Outsourcing, also known as blind off-shoring, is a process by which companies hire other companies, usually located in other countries, to perform lower-level work. The main motivation behind the practice of outsourcing is for a company to minimize its costs while at the same time increase its revenue and productivity and thus gain advantage over other firms.
The 1970s saw a change in the outsourcing trend where global outsourcing shifted from comprising solely manufacturing services to including information technology outsourcing (ITO), and later, business process outsourcing (BPO). As the name suggests, the former involves the provision of some or all information systems by one or more providers, which might include data conversions, database administration, help desk, and network management, among many others. BPO, on the other hand, takes place when a firm turns over its management to a third party by outsourcing call centers, human resources administration, finance, as well as accounting functions. ITO and BPO are currently two of the fastest-growing sectors in outsourcing.
Today, India in particular has become the leading destination for ITO and BPO because its cheap and skilled labor makes it a very affordable destination for foreign companies. Although the IT industry in India has been present since the 1980s, it was not until the following decade that Indian firms became the outsourcing destinations for companies around the world, which included firms such as American Express, GE Capital, and British Airways. In comparison, the BPO industry has been in existence for little more than five years, making it a fairly new, yet rapidly developing, sector today. Presently, India is characterized by being home to numerous IT “giants” such as Infosys or Wipro, which are the leaders in this particular field. Moreover, trying to stay on top, India is actually beginning to outsource its outsourcing services, hoping that such a step will place it ahead of other outsourcing nations such as China. Indian companies are hiring representatives all over the world so as to ensure a broader range of language skills along with other abilities to offer companies who outsource their services to this nation.
As the number of companies outsourcing to India increases, what has to be taken into account is that not all of these transactions end up being a success. In the case of the insurance and financial firm Conseco, the decision to outsource has definitely done more harm than help, and it experienced numerous problems. On the other end of the spectrum, however, is the air industry giant Boeing, which has experienced tremendous gains as a result of transferring manufacturing offshore.
Benefits and Risks
A company that decides to delegate some of its operations to a foreign country like India is able to focus on its core competency, which is yet another benefit to outsourcing as core competencies are where the success and the profit of the firm lie. After all, having all the responsibility of finishing the mundane and everyday tasks transferred to a foreign company enables the firm to dedicate more of its at-home personnel and resources to doing what truly distinguishes the company from its competition. The improved communication system makes this process even easier as companies in India can collaborate daily with their customer companies so as to make sure that everything is being done according to the predetermined standards. In addition, time differences mean that a U.S. company can shut down for the day while the partner in India is continuing on with the work, making the home company more efficient.
Yet another important benefit that companies can enjoy when outsourcing is having no overhead costs. Seeing that the offshore companies provide their own facilities and personnel, a U.S. firm does not have to deal with all of the logistics associated with building its own plant overseas, such as is the case with greenfield investments. Specifically, there is no need to recruit, hire, or train new employees in addition to other expenses such as insurance, workers compensation, social security, and company benefits, as all are put on the shoulders of the outsourcing company. The U.S. business reaps the benefits of having another firm provide them with a ready service or product.
The most controversial issue with outsourcing is whether this business method is a boon to workers and employees of particular firms and society in general. Namely, to many workers the word outsourcing is feared and despised, as they automatically assume that it goes together with job termination. The truth is, however, that although outsourcing does involve delegating jobs to people in other countries, it does not mean that workers in a home country are left jobless. After all, in some cases outsourcing may create services not previously available, which means that new positions will be created and workers acquired to fill those job openings. In addition, hiring cheaper labor overseas enables companies to hire more “higher-end” skilled workers or dedicate funds to further train current workers. Moreover, the common mistake is to believe that every job can be outsourced; the truth is that jobs, especially in the service sector, which may require face to face interaction, can be very difficult to transfer overseas.
Despite the benefits described above, outsourcing does have its faults and shortcomings. Many of the companies that decide to engage in this business method share the common fear of losing their intellectual property or trade secrets. Joining in with a firm in a foreign country requires the home company to share some of its strategy and strengths, making both easy targets for the outsourcing firms to steal and incorporate into their own operations. As part of learning operations, offshore workers can gain knowledge that can be applied to other projects down the road. Seeing as most offshore workers act as contractors, there is the possibility that they might use the information they gain to help competitors. In other words, outsourcing threatens the safety of the know-how of the home company.
Language and cultural differences can pose yet another disadvantage for a firm that plans to engage in offshore outsourcing. Customers may find it difficult to communicate with customer service representatives when they are located in another country. As a result, companies might find that they have many customers who, dissatisfied with the service, are looking for a different company. The need to study cultural differences is, therefore, a crucial step that every company should consider before entering into an outsourcing contract.
Outsourcing is closely related to the concept of foreign direct investment (FDI). Much like FDI, outsourcing involves investing in a foreign country, only on slightly different terms. The main difference between the two concepts is that through FDI, the home company is looking to sell the goods on the foreign market whereas in outsourcing, the services and the products are brought back to be sold or implemented in the company’s home facilities.
Because outsourcing is becoming a dominant trend in today’s world, it should not be forgotten that the business strategy carries both benefits and disadvantages, meaning that not every company is set to gain from applying outsourcing. It is a fault of many firms to not take into account the risks of this business decision and instead focus solely on the good that it can provide. It is imperative that a company do thorough research on the country before plunging in. To make the process of outsourcing more efficient, studies should be conducted illustrating the necessary steps a company should take to successfully implement outsourcing strategy in a particular country. Such research can help eliminate some of the risks associated with outsourcing. In all, patience and careful planning seem to be the determinants of any successful business decision, especially one as complicated as investing overseas.