| Outsourcing is the delegation of tasks or jobs from internal production to an external entity (such as a
subcontractor). Most recently, it has come to mean the elimination of native staff to staff overseas, where salaries are markedly
lower. This is despite the fact that the majority of outsourcing that occurs today still occurs within country boundaries,
especially in North America. It became a popular buzzword in business and management in the 1990s.
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.
The concept started with Ross Perot when he founded Electronic Data Systems in 1962. EDS would tell a prospective client, "You are familiar with designing, manufacturing and selling furniture, but we're familiar with managing information technology. We can sell you the information technology you need, and you pay us monthly
for the service with a minimum commitment of two to ten years."
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. Outsourcing business is characterized by expertise not inherent to the
core of the client organization.
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.
The international context
With the rise of globalization, many companies are turning to either
offshoring, offshore outsourcing or Global Sourcing. Offshore outsourcing more and more takes the shape of
Business Process Outsourcing, where whole business processes (such as support and
development) are outsourced. The client is usually free to choose who provides the outsourced business processes, while stock
markets press the company to do more for less. This requires that managers search out the cheapest sources they can find. In
countries like India and China (primarily
Bangalore in India), companies like IBM,
Microsoft, Hewlett
Packard, and Novell choose to get services from sub-contractors in these countries
or move many development and support jobs there. Smaller businesses can also take advantage of freelancing on the Internet to get smaller projects
done by offshore developers at minimum cost.
This practice became even more popular after the dot-com crash
of the early 21st century. As many businesses struggled with cash-flow
problems, many investors were leery of investing money in high-tech companies, which many felt were still vulnerable to the
dot-com effect. Struggling to do more with less, companies looked for less expensive avenues of development and support. For the
United States, India seemed like
a perfect resource for these needs since most nationals spoke English—a side-effect of several decades of British
colonial rule. A company can hire an engineer in India, for example, for US$10,000 a year where an equally qualified engineer in
the U.S. could cost $60,000-$90,000 a year.
A side effect of this practice led to the domestic unemployability of thousands of high-tech professionals, many of whom were
new college graduates. Many of these new graduates studied high-tech fields specifically because a few years earlier, they were
told there was an earnest need for people with the skills they actively acquired. Many companies required their employees to
train their off-shore replacements, after which they were downsized (laid off).
In practice, this trend has experienced mixed results. Some companies, which were required to hire off-shore talent by
investors, reported communication barriers and high foreign personnel turnover rates. They would often ask for one thing, but be
delivered a different item. Communication between onsite and offshore teams is a must. Attrition in the offshore company is
another issue. One company in Pleasanton, California
specializes in fixing jobs that were botched due to offshoring.
Because of the outsourcing of many jobs from the United States to
India, the prominence of Bangalore as a high-tech region has caused the rise of the term "Don't Get Bangalored" in American
business. The term refers to loss of American jobs overseas. There are several US websites that sell "Don't Get Bangalored"
T-shirts.
Some companies report favorable results . One company said that the low cost of his Indian development team allows him to hire
higher-paid American lead developers. Major companies doing outsourcing include Microsoft, Cisco Systems and IBM to name a few.
Outsourcing, especially BPO (Business Process Outsourcing), has long been a factor in American business, but the trend is
beginning to reach Europe. More outsourcing deals were signed there last quarter than
in any single quarter since 2000. According to a recent Zogby International poll, 71% of
Americans feel that outsourcing is bad for the nation's economy. But most economists feel that it will inevitably remain a part of global trade.
Outsourcing is not just related to the services sector. A lot of manufacturing of products is also outsourced to countries
like China and Taiwan. Consumer products including clothes and computer hardware are manufactured in these countries due to cheap
labor. These products in turn lead to a cheaper prices in the consuming nations.
Politics
California Governor Arnold Schwarzenegger vetoed a bill that would have barred state
contractors or agencies from outsourcing jobs offshore. Democratic Presidential candidate John
Kerry, who had earlier denounced as "traitors" CEOs of US companies outsourcing to
countries like India and China, acknowledged that the practice is here to stay but promised a level-playing field for the
American worker.
Research
Milken Institute
From: The Milken Institute Review - December 2004
We looked into what happens to a dollar of U.S. corporate spending when a company moves a service job to India. We found that,
far from being a zero-sum game, offshoring is a story of mutual gain, benefiting both countries.
The receiving economy (India) captures 33 cents, in the form of wages paid to local workers, profits earned by local
outsourcing providers and their suppliers, and taxes collected from second- and third-tier suppliers to the outsourcing
companies.
But the gains to the U.S. economy are much larger. The most obvious source of value is the cost savings enjoyed by U.S.
companies. Thus, far from being bad for the United States, offshoring creates net value for the economy – to the tune of
$1.12 to $1.14 for every dollar that goes abroad.
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