Outsourcing

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Outsourcing (or contracting out) is often defined as the delegation of non-core operations or jobs from internal production to an external entity (such as a subcontractor) that specializes in that operation. Outsourcing is a business decision that is often made to focus on core competences. A subset of the term (offshoring) also implies transferring jobs to another country, either by hiring local subcontractors or building a facility in an area where labor is cheap. It became a popular buzzword in business and management in the 1990s. EDS was the first company to establish the outsourcing business.

Contents

Overview

Outsourcing is defined as the management and/or day-to-day execution of an entire business function by a third party service provider.

Outsourcing and out-tasking involve transferring a significant amount of management control to the supplier. Buying products from another entity is not outsourcing or out-tasking, but merely a vendor relationship. Likewise, buying services from a provider is not necessarily outsourcing or out-tasking. Outsourcing always involves a considerable degree of two-way information exchange, co-ordination, and trust.

Organizations that deliver such services feel that outsourcing requires the turning over of management responsibility for running a segment of business. In theory, this business segment should not be mission-critical, but practice often dictates otherwise. Many companies look to employ expert organizations in the areas targeted for outsourcing. Business segments typically outsourced include Information Technology, Human Resources, Facilities and Real Estate Management and Accounting. Many companies also outsource customer support and call center functions, manufacturing and engineering. Outsourcing business is characterized by expertise not inherent to the core of the client organization.

The overhead costs of customer service are typically less where outsourcing has been used leading to many companies, from utilities to manufacturers, closed their in-house customer relations departments and outsourced their customer service to third party call centers. The logical extension of these decisions was of outsourcing labor overseas to countries with lower labor costs, this trend is often referred to as offshoring of customer service.

Due to this demand call centers have sprung up in India, Pakistan, the Philippines, Canada and even the Caribbean. Many companies, most notably Dell and AT&T Wireless, have gained significant negative publicity for their decisions to use Indian and Pakistani based labor for customer service and technical support; one of the most prominent complaints being the expectation that the replacement staff will have more trouble communicating with customers.

A related term is out-tasking: turning over a narrowly-defined segment of business to another business, typically on an annual contract, or sometimes a shorter one. This usually involves continued direct or indirect management and decision-making by the client of the out-tasking business.

Criticisms of Outsourcing

The term "outsourcing" became more well known largely because of a growth in the number of high-tech companies in the early 1990s that were often not large enough to be able to easily maintain large customer service departments of their own. In some cases these companies hired technical writers to simplify the usage instructions of their products, index the key points of information and contracted with temporary employment agencies to find, train and hire generally low-skilled workers to answer their telephone technical support and customer service calls. These agents generally worked in call centers where the information needed to assist the calling customer was indexed in a computer system. The agents were often not able to tell the customer they did not actually directly work for the original manufacturer. In some cases, the agents are not allowed to even give out their real name.

Because the workers were not actually paid agents of the company, it has been argued that there is less incentive for the agent to show loyalty or work ethic in its representation of said company. It has been therefore argued that quality levels of customer service and technical support of outsourced tasks are lower than where they have remained 'in-house'.

Criticisms of outsourcing from the public and media tend to concentrate on lackluster customer service and technical support being provided by either local workers who are not actually employees of the company, or by overseas workers attempting to communicate with Americans in broken or incomprehensible English. Defenders of outsourcing say if this were true, then companies would experience market forces compelling them to return service and support handling back from the outsourced company. However, service and support are often not considered by customers as part of their original purchases. Customers only experience outsourced service and support after they have spent their money since sales is generally done in-house by the original company. Dealing with lackluster outsourced service is a negative surprise after the money is already spent.

There are also security issues concerning companies giving outside access to sensitive customer information. In April of 2005, a high-profile case involving the theft of $350,000 from four Citibank customers occurred when Indian call center workers in Pune, India, 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.

Democratic U.S. presidential candidate John Kerry blasted firms that outsource jobs abroad or that incorporate overseas in tax havens to avoid paying their fair share of US taxes during his unsuccessful 2004 campaign, calling such firms "Benedict Arnold corporations," in reference to the infamous traitor Benedict Arnold.


It is argued a malicious implementation of the Higher Education Role Analysis (HERA) in the UK may force Higher Education administrative and support staff to prematurely retire or seek for new employment in other organisations, thus freeing of staff many departments which could then be effectively outsourced. Outsourcing departments like Accounts, Payroll and Procurement is now common practice, as seen in August 2005 at the University of Portsmouth.

Arguments for Outsourcing

A recent poll of economists by the Wall Street Journal found that only 16 percent of them saw outsourcing as having a significant impact on the overall job picture. [1]

One criticism of outsourcing is that product quality suffers. But the outsourcing firm has freedom to move a firm department or division back home if its profits are suffering as a result of poor quality. In fact, many American companies like Dell have moved customer service divisions back to America as a result of poor quality [2]. The decision to outsource is like any other business investment decision in that there is risk. Critics of outsourcing often talk about outsourcing failures without mentioning instances of outsourcing success. The decision to outsource is like the decision to expand a business overseas, to incorporate computer technology, or to hire new workers. If the company does it correctly, it benefits from higher profits. Proponents of outsourcing believe that arguing that outsourcing leads to lower product quality is pointless because if it were true, consumer demand will force firms to shift back to producing the good or service in-firm rather than out-firm. That many large businesses outsource and continue to outsource suggests that in many cases outsourcing is successful in that it increases product quality, lowers costs substantially, or both.

Some economists have argued that outsourcing is a form of technological innovation analogous to machines on a car assembly line. American Motor Company Ford relied heavily on workers in the past to assemble car parts. Today these workers are replaced by machines because they are cheaper in the long run, produce better quality products, or a combination of both (the firm is trying to increase its quality to cost ratio, quality being defined by the consumer and inferred from revenue). Economists argue that machines on the car assembly line must have a higher quality to cost ratio than workers because, if they didn’t, there would be no incentive for the firm to replace workers with machines. Although workers’ jobs were lost from this replacement of workers with machines, the Ford Motor Company made more money by lowering costs (or increasing quality, thereby increasing revenue). Some argue that greater profits to the labor owners lead to higher consumption, which leads to further job creation, allowing those who lost jobs to gain jobs in other sectors of the economy. However, economists do concede that labor is not always perfectly mobile and that some workers may have difficult getting new jobs. Some economists suggest that government training programs be provided.

A firm's motivation for replacing workers with machines is identical to the motivation for outsourcing, i.e. the firm is trying to maximize the quality of its product given cost (its productivity). Because outsourcing allows for lower costs, even if quality reduces slightly or not at all, productivity increases, which benefits the economy on aggregate.

Economist Thomas Sowell from the University of Chicago said “anything that increases economic efficiency--whether by outsourcing or a hundred other things--is likely to cost somebody's job. The automobile cost the jobs of people who took care of horses or made saddles, carriages, and horseshoes.” [1] Walter Williams, another economist, said “we could probably think of hundreds of jobs that either don't exist or exist in far fewer numbers than in the past--jobs such as elevator operator, TV repairman and coal deliveryman. ‘Creative destruction’ is a discovery process where we find ways to produce goods and services more cheaply. That in turn makes us all richer.” [2]

Professor Drezner reports that for every dollar spent on outsourcing to India, the United States reaps between $1.12 and $1.14 in benefits. [3] Drezner also points out that large software companies such as Microsoft and Oracle have increased outsourcing and used the savings for investment and larger domestic payrolls. Nationally, 70,000 computer programmers lost their jobs between 1999 and 2003, but more than 115,000 computer software engineers found higher-paying jobs during that same period. [3]

Notes

  1. ^  This view is born out by a recent study by Richard Freeman at the National Bureau of Economic Research in Washington. He found that in the year 2000, 17 percent of university bachelor degrees in the U.S. were in science and engineering compared with a world average of 27 percent and 52 percent in China. Universities in the European Union granted 40 percent more science and engineering doctorates than the United States, with that figure expected to reach nearly 100 percent by about 2010 according to Freeman's paper.
  2. 1. ^  “Outsourcing” and “Saving Jobs” by Thomas Sowell
  3. 2. ^  Should we “Save Jobs”? by Walter Williams
  4. 3. ^  "The Outsourcing Bogeyman" (Foreign Affairs, May/June 2004)

See also

External links

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