Outsourcing and offshoring, often are used synonymously. However, there are subtle differences between the two. Both outsourcing and offshoring are a consequence of capitalism.
The former refers to sub-contracting a process to a vendor, who may be located within the geographical boundaries of the same country, while the latter, on the other hand, refers to the situation, wherein the subcontractor and the outsourcing company are situated in different countries.
The desire to reduce costs and focus on core activities propelled the companies to concentrate on activities that were intrinsic to the company, while outsourcing/offshoring activities that were not central to their existence.
In the early 1960s and '70s, a few American textile companies began sub-contracting the production of textiles and garments to Asia. This was followed by the outsourcing of the production of shoes, toys, electronic items, and auto parts. In fact, major auto producers started setting up assembly plants in foreign countries.
In the late 1990s, American companies began outsourcing services to countries, like India. Jobs that did not require a great deal of skill, were outsourced to countries with a huge English-speaking workforce. Banks and insurance companies offshored most of their back-office work.
Outsourcing software development work caught on in a big way. Accounting and law firms, too, started using firms, located overseas, for expediting routine work. Payroll processing, medical billing, paperwork, and benefits administration are the latest in the series of jobs to be outsourced.
In fact, licensed radiologists in foreign countries have been entrusted with the task of reading X-rays at night and on weekends, when local radiologists are unavailable.
It is evident that the process of outsourcing has gathered momentum over the years. However, most people feel that it has resulted in a number of Americans losing their jobs to foreigners. The following pros and cons can help understand the need to outsource and the opposition that the companies/countries are likely to face on account of outsourcing.
Lower Operating Costs
Outsourcing to countries, like India that have a well-educated population, where people are more than willing to provide the desired service for a fraction of the cost as compared to the domestic workers, has been instrumental in lowering operating costs. Companies have reaped huge profits on account of lower operating costs.
Companies, preponderantly outsource tasks that would cost them massive monetary inputs. If the employees of the company are not well acquainted with completing a particular task, the tasks better be outsourced to an industry expert.
The task, however, may be accomplished in-house; the time taken would be longer, being far costly for the company considering long-term propositions.
Corporate Tax Breaks
According to U.S. laws, a company can defer paying taxes on profits earned abroad as long as the profits are not remitted to the parent company located in the U.S. Moreover, the deferral period can be extended indefinitely. Corporates, thus have managed to reap the benefits of outsourcing.
According to the theory of core competence, an organization would do well to focus on its main or core operations and outsource activities that are of an operational nature. This would help the company maintain its competitive advantage, improve efficiency, and consequently increase profits.
There are companies, who garner expert guidance only when assistance is required. With experts available to impart essential whys and wherefores, the company marches toward craning concrete projects. This, precisely, is how they skin lucrative opportunities and bag success aplenty.
The Theory of Comparative Advantage
This theory was proposed by the famous economist David Ricardo, who advocated free trade by theorizing its positive effects on the GDP of a country.
It was his belief that by trading, irrespective of boundaries, a country could focus on the production of a good for which it had a comparative advantage and barter those with goods produced by other countries. This, in turn would result in maximizing the GDP of the country.
However, with outsourcing you may employ a larger workforce as and when tasks become overwhelmingly demanding. Additional workforce is employed temporarily, thus the question of the additional personnel being on permanent payroll does not arise.
However well planned a project may be, there are instances, where companies find themselves in a high-pressure zone with heated round-table conferences and time-line crunches.
Erroneous decisions and out-of-the-blue changes may overwhelm the project's progress chart. It is when small-scale companies endure such situations that outsourcing comes to the fore. Through outsourcing, a company can sustain the project and perform as expected.
It is common knowledge that time zones differ for the Asian countries as compared to the West. For industries that demand services on the go, wheeling with the clock serves well. While you wrap up for the day in Asia, the west gets ticking to work. This is where outsourcing plays a major role, especially when your business demands work round the clock.
Outsourcing manufacturing activities has rendered a number of blue collar workers jobless. The laid-off workers have found it exceedingly difficult to seek alternate employment on account of the decreasing demand for their skills.
Offshoring White-collar Jobs
It has been estimated that by the year 2015 nearly 3.3 million U.S. white-collar jobs will be offshored by the U.S., and nearly $136 billion worth of wages will be lost.
Deteriorating quality is an oft-proclaimed argument against outsourcing. People believe that white-collar jobs that require a certain skill set, has resulted in deteriorating quality. The efficacy of outsourcing in delivering results thus, has been questioned.
Loss of Control
Your organization functions on certain preempt standards. These standards drive your working style. However, the organization to which you have outsourced a particular job, is not liable to adhere to your standards.
You, sure, would have a contract in place; however, the decisions pertaining to their management would not be governed by your organization. The outlook and mode of functioning is bound to differ leading to a perpetual conflict creep.
Security Is Compromised
Running a thorough check on the outsourcing company may prove helpful, when your company ought to share important documents, product design, or any authentic property of the company.
There have been instances where important data has been spilled over the counter by the outsourcing company. To confront such situations, play a part in structuring the contract document. Voicing an additional clause for penalty on infringement would help. After all, it is far better to err on the side of caution.
Lagging In-house Talent
Outsourcing, indeed, saves time; however, it is at the cost of sheathing certain opportunities of the employees which would have increased their knowledge base. The employees, thus lose their chance of proving their mettle, even if that means sticking out a recently discovered talent. Utilizing in-house resources boosts morale of the existing employees.
The dispute between the proponents and the opponents of outsourcing is yet to be resolved. The difficulty in reaching a consensus can be attributed to the aforementioned pros and cons of outsourcing that have made offshoring a double-edged sword.