Question

QUESTIONS:

• How do you view outsourcing?
• Considering all of the stakeholders of a business (owners, employees, shareholders, customers, and the community in which the business operates), who stands to benefit the most from outsourcing?
• Have you or a friend or family member been impacted by outsourcing? If so, please share your experience to the extent you are comfortable.

According to Investopedia.com, “outsourcing” is defined as “a practice used by different companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally.” Further, “outsourcing is an effective cost-saving strategy when used properly. It is sometimes more affordable to purchase a good from companies with comparative advantages than it is to produce the good internally. An example of a manufacturing company outsourcing would be Dell buying some of its computer components from another manufacturer in order to save on production costs. Alternatively, businesses may decide to outsource book-keeping duties to independent accounting firms, as it may be cheaper than retaining an in-house accountant.”

There has been much controversy and concern in the business world and in our overall economy in the U.S. regarding the outsourcing of many jobs, particularly in the manufacturing sector, from the U.S. to foreign countries. This is not just a U.S. problem; there are recent concerns of outsourcing in Germany and Brazil, for example.

Some of the benefits of outsourcing are seen as lower overall costs, potentially less government regulation and increased profits. Often cited detriments of outsourcing are bad publicity (“taking jobs away from Americans”, etc.) and reduced quality of goods and services unless an employee of the U.S. company can be on site to oversee the work.

Answer 1

In simple terms, outsourcing is a business practice of hiring a third party to provide services, or produce goods which were traditionally done by the company itself. Outsourcing can be seen as a strategic initiative to stay ahead of the competition by reducing costs, and focusing only on core strengths. The concept has evolved, and has been in practice in different countries since 1989. Globalisation has also a role to play as many companies go international, and the labour market isn't restricted anymore.

Businesses always strive for comparative advantages to maximise their market share, and profits. During the period of industrial revolution, all companies wanted to own, manage, and control their operations. Then slowly concepts like economies of scale, and diversification were used to maximise returns. The most recent trend to save costs, and compete internationally taking advantages of the resources available is outsourcing.

Cost saving, access to world class resources outside of the company, letting go of ineffective functions which can be done effectively by external resources, sharing of risks with partner companies, and effective utilisation of internal resources are some of the reasons why a company outsources it's functions. The success of this process depends on how well the company understands it's goals, vision, mission, objectives, and core operations. Selection of the right vendor, cost implications, senior executive support, open communication with affected groups, managing expectations, and a clear contract are key factors affecting success of outsourcing operation.

Impact on stakeholders

Owners - These are the decision makers, and if the decision is taken with a clear strategic objective, then the impact is really positive as cost will be reduced, time will be utilised effectively, and profits can be maximised.

Shareholders - Shareholders will definitely gain from outsourcing as profits are maximised. Products, and services are now offered taking advantage of the world resources. Quality, and brand image are impacted positively which means shareholders will be happy with the decision as long it is successful.

Customers - Customers will gain if the best resources are used to produce the goods. For example, Tim Cook said it was not cost, but the skill which is the major factor behind the decision of manufacturing iphones in China. From this perspective, customers will be happy to get a great product, and the impact is positive. Language, and geographical barriers could also provide negative customer experience if the outsourcing is done without due diligence, or if the partner isn't good enough.

Employees - Employees who are part of the core function will stand in good stead. However, some jobs will be lost when the functions are outsourced. The existing employees will also feel the pressure, and there can be a sense of insecurity due to the changes in technology. For example, evolution of robotics has instilled a sense of fear in employees with regards to job security.

Community - The community will be impacted negatively as unemployment slows down the economic activity, and there is more competition for existing jobs. There is a sense of unhappiness that prevails.

Impact of outsourcing

I have heard stories of impact of outsourcing, especially in the services sector. An example would be Indian IT services industry being the beneficiary of several US projects. US visa rules are also misused in certain cases impacting jobs of equally qualified engineers in the country. Though the major reasons for outsourcing IT projects to countries like India is the cost & skill, alternatives do exist in the country. Competition will induce competitive prices, and education system in the US is one of the best in the world producing quality students every year.

One of our family friend lost his job due to outsourcing of projects, and really found it difficult to get his next break. When there is talent is available in the country, and cost becomes the only factor, policies to induce competition can stop outsourcing in sectors where resources are available in the country. Unemployment, unhappiness, dejection, and leading to a political issue is what I could feel is the negative impact. This was seen in the case of my family friend.