Question

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

Ans:

In simple terms, outsourcing can be defined as the process in which a company hires a third party/an alien company, a company with no relation to its organization, either within the country or outside to get its job/work done, considering the cost cutting factor.

In my perspective, the department or vertical or functionality that is being outsourced is a major deciding factor in seeing outsourcing as a positive or negative. In general outsourcing has its pros and cons:

Pros:

1. Lower labor costs

2. More available talent

3. If being outsourced to a country, which comprises of a large market for the company, shorter go-to-market cycle

4. More innovation

5. Improves socio economic stature of the region the company is outsourcing to, thereby building a better brand image, and in the long run increasing brand equity ( Example: IKEA in India)

Cons:

1. Lesser control over quality of the product

2. Lesser grasp on how the outsourced entity operates in the new region

3. Difficulty in understanding the culture of the region (for example, in rural parts of India, families with a large number of children prefer to have their children work to earn extra, whereas most global companies do not allow this. Therefore, imparting the knowledge and awareness of child labor falls on the company. A great example: How Walmart achieved this in India? )

4. Political unrest in the region impacts business

5. Sudden changes in trade laws could turn outsourcing into a boon (Higher Tariffs on products shipped from China to the US, makes them less competitive in the US markets in regards to price. )

Therefore, in my perspective, based on the unit that is being outsourced, it can be considered a boon or a bane. For example, if the core functionality of a company is outsourced, it may not have a positive impact on the company. A great example of this would be Lego. During Lego's rough years, they decided to outsource the production of the small lego parts to a major plastic production company in Singapore, who are known for their expertise in semiconductors and plastic parts. Lego is known for their customization of their kits based on new movies, new cartoon trends, etc. The company in Singapore, who Lego chose was a forerunner in mass production and had very little flexibility in customization. Therefore, they were not able to adapt to the changing Lego parts quickly, due to the high cost associated with the plastic molds needed to create the Lego parts. Therefore, when a business decision is being made to outsource, it is always best to keep the core functionality in-house.

When outsourcing, once again, the stakeholders who benefit depends entirely on the business unit being outsource. Definitely, when a business unit in outsourced to a region, the socio-economic stature improves, but it also results in industrialization, which many people are still against. When handled well, all stakeholders could benefit from an outsourcing decision, and if handled poorly, the same decision could backfire.