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Outsourcing is the process of contracting an existing business process which an organization previously performed internally to an independent organization, where the process is purchased as a service. Though this practice of purchasing a business function--instead of providing it internally--is a common feature of any modern economy, the term outsourcing became popular in America near the turn of the 21st century. An outsourcing deal may also involve transfer of the employees involved to the outsourcing business partner.[1]
Although the definition of outsourcing includes both foreign or domestic contracting,[2] the term is sometimes used exclusively referring to the former. The more clear term for this is offshoring, which is described as “a company taking a function out of their business and relocating it to another country,” [3] whether the external country is physically offshore or not.
The opposite of outsourcing is called insourcing, and is sometimes accomplished via vertical integration.
Two organizations may enter into a contractual agreement involving an exchange of services and payments. Outsourcing is said to help firms to perform well in their core competencies and mitigate shortage of skill or expertise in the areas where they want to outsource.[4]
In the early 21st century businesses increasingly outsourced to suppliers outside their own country, sometimes referred to as offshoring or offshore outsourcing. Several related terms have emerged to refer to various aspects of the complex relationship between economic organizations or networks, such as nearshoring, crowdsourcing, multisourcing[5][6] and strategic outsourcing.[7]
Outsourcing can offer greater budget flexibility and control. Outsourcing lets organizations pay for only the services they need, when they need them. It also reduces the need to hire and train specialized staff, brings in fresh engineering expertise, and reduces capital and operating expenses.[8]
One of the biggest changes in the early 21st century came from the growth of groups of people using online technologies to use outsourcing as a way to build a viable service delivery business that can be run from virtually anywhere in the world. The preferential contract rates that can be obtained by temporarily employing experts in specific areas to deliver elements of a project purely online means that there is a growing number of small businesses that operate entirely online using offshore contractors to deliver the work before repackaging it to deliver to the end user. One common area where this business model thrives is in provided website creating, analysis and marketing services. All elements can be done remotely and delivered digitally and service providers can leverage the scale and economy of outsourcing to deliver high value services at reduced end-customer prices.
The most common reasons why companies decide to outsource include cost reduction and cost savings, the ability to focus its core business, access to more knowledge, talent and experience, and increased profits.
Many companies decide to outsource because it cut costs such as labor costs, regulatory costs, and training costs. Foreign countries tend to have workers who will complete the same amount of work as in the United States, but for less than half the salary that an American employee will make [9]. This motivates companies to outsource overseas to find foreign workers who are willing to work for these lower wages. The company can spend up to half the usual cost to train these workers to become experts in a different country [10]. Lower regulatory costs are an addition to companies saving money when outsourcing. Comparing the costs to employing a worker in the United States to a worker in China, it is noticed that an employer in the U.S. has to pay higher taxes (social security, Medicare, safety protection (OSHA regulations) and also FICA (taxes))[11].
Companies are able to focus their money and resources more towards improving the core aspects of its business when outsourced. For example an insurance company may outsource its landscaping functions to a service provider that specializes in landscaping since it is irrelevant to the core operations of insurance. The landscaping is performed by an expert outsourced organization and the insurance company can focus on doing what it specializes in. This allows the outsourcing company to build onto its core functions that keep the business running smoothly[12]. Another example is that companies and public entities such as a public school district that outsources functions, such as their payroll offices to companies like ADP or Ceridian, which specialize in payroll functions.
In the case of outsourcing, firms may find that workers in other countries can provide better customer support than their domestic counterparts. For example, an online coffee shop owner who moved his calling center to the Philippines found that his customers received better customer support from workers in this country.[13]
Revenue and profit plays a large role in the reason for a company outsourcing. Since the costs are cheaper in different countries for a corporation to run it, as well as to train the employees, this saves the company a large sum of money. More profit comes in when the vendors are able to purchase products at a less expensive rate and continue to sell them at a reasonable price for consumers. The prices are reduced for services as well as products when purchased at a cheaper price.[14]
When companies offshore services, even though it may not be the core parts of the business, those jobs leave the home country for foreign countries. [15]. Outsourcing may increase the risk of leakage, reduce confidentiality, as well as introduce additional privacy and security concerns.[16]
Companies are able to provide services and products to consumers at a cheaper price while still having a large margin for profit. This profit margin benefits both the company as well as the consumer. The cheaper prices lead to an increase a company’s economy. Although losing jobs hurts the economy because more citizens become unemployed, the cheaper prices allows customers to purchase more products and services which helps to rebuild an economy[17].
Greater physical distance between higher management and the production floor employees often requires a change in management methodologies, as inspection and feedback may not be as direct and frequent as in internal processes. This often requires the assimilation of new communication methods such as Voice over ip, Instant messaging, and Issue Tracking Systems, new Time management methods such as Time Tracking Software, and new cost and schedule assessment tools such as Cost Estimation Software.
Quality of service is best measured through customer satisfaction questionnaires which are designed to capture an unbiased view.[18]
In the area of call centers end-user-experience is deemed to be of lower quality when a service is outsourced. This is exacerbated when outsourcing is combined with offshoring to regions where the first language and culture are different.[19]
Foreign Call center agents may speak with different linguistic features such as accents, word use and phraseology, which may impede comprehension. The visual clues that are missing in a telephone call may lead to misunderstandings and difficulties.[20]
Before outsourcing an organization is responsible for the actions of all their staff and liable for their actions. When these same people are transferred to an outsourcer they may not change desk but their legal status has changed. They are no longer directly employed or responsible to the organization. This causes legal, security and compliance issues that need to be addressed through the contract between the client and the suppliers. This is one of the most complex areas of outsourcing and requires a specialist third party adviser.[citation needed]
Fraud is a specific security issue that is criminal activity whether it is by employees or the supplier staff. However, it can be disputed that the fraud is more likely when outsourcers are involved, for example credit card theft when there is scope for fraud by credit card cloning. In April 2005, a high-profile case involving the theft of $350,000 from four Citibank customers occurred when call center workers acquired the passwords to customer accounts and transferred the money to their own accounts opened under fictitious names. Citibank did not find out about the problem until the American customers noticed discrepancies with their accounts and notified the bank.[21]
In the engineering discipline there has been a debate about the number of engineers being produced by the major economies of the United States, India and China. The argument centers around the definition of an engineering graduate and also disputed numbers. The closest comparable numbers of annual graduates of four-year degrees are United States (137,437) India (112,000) and China (351,537).[22][23]
Companies looking to outsource their engineering activities should evaluate the capabilities of the providers. There are many bench marking reports by independent research and consulting firms which analyze the vendors capabilities.[citation needed]
The early trend in outsourcing was manifest in a financial construct where a function's associated capital and personnel were sold to a vendor and then rented back over a series of years. Early benefits were a boost in expertise and efficiency as outsource vendors had more focus and capability in their specialization. As time progressed, the year 0 benefit was off the books, customer needs evolved and contracts generally aged poorly. Rigid contracts hampered the ability of customers to respond to emerging business drivers, and simultaneously tied the hands of the vendor's team who was focused on increased efficiencies for static problems. The result tended to be additional "project" contracts for incremental changes in a monopoly environment. Many deals became contentious, and many customers have become very uncomfortable surrendering so much power to a single vendor. As the contract aged, it became increasingly difficult to even negotiate with vendors with confidence, because the customer began to lack any real knowledge of the cost structure of the function, or the competitive situation of the vendor.
Industry leaders turned to each other, trade journals and management consultants to try to regain control of the situation, and the next answer that grabbed hold of the industry was labor cost arbitration; leveraging cheap, offshore resources to replace or pressure increasingly expensive legacy outsource vendors. Pressure led incumbent vendors to move resources offshore, or to be replaced wholesale. As this renegotiation was under way, many customers seized the opportunity to restructure to gain more control, transparency and negotiating power. The end result has been fragmentation of outsource contracts and a decline in mega-deals. Many companies are now relying on several vendors who each offer specialization and / or lowest cost.
As mentioned above, outsourcing has gone through many iterations and reinventions. Some outsourcing deals have been partially or fully reversed citing an inability to execute strategy, lost transparency & control, onerous contractual models, a lack of competition, recurring costs, hidden costs, etc... Many companies are now moving to more tailored models where along with outsource vendor diversification, key parts of what was previously outsourced has been insourced. Insourcing has been identified as a means to ensure control, compliance and to gain competitive differentiation through vertical integration or the development of shared services [commonly called a 'center of excellence']. Insourcing at some level also tends to be leveraged to enable organizations to undergo significant transformational change.[citation needed]
Further, the label outsourcing has been found to be used for too many different kinds of exchange in confusing ways. For example, global software development, which often involves people working in different countries, it cannot simply be called outsourcing. The outsourcing-based market model fails to explain why these development projects are jointly developed, and not simply bought and sold in the marketplace. Recently, a study has identified an additional system of governance, termed algocracy, that appears to govern global software projects along side bureaucratic and market-based mechanisms. The study[24] distinguishes code-based governance system from bureaucracy and the market and underscores the prominent features of each organizational form in terms of its ruling mechanism: bureaucracy (legal-rational), the market (price), and algocracy (programming or algorithm). So, global software development projects, though not insourced, are not outsourced either; rather, they are developed together where a common software platform allows different teams around the world to work on the same project together.
From the standpoint of labor, outsourcing may represent a new threat, contributing to worker insecurity, and reflective of the general process of globalization.[25]
On June 26, 2009, Jeff Immelt, the CEO of General Electric, called for the United States to increase its manufacturing base employment to 20% of the workforce commenting that the U.S. has outsourced too much and can no longer rely on consumer spending to drive demand.[26]
Western governments may attempt to compensate workers affected by outsourcing through various forms of legislation. In Europe, the Acquired Rights Directive attempts to address the issue. The Directive is implemented differently in different nations. In the United States, the Trade Adjustment Assistance Act is meant to provide compensation for workers directly affected by international trade agreements. Whether or not these policies provide the security and fair compensation they promise is debatable.
"Outsourcing" became a popular political issue in the United States, having been confounded with offshoring, during the 2004 U.S. presidential election. The political debate centered on outsourcing's consequences for the domestic U.S. workforce. Democratic U.S. presidential candidate John Kerry criticized U.S. firms that outsource jobs abroad or that incorporate overseas in tax havens to avoid paying their "fair share" of U.S. taxes during his 2004 campaign, calling such firms "Benedict Arnold corporations".[27]
Criticism of outsourcing, from the perspective of U.S. citizens, generally revolves around the costs associated with transferring control of the labor process to an external entity in another country. A Zogby International poll conducted in August 2004 found that 71% of American voters believed that “outsourcing jobs overseas” hurt the economy while another 62% believed that the U.S. government should impose some legislative action against companies that transfer domestic jobs overseas, possibly in the form of increased taxes on companies that outsource.[28]
Union busting is one possible cause of outsourcing. As unions are disadvantaged by union busting legislation, workers lose bargaining power and it becomes easier for corporations to fire them and ship their job overseas.[29]
Another given[by whom?] rationale is the high corporate income tax rate in the U.S. relative to other OECD nations,[30][31][32] and the practice of taxing revenues earned outside of U.S. jurisdiction, a very uncommon practice. However, outsourcing is not solely a U.S. phenomenon as corporations in various nations with low tax rates outsource as well, which means that high taxation can only partially, if at all, explain US outsourcing. For example, the amount of corporate outsourcing in 1950 would be considerably lower than today, yet the tax rate was actually higher in 1950.[33]
It is argued[by whom?] that lowering the corporate income tax and ending the double-taxation of foreign-derived revenue (taxed once in the nation where the revenue was raised, and once from the U.S.) will alleviate corporate outsourcing and make the U.S. more attractive to foreign companies. However, while the US has a high official tax rate, the actual taxes paid by US corporations may be considerably lower due to the use of tax loopholes, tax havens, and "gaming the system".[34] Rather than avoiding taxes, outsourcing may be mostly driven by the desire to lower labor costs (see standpoint of labor above). Sarbanes-Oxley has also been cited as a factor for corporate flight from U.S. jurisdiction.
Where outsourcing involves the transfer of an undertaking, it is subject to Council Directive 77/187 of 14 February 1977, on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of businesses (as amended by Directive 98/50/EC of 29 June 1998; consolidated in Directive 2001/23 of 12 March 2001).[35] Under that directive, rights acquired by employees with the former employer are to be safeguarded when they, together with the undertaking in which they are employed, are transferred to another employer, i.e. the contractor. An example of a case involving such contracting-out was the decision of the European Court of Justice in Christel Schmidt v. Spar- und Leihkasse der früheren Ämter Bordesholm, Kiel und Cronshagen, Case C-392/92 [1994]. Although subsequent decisions have disputed whether a particular contracting-out exercise constituted a transfer of an undertaking (see, for example, Ayse Süzen v. Zehnacker Gebäudereinigung GmbH Krankenhausservice, Case C-13/95 [1997]), in principle, employees of an enterprise outsourcing part of its activities in which they are employed may benefit from the protection offered by the directive.
Seeking to implement the cost-cutting solutions, many Western European firms have been transferring tech projects eastward. For example, Deutsche Bank has some of its software developed in Ukraine, Siemens possess R&D center in Romania. Europe Outsourcing has produced outstanding results and henceforward they are increasing them in numbers.[citation needed]
- ^ "Terms and Definitions". ventureoutsource.com. http://www.ventureoutsource.com/contract-manufacturing/information-center/terms-and-definitions/3/. Retrieved 2007-10-05.
- ^ Hira, Ron, and Anil Hira. Outsourcing America: What's behind Our National Crisis and How We Can Reclaim American Jobs? New York: AMACOM, 2008. Print # 67-96.
- ^ Davies, Paul. What's This India Business?: Offshoring, Outsourcing, and the Global Services Revolution. London: Nicholas Brealey International, 2004. Print.
- ^ Overby, S (2007) ABC: An Introduction to Outsourcing. CIO.com.
- ^ (Q4 2006)Mandatory Multisourcing Discipline Business Trends Quarterly
- ^ (2006) Mandatory Multisourcing Discipline
- ^ see Holcomb & Hitt, 2007
- ^ Olive, B (2004). "Outsourcing Growing, Despite Controversy". Power: 148(4), 19-20..
- ^ Hira, Ron, and Anil Hira. Outsourcing America: What's behind Our National Crisis and How We Can Reclaim American Jobs? New York: AMACOM, 2008. Print # 67-96.
- ^ Weidenbaum, Murray. Outsourcing : Pros and Cons 19.1 (2004): 23-37. America: History and Life. Web. 13 Mar. 2012.
- ^ Buchholz, Todd G. Bringing the Jobs Home: How the Left Created the Outsourcing Crisis--and How We Can Fix It. New York: Sentinel, 2004. Print 97-118.
- ^ Forey, Gail, and Jane Lockwood. Globalization, Communication and the Workplace: Talking across the World. New York: Continuum, 2011. Electronic Book #21-26.
- ^ http://www.businessweek.com/magazine/content/06_05/b3969401.htm
- ^ Koulopoulos, Thomas M.: Driving Innovation and Growth through Outsourcing. Avon, MA: Platinum/Adams Media, 2006. Print.
- ^ Hira, Ron, and Anil Hira. Outsourcing America: What's behind Our National Crisis and How We Can Reclaim American Jobs? New York: AMACOM, 2008. Electronic Book # 67-96.
- ^ Lawrence, Robert Z. Single World, Divided Nations: International Trade and OECD Labor Markets. Washington, DC: Brookings Institution 1996. Print #89-102.
- ^ Weidenbaum, Murray. Outsourcing: Pros and Cons 19.1 (2004): 23-37. America: History and Life. Web. 13 Mar. 2012. <http:// web.ebscohost.com.ezproxy.drew.edu/ehost/detail?vid=6&hid=18&sid=391a07e0-b76b-47bd-b8e9 47969528c931%40sessionmgr11&bdata=JnNpdGU9ZWhvc3QtbGl2ZSZzY29wZT1zaXRl#db=aph&AN=14244260>.
- ^ Maddock, B. & Warren, C. & Worsley A. (2005) Survey of canteens and food services in Victorian schools.
- ^ Nadeem, S (2009) Macaulay’s (Cyber) Children: The Cultural Politics of Outsourcing in India. Cultural Sociology.
- ^ Alster, N (2005) Customer Disservice. www.CFO.com.
- ^ Ribeiro, J (2005) Indian call center workers charged with Citibank fraud. www.infoworld.com
- ^ Wadhwa, V (2005) About That Engineering Gap. www.businessweek.com
- ^ Gereffi, G. & Wadhwa, V. Framing the Engineering Outsourcing Debate: Placing the United States on a Level Playing Field with China and India. Duke University.
- ^ Aneesh, A. Global Labor: Algocratic Modes of Organization, Sociological Theory 27:4 December 2009
- ^ Krugman, Paul (2006). "Feeling No Pain." New York Times, March 6, 2006.
- ^ Bailey, David and Soyoung Kim (June 26, 2009).GE's Immelt says U.S. economy needs industrial renewal.UK Guardian.. Retrieved on June 28, 2009.
- ^ Croghan, Lore (February 23, 2004). "Kerry Targets N.Y. Firms: 'Benedict Arnold' move sending jobs overseas". Daily News. http://www.nydailynews.com/archives/money/2004/02/23/2004-02-23_kerry_targets_n_y__firms___b.html. Retrieved March 7, 2011.
- ^ Zogby International survey results online at zogby.com
- ^ "Tell Xerox to Stop Unionbusting and Shipping Jobs Overseas". American Rights at Work. http://act.americanrightsatwork.org/p/dia/action/public/?action_KEY=576. Retrieved 2011-03-09.
- ^ "Veronique de Rugy on Corporate Flight & Taxes on NRO Financial". Nationalreview.com. 2002-04-18. http://www.nationalreview.com/nrof_comment/comment-rugy041802.asp. Retrieved 2010-03-15.
- ^ "U.S. Lagging Behind OECD Corporate Tax Trends". The Tax Foundation. 2006-05-05. http://www.taxfoundation.org/news/show/1466.html. Retrieved 2010-03-15.
- ^ John Tamny. "John Tamny on Hillary Clinton Economics on NRO Financial". Article.nationalreview.com. http://article.nationalreview.com/?q=ODZjNjI4ZTNjZmNiOGMxYjAwOTg1ZGI0NmFiOWFjZjI=. Retrieved 2010-03-15.
- ^ Joel Friedman (October 24, 2003). "The Decline of Corporate Income Tax Revenues" (pdf). Center on Budget and Policy Priorities. http://www.cbpp.org/files/10-16-03tax.pdf. Retrieved 2011-03-09.
- ^ "High Corporate Tax Rate Is Misleading at". Smartmoney.com. http://www.smartmoney.com/investing/economy/high-corporate-tax-rate-is-misleading-22463/. Retrieved 2010-03-15.
- ^ "Council Directive 2001/23/EC". EUR-Lex. http://eur-lex.europa.eu/smartapi/cgi/sga_doc?smartapi!celexapi!prod!CELEXnumdoc&lg=EN&numdoc=32001L0023&model=guichett. Retrieved 2011-03-09.
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