outsourcing

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Outsourcing is subcontracting a service, such as product design or manufacturing, to a third-party company.^[1] The decision whether to outsource or to do inhouse is often based upon achieving a lower production cost, making better use of available resources, focussing energy on the core competencies of a particular business, or just making more efficient use of labor, capital, information technology or land resources.^{[citation needed]} It is essentially a division of labour. Outsourcing became part of the business lexicon during the 1980s.

Overview

Outsourcing involves the transfer of the management and/or day-to-day execution of an entire business function to an external service provider.^[2] The client organization and the supplier enter into a contractual agreement that defines the transferred services. Under the agreement the supplier acquires the means of production in the form of a transfer of people, assets and other resources from the client. The client agrees to procure the services from the supplier for the term of the contract. Business segments typically outsourced include information technology, human resources, facilities, real estate management, and accounting. Many companies also outsource customer support and call center functions like telemarketing, CAD drafting, customer service, market research, manufacturing, designing, web development, print-to-mail, ghostwriting and engineering.

Offshoring is outsourcing in which the buyer organization belongs to another country. Outsourcing and offshoring are used interchangeably in public discourse despite important technical differences. Outsourcing involves contracting with a supplier, which may or may not involve some degree of offshoring. Offshoring is the transfer of an organizational function to another country, regardless of whether the work is outsourced or stays within the same corporation/company.^[3][4][5] With increasing globalization of outsourcing companies, the distinction between outsourcing and offshoring will become less clear over time. This is evident in the increasing presence of Indian outsourcing companies in the United States and United Kingdom. The globalization of outsourcing operating models has resulted in new terms such as nearshoring, noshoring, and rightshoring that reflect the changing mix of locations. This is seen in the opening of offices and operations centers by Indian companies in the U.S. and UK. A major job that is being outsourced is accounting and preparation of tax returns.^[6][7]

Multisourcing refers to large outsourcing agreements (predominantly IT).^[8] Multisourcing is a framework to enable different parts of the client business to be sourced from different suppliers. This requires a governance model that communicates strategy, clearly defines responsibility and has end-to-end integration.^[9]

Strategic outsourcing is the organizing arrangement that emerges when firms rely on intermediate markets to provide specialized capabilities that supplement existing capabilities deployed along a firm’s value chain.^[10] Such an arrangement produces value within firms’ supply chains beyond those benefits achieved through cost economies. Intermediate markets that provide specialized capabilities emerge as different industry conditions intensify the partitioning of production. As a result of greater information standardization and simplified coordination, clear administrative demarcations emerge along a value chain. Partitioning of intermediate markets occurs as the coordination of production across a value chain is simplified and as information becomes standardized, making it easier to transfer activities across boundaries.

Due to the complexity of work definition, codifying requirements, pricing, and legal terms and conditions, clients often utilize the advisory services of outsourcing consultants or outsourcing intermediaries to assist in scoping, decision making, and vendor evaluation.

Activities for outsourcing

Research and Development

The competitive pressures on firms to bring out new products at an ever rapid pace to meet market needs are increasing^{[citation needed]}. As such, the pressures on the R&D department are increasing. In order to alleviate the pressure, firms have to either increase R&D budgets or find ways to utilize the resources in a more productive way^{[citation needed]}. There are situations when a firm may consider outsourcing some of its R&D work to a contract research organizations or universities. Reasons why a firm could consider outsourcing are:

• new product design does not work
• project time and cost overruns
• loss of key staff
• competitive response
• problems of quality/yield.

The key drivers for R&D outsourcing are emerging mass markets and availability of expertise in the field^{[citation needed]}. In this context, the two most populous countries in the world, China and India, provide huge pools from which to find talent. Both countries produce over 200,000 engineers and science graduates each year. Moreover both countries are low cost sourcing countries. Other strategic drivers for outsourcing R&D are access to expertise and intellectual property, filling gaps in the capabilities of the R&D function, managing risk better, reducing the time to market, and focusing on the core competence or activities of the firm^{[citation needed]}.

Manufacturing

Often companies will develop and market products but leave the manufacturing to other companies that specialize in it^{[citation needed]}. Thus a factory can do manufacturing for several companies and keep a large manufacturing plant operating at nearly full capacity when no individual contract could justify the expense of maintaining the infrastructure. An example of this would be Fabless semiconductor companies which do design etc but do not have their own, extremely expensive, fabrication facilities. Other examples would be companies that specialize in the tasks of procuring parts, assembly, QA, etc. and market this skills as their primary business to companies that outsource manufacturing to them.

Information technology field

Outsourcing in the information technology field has two meanings.^[11] One is to commission the development of an application to another organization, usually a company that specializes in the development of this type of application. The other is to hire the services of another company to manage all or parts of the services that otherwise would be rendered by an IT unit of the organization. The latter concept might not include development of new applications.

Reasons for outsourcing

Organizations that outsource are seeking to realize benefits or address the following issues:^[12][13][14]

• Cost savings. The lowering of the overall cost of the service to the business. This will involve reducing the scope, defining quality levels, re-pricing, re-negotiation, cost re-structuring. Access to lower cost economies through offshoring called "labor arbitrage" generated by the wage gap between industrialized and developing nations.^[15]
• Focus on Core Business. Resources (for example investment, people, infrastructure) are focused on developing the core business. For example often organizations outsource their IT support to specialised IT services companies.
• Cost restructuring. Operating leverage is a measure that compares fixed costs to variable costs. Outsourcing changes the balance of this ratio by offering a move from fixed to variable cost and also by making variable costs more predictable.
• Improve quality. Achieve a step change in quality through contracting out the service with a new service level agreement.
• Knowledge. Access to intellectual property and wider experience and knowledge.^[16]
• Contract. Services will be provided to a legally binding contract with financial penalties and legal redress. This is not the case with internal services.^[17]
• Operational expertise. Access to operational best practice that would be too difficult or time consuming to develop in-house.
• Access to talent. Access to a larger talent pool and a sustainable source of skills, in particular in science and engineering.^[3][18]
• Capacity management. An improved method of capacity management of services and technology where the risk in providing the excess capacity is borne by the supplier.
• Catalyst for change. An organization can use an outsourcing agreement as a catalyst for major step change that can not be achieved alone. The outsourcer becomes a Change agent in the process.
• Enhance capacity for innovation. Companies increasingly use external knowledge service providers to supplement limited in-house capacity for product innovation.^[19][20]
• Reduce time to market. The acceleration of the development or production of a product through the additional capability brought by the supplier.
• Commodification. The trend of standardizing business processes, IT Services, and application services which enable to buy at the right price, allows businesses access to services which were only available to large corporations.
• Risk management. An approach to risk management for some types of risks is to partner with an outsourcer who is better able to provide the mitigation.^[21]
• Venture Capital. Some countries match government funds venture capital with private venture capital for startups that start businesses in their country.[1]
• Tax Benefit. Countries offer tax incentives to move manufacturing operations to counter high corporate taxes within another country.

Criticisms of outsourcing

Quality Risks

Quality Risk is the propensity for a product or service to be defective, due to operations-related issues. Quality risk in outsourcing is driven by a list of factors. One such factor is opportunism by suppliers due to misaligned incentives between buyer and supplier, information asymmetry, high asset specificity, or high supplier switching costs. Other factors contributing to quality risk in outsourcing are poor buyer-supplier communication, lack of supplier capabilities/resources/capacity, or buyer-supplier contract enforceability. Two main concepts must be considered when considering observability as it related to quality risks in outsourcing: the concepts of testability and criticality.

Quality fade is the deliberate and secretive reduction in the quality of labor in order to widen profit margins. The downward changes in human capital are subtle but progressive, and usually unnoticeable by the out sourcer/customer. The initial interview meets requirements, however, with subsequent support, more and more of the support team are replaced with novice or less experienced workers. India IT shops will continue to reduce the quality of human capital^{[citation needed]}, under the pressure of drying up labor supply and upward trend of salary, pushing the quality limits. Such practices are hard to detect, as customers may just simply give up seeking help from the help desk. However, the overall customer satisfaction will be reduced greatly over time^{[citation needed]}. Unless the company constantly conducts customer satisfaction surveys, they may eventually be caught in a surprise of customer churn, and when they find out the root cause, it could be too late. In such cases, it can be hard to dispute the legal contract with the India outsourcing company, as their staff are now trained in the process and the original staff made redundant. In the end, the company that outsources is worse off than before it outsourced its workforce to India or another country^{[citation needed]}.

Quality of service

Quality of service is measured through a service level agreement (SLA) in the outsourcing contract. In poorly defined contracts there is no measure of quality or SLA defined. Even when an SLA exists it may not be to the same level as previously enjoyed. This may be due to the process of implementing proper objective measurement and reporting which is being done for the first time. It may also be lower quality through design to match the lower price.

There are a number of stakeholders who are affected and there is no single view of quality. The CEO may view the lower quality acceptable to meet the business needs at the right price. The retained management team may view quality as slipping compared to what they previously achieved. The end consumer of the service may also receive a change in service that is within agreed SLAs but is still perceived as inadequate. The supplier may view quality in purely meeting the defined SLAs regardless of perception or ability to do better.

Quality in terms of end-user-experience is best measured through customer satisfaction questionnaires which are professionally designed to capture an unbiased view of quality. Surveys can be one of research^[22]. This allows quality to be tracked over time and also for corrective action to be identified and taken.

Language skills

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 off-shoring to regions where the first language and culture are different. The questionable quality is particularly evident when call centers that service the public are outsourced and offshored.^{[citation needed]}

The public generally find linguistic features such as accents, word use and phraseology different which may make call center agents difficult to understand. The visual clues that are present in face-to-face encounters are missing from the call center interactions and this also may lead to misunderstandings and difficulties.^[23] In addition to language and accent differences, a lack of local social and geographic knowledge is often present, leading to misunderstandings or mis-communications.^{[citation needed]}

Public opinion

There is a strong public opinion regarding outsourcing (especially when combined with offshoring) that outsourcing damages a local labor market. Outsourcing is the transfer of the delivery of services which affects both jobs and individuals. It is difficult to dispute that outsourcing has a detrimental effect on individuals who face job disruption and employment insecurity; however, its supporters believe that outsourcing should bring down prices, providing greater economic benefit to all. There are legal protections in the European Union regulations called the Transfer of Undertakings (Protection of Employment). Labor laws in the United States are not as protective as those in the European Union.^[24] 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.^[25]

Social responsibility

Outsourcing sends jobs to the lower-income areas where work is being outsourced to, which provides jobs in these areas and has a net equalizing effect on the overall distribution of wealth. Some argue that the outsourcing of jobs (particularly off-shore) exploits the lower paid workers. A contrary view is that more people are employed and benefit from paid work. Despite this argument, domestic workers displaced by such equalization are proportionately unable to outsource their own costs of housing, food and transportation.

On the issue of high-skilled labor, such as computer programming, some argue that it is unfair to both the local and off-shore programmers to outsource the work simply because the foreign pay rate is lower. On the other hand, one can argue that paying the higher-rate for local programmers is wasteful, or charity, or simply overpayment. If the end goal of buyers is to pay less for what they buy, and for sellers it is to get a higher price for what they sell, there is nothing automatically unethical about choosing the cheaper of two products, services, or employees.^[26]

Social responsibility is also reflected in the costs of benefits provided to workers. Companies outsourcing jobs effectively transfer the cost of retirement and medical benefits to the countries where the services are outsourced. This represents a significant reduction in total cost of labour for the outsourcing company. A side effect of this trend is the reduction in salaries and benefits at home in the occupations most directly impacted by outsourcing.

Staff turnover

The staff turnover of employee who originally transferred to the outsourcer is a concern for many companies. Turnover is higher under an outsourcer and key company skills may be lost with retention outside of the control of the company. In outsourcing offshore there is an issue of staff turnover in the outsourcer companies call centers. It is quite normal for such companies to replace its entire workforce each year in a call center.^[27] This inhibits the build-up of employee knowledge and keeps quality at a low level.

Company knowledge

Outsourcing could lead to communication problems with transferred employees. For example, before transfer staff have access to broadcast company e-mail informing them of new products, procedures etc. Once in the outsourcing organization the same access may not be available. Also to reduce costs, some outsource employees may not have access to e-mail, but any information which is new is delivered in team meetings.

Qualifications of outsourcers

The outsourcer may replace staff with less qualified people or with people with different non-equivalent qualifications.^[28]

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).^[29][30]

Failure to deliver business transformation

Business transformation promised by outsourcing suppliers often fails to materialize. In a commoditised market where many service providers can offer savings of time and money, smart vendors have promised a second wave of benefits that will improve the client’s business outcomes. According to Vinay Couto of Booz & Company “Clients always use the service provider’s ability to achieve transformation as a key selection criterion. It’s always in the top three and sometimes number one.” While failure is sometimes attributed to vendors overstating their capabilities, Couto points out that clients are sometimes unwilling to invest in transformation once an outsourcing contract is in place.^{[31][unreliable source?]}

Productivity

Offshore outsourcing for the purpose of saving cost can often have a negative influence on the real productivity of a company. Rather than investing in technology to improve productivity, companies gain non-real productivity by hiring fewer people locally and outsourcing work to less productive facilities offshore that appear to be more productive simply because the workers are paid less. Sometimes, this can lead to strange contradictions where workers in a developing country using hand tools can appear to be more productive than a U.S. worker using advanced computer controlled machine tools, simply because their salary appears to be less in terms of U.S. dollars.

In contrast, increases in real productivity are the result of more productive tools or methods of operating that make it possible for a worker to do more work. Non-real productivity gains are the result of shifting work to lower paid workers, often without regards to real productivity. The net result of choosing non-real over real productivity gain is that the company falls behind and obsoletes itself overtime rather than making investments in real productivity.

Standpoint of labor

From the standpoint of labor within countries on the negative end of outsourcing this may represent a new threat, contributing to rampant worker insecurity, and reflective of the general process of globalization.^[32] While the "outsourcing" process may provide benefits to less developed countries or global society as a whole, in some form and to some degree - include rising wages or increasing standards of living - these benefits are not secure. Further, the term outsourcing is also used to describe a process by which an internal department, equipment as well as personnel, is sold to a service provider, who may retain the workforce on worse conditions or discharge them in the short term. The affected workers thus often feel they are being "sold down the river." Careers Impact
Industry Impact

Security

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 no-longer are 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.

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.^[33]

By Country

The U.S.

'Outsourcing' became a popular political issue in the United States 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". Criticism of outsourcing, from the perspective of U.S. citizens, by-and-large, 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.^[34] One given rationale is the extremely high corporate income tax rate in the U.S. relative to other OECD nations,^[35][36][37] and the peculiar practice of taxing revenues earned outside of U.S. jurisdiction, a very uncommon practice. It is argued 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. Sarbanes-Oxley has also been cited as a factor for corporate flight from U.S. jurisdiction. Policy solutions to outsourcing are also criticized.

See also

References

Further reading

• A.D. Bardhan and C. Kroll, The New Wave of Outsourcing (2003).
• Peter Bendor-Samuel (author), Turning Lead Into Gold: The Demystification of Outsourcing (2000), ISBN 1-890009-87-3
• Peter Brudenall (editor), Technology and Offshore Outsourcing Strategies (2005), ISBN 1-4039-4619-1
• Vinaj Couto, Mahadeva Mani, Vikas Sehgal, Arie Y. Lewin, Stephan Manning, Jeff W. Russell, Offshoring 2.0: Contracting Knowledge and Innovation to Expand Global Capabilities Offshoring Research Network 2007 Service Provider Report.
• Lou Dobbs, Exporting America Why Corporate Greed is Shipping American Jobs Overseas, 2004 ISBN 0-446-57744-8
• Simon Domberger, The Contracting Organization: A Strategic Guide to Outsourcing, 1998, Oxford University Press, ISBN 0-198-77457-5
• Christopher M. England, Outsourcing the American Dream, October 2001, Writer's Club Press, ISBN 0-595-20148-2
• Georg Erber, Aida Sayed-Ahmed, Offshore Outsourcing - A Global Shift in the Present IT Industry , in: Intereconomics, Volume 40, Number 2, March 2005, S. 100 - 112, [2]
• Thomas L. Friedman, The World is Flat: A Brief History of the Twenty-First Century 2005 ISBN 0-374-29288-4
• Ganesh, S. 2007. "Outsourcing as Symptomatic: Class visibility and ethnic scapegoating in the US IT Sector." Journal of Communication Management. 11.1: 71-83.
• Gary Gereffi and Vivek Wadhwa, Framing the Engineering Outsourcing Debate: Placing the United States on a Level Playing Field with India and China (2006).
• Stephen Haag, Maeve Cummings, Donald J. McCubbrey, Alain Pinsonneault, Richard Donovan Management Information Systems For The Information Age, 2006, McGraw-Hill Ryerson, ISBN 0-07-095569-7
• Ron Hira and Anirl Hira, with forward by Lou Dobbs Outsourcing America, What's Behind our national crisis and how we can reclaim American Jobs 2005 ISBN 0-8144-0868-0
• Tim R. Holcomb, Michael A. Hitt. 2007. Toward a model of strategic outsourcing Journal of Operations Management, 25(2), 464–481
• J Carlos Jarillo, Strategic Networks: Creating Borderless Organization, 1993, Butterworth-Heinemann, ISBN 0-750-62327-6
• Thomas Kern, Leslie P. Willcocks: The Relationship Advantage Oxford University Press 2002, ISBN 0199241929
• Thomas Kern, Leslie P. Willcocks, Mary C. Lacity: Netsourcing Prentice Hall PTR 2002, ISBN 0130923559
• Mark Kobayashi-Hillary. 2004. (2nd ed 2005) Outsourcing to India. ISBN 3-540-23943-X.
• Mark Kobayashi-Hillary, 'Building a Future with BRICs: The Next Decade for Offshoring' (Nov 2007). ISBN 978-3-540-46453-2.
• Mark Kobayashi-Hillary & Dr Richard Sykes, 'Global Services: Moving to a Level Playing Field' (May 2007). ISBN 978-1-902505-83-1.
• William Lazonick, Globalization of the ICT Labor Force, in: The Oxford Handbook on ICTs, eds. Claudio Ciborra, Robin Mansell, Danny Quah, Roger Solverstone, Oxford University Press, (forthcoming)
• Baziotopoulos A. Leonidas (2006), "Logistics Innovation and Transportation", Work-in-Progress Conference paper, EuroCHRIE Thessaloniki, 2006.
• Arie Y. Lewin and Vinaj Couto, Next Generation Offshoring: The Globalization of Innovation Offshoring Research Network 2006 Survey Report.
• Mario Lewis, IT Application Service Offshoring: An Insider's Guide, Sage Publications, 2006, ISBN 0761935258 ISBN 978-0761935254
• Catherine Mann, Accelerating the Globalization of America: The Role for Information Technology, Institute for International Economics, Washington D.C., June 2006, [3], ISBN paper 0-88132-390-X
• Stephan Manning, Silvia Massini and Arie Y. Lewin, "A Dynamic Perspective on Next-Generation Offshoring: The Global Sourcing of Science and Engineering Talent", in: Academy of Management Perspectives, Vol. 22, No.3, October 2008, 35-54.[4]
• McDonald, SM and Jacobs, TJ (2005) Brand Name ‘India’: The Rise of Outsourcing, Int. J. Management Practice, Vol. 1, No. 2, pp. 152–174.
• National Academy of Public Administration. (2006). "Off-Shoring: An Elusive Phenomenon". Report for the U.S. Congress and the Bureau of Economic Analysis: Washington.
• Mario Toledo, Outsourcing and Offshoring: Companies immerged in a complex environment, Institute of Technology and Innovation Management Project Work, Hamburg University of Technology.
• Bharat Vagadia, "Outsourcing to India: A Legal Handbook", August 2007, Springer, ISBN 978-3-540-72219-9
• Peter Wiggers, Maritha de Boer-de Wit, and Henk Kok, "IT Performance Management", 2003, ISBN 0750659262

External links

This article's external links may not follow Wikipedia's content policies or guidelines. Please improve this article by removing excessive or inappropriate external links. (July 2009)

• At Mysore We are Running a US Law Firm by Shelley Singh (Economic Times)
• Chindia Sweeps the Sourcing Space - by Partha Iyengar and James Popkin (Q2 2007)
• Extreme Outsourcing
• Fortune 500 firms driving LPO industry by Praveen Bose (Business Standard)
• Free Trade Bulletin no. 10. Why We Have Nothing to Fear from Foreign Outsourcing
• Identifying, understanding and resolving legal and operational issues in outsourcing
• LPOs add more punch to India action by Sushmita Mohapatra & P P Thimmaya (The Economic Times)
• Making a Decision to Outsource: Driving Factors
• Nearshore outsourcing is more cost efficient than offshore outsourcing - by H.J.M. Boersen, W.G. van Gils and M. Zantinge.
• New York Firm Takes On India... "Very Nice!" by Heather Greenwood Davis (The Globe and Mail -- Lexpert Magazine)
• Now, for some LPO action by Sachin Malhan (The Hindu)
• Outsourcing to China
• Reasons Leading to the Ineffectiveness of Information Systems Outsourcing in Minimising Costs - by Petros Michaelides (2006)
• Towers Perrin HR Outsourcing Effectiveness Survey Report 2008
• U.S. corporates outsource legal work to India by Anjali Prayag (The Hindu Business Line)

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