laws acts as a major threat to the outsourcer companies. The confidential data of outsourcers are at risk in developing countries where these laws are not strictly enforced. When Taiwan’s BenQ was given a contract by Motorola for designing and manufacturing mobile phones, Ben Q violated the contract and created its own brand and Market in China for selling mobile phones (Bahrami 2009). As a measure to avoid such fraudulent cases Khan (2003) suggests joint venture between the outsourcer and overseas supplier as an option which binds the supplier to handle their customer’s data with utmost care as the supplier will also be a partner in this case.
The loss of western country jobs to foreign providers might lead to negative publicity of the company. Examples about the accusation faced by the US companies like Dell, IBM, City Group for exporting jobs overseas leading to job losses in the USA (Hill 2007, cited in Bahrami 2005) demonstrates this issue.
The unethical practices followed by suppliers will have an impact on the reputation of western companies. Nike and Adidas being criticized by the media because of their Indonesia’s supplier sweatshops’ poor workplace standards attracted negative publicity and thus reduced sales. To avoid such issues, companies are now taking precautionary measures like initiatives to improve existing poor conditions and also signing contract only with ethical suppliers.
For companies involved in outsourcing their engineering and design technologies overseas, keeping abreast with current technological developments will be very difficult since the company will not be directly involved in the process which might lead to diminishing value of the firm’s competitive advantage, level of expertise and competencies (Kotabe1998, cited in Kotabe and Mudambi 2009).For example, General Electric’s (US based company) heavy dependency on Samsung (South Korean Company) for manufacturing its Microwaves ultimately led to the success of Samsung in the same field(Javalgi 2009).
Western companies’ management might benefit in terms of cost reduction by sub-contracting its work to an emerging market country firm, on the flip side it puts a tremendous amount of pressure on their own workforce due to replacement with the equally skilled lower wage overseas employees and also builds an intense competition as they will be competing with the global workforce (Shao and David 2007).
The labour force sustainability in any economy is inter-dependent. If technologists for IT activities are outsourced, even the Human resource personnel and other support jobs become redundant in the home country (Shao and David 2007). During 2003 “… 400,000 US jobs have already gone offshore” (Ford 2003).This job shift impacts all sectors of western workforce. Also the older western workers failing to acquire new skills or failing to search for alternate jobs would leave the workforce and become a financial burden to the society (Bahrami 2009).
ADVANTAGES OF OFFSHORE OUTSOURCING TO EMERGING MARKET COMPANIES AND WORKFORCE IN EMERGING MARKET COUNTRIES
New business opportunities available to emerging market companies puts them in limelight and aids in global recognition by being a part of “global commodity chain” which would attract more clients and hence enhance its reputation. For example, Tata consultancy Services, Infosys and Wipro are the top three India based information service companies which have carved their niche in the global market mainly by serving US clients.
The services offered by emerging market companies are expected to be of high standards to match requirements of western companies and to rope in new customers. Hence quality and capability standards of the labour pool (i.e. language, computer skills etc.) will be improved not just to match the requirements but also to attract Multi-national companies from other countries.
The stimulation of growth and starting of local vendors due to new company establishments would increase the infrastructure, availability of human resource jobs and also the job opportunities and wages thus improving standards of living in developing countries (Farrel et al. 2006).
DISADVANTAGES OF OFFSHORE OUTSOURCING TO EMERGING MARKET COMPANIES AND WORKFORCE IN EMERGING MARKET COUNTRIES
Emerging market companies heavily relying on offshore clients for their survival will have its profitability entwined with the western economic and political stability and hence will be affected when there is fluctuation in foreign currency rates or any political instability (Birou and Fawcett 1993; Huchzermeier and Cohen 1996; Cho and Kang 2001; Kouvelis 1999; Chopra and Sodhi 2004, cited in Canbolat et al. 2008).
For example, ‘credit-crunch’ during 2008 had an adverse effect on all the globally spread companies dependent on the US market.
The strong market players might overexploit their offshore suppliers through their high bargaining power. Wal-Mart, the US retailer, approximately subcontracts 6000 global suppliers and 80% are from China which imposes strong buyer power on its china suppliers by setting price for some of the products they buy (PBS-Frontline- Is_Walmart_Good_for_America.mpg).
The cultural and linguistic barriers might pose as a problem to communicate and co-ordinate effectively for both the western companies and the developing world companies.
The cream of the workforce will be lured and employed to work for the benefit of the companies of developing countries which would lead to “enclaved development” and international ‘brain drain'(Kobrin 1999) thus widening the economic gap in the society.
The offshore outsourcing business is a dynamic and highly competitive strategy. India, which once had the highest number of contact centre jobs, is recently being out paced by Philippines.”The Philippines now leads India in call-centre jobs, employing 350,000 compared with India’s 330,000…” (Yun and Chu 2011).Replacement of the low wage outsourced vendors due to automation also poses as a threat to emerging market workforce (UNCTAD 2005).
The effect of ‘polarization’, ‘dualism’ and ‘geographical isolation’ would lead to unequal distribution of wealth amongst the developing county’s workforce (Kobrin 1999). Like anti-globalists argue, offshore outsourcing (contributor to the process of globalization) benefits only to those developing countries with a comparative advantage to thrive economically and the others remain neglected. This is the same with respect to the workforce in fewer cities of a country enjoying the limelight and the others being left out. Bangalore and other metropolitan cities in case of India and Shangai in China which are the hotbed for offshore outsourcers enjoy top class services and amenities while the majority of the rural workforce of India and China still faces issues like unemployment and poverty.
Offshore outsourcing can be a win-win situation for both western and emerging market countries if a balance between capitalizing the benefits and adopting measures to counteract the drawback is achieved. The “international divisions of labour on a global scale” which is the result of the capitalist-world system(Gereffi 2009) can lead to what Amable(2000, p.656), cited in(Gereffi 2009) describes as ” institutional complementarily i.e. Multilateral reinforcement mechanism between institutional arrangements” – the existence of western companies facilitating the existence of the vendors in developing countries and vice versa.
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