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Outsourcing

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Not to be confused with offshoring.

Outsourcing is the contracting out of a business process, which an organization may have previously performed internally or has a new need for, to an independent organization from which the process is purchased back as a service. Though the practice of purchasing a business function—instead of providing it internally—is a common feature of any modern economy, the term outsourcing became popular in America near the turn of the 21st century. An outsourcing deal may also involve transfer of the employees and assets involved to the outsourcing business partner.[1]

The definition of outsourcing includes both foreign or domestic contracting,[2] which may include offshoring, described as “a company taking a function out of their business and relocating it to another country.”[3]

The opposite of outsourcing is called insourcing, and is sometimes accomplished via vertical integration. However, a business can provide a contract service to another business without necessarily insourcing that business process.

Overview

Two organizations may enter into a contractual agreement involving an exchange of services and payments. Outsourcing is said to help firms to perform well in their core competencies and mitigate shortage of skill or expertise in the areas where they want to outsource.[4]

In the early 21st century businesses increasingly outsourced to suppliers outside their own country, sometimes referred to as offshoring or offshore outsourcing. Several related terms have emerged to refer to various aspects of the complex relationship between economic organizations or networks, such as nearshoring, crowdsourcing, multisourcing[5][6] and strategic outsourcing.[7]

Outsourcing can offer greater budget flexibility and control. Outsourcing lets organizations pay for only the services they need, when they need them. It also reduces the need to hire and train specialized staff, brings in fresh engineering expertise, and reduces capital and operating expenses.[8]

One of the biggest changes in the early 21st century came from the growth of groups of people using online technologies to use outsourcing as a way to build a viable service delivery business that can be run from virtually anywhere in the world. The preferential contract rates that can be obtained by temporarily employing experts in specific areas to deliver elements of a project purely online means that there is a growing number of small businesses that operate entirely online using offshore contractors to deliver the work before repackaging it to deliver to the end user. One common area where this business model thrives is in provided website creating, analysis and marketing services. All elements can be done remotely and delivered digitally and service providers can leverage the scale and economy of outsourcing to deliver high value services at reduced end-customer prices.

Reasons for Outsourcing: Opportunity Costs and Risk

Companies outsource to avoid certain types of costs. Among the reasons companies elect to outsource include avoidance of burdensome regulations, high taxes, high energy costs, and unreasonable costs that may be associated with defined benefits in labor union contracts and taxes for government mandated benefits. Perceived or actual gross margin in the short run incentivizes a company to outsource. With reduced short run costs, executive management sees the opportunity for short run profits while the income growth of the consumers base is strained.[2] This motivates companies to outsource for lower labor costs. However, the company may or may not incur unexpected costs to train these overseas workers.[9] Lower regulatory costs are an addition to companies saving money when outsourcing. On comparative costs, a U.S. employer typically incurs higher defined benefit costs associated with taxes for (social security, Medicare, safety protection (OSHA regulations)/FICA (taxes)).[10] On comparative CEO pay, executive pay in the United States in 2007 was more than 400 times more than average workers -- a gap 20 times bigger than it was in 1965.[11] In 2011, twenty-six of the largest US corporations paid more to CEO's than they paid in federal taxes [12]. However, it appears companies do not outsource to reduce executive or managerial costs.

Companies may seek internal savings to focus money and resources towards core business. A company may outsource its landscaping functions irrelevant to the core business.[13] Companies and public entities may outsource certain specialized functions, such as payroll, to ADP or Ceridian. Companies may find the same level of consumer satisfaction.[14][15]

Import marketers may make short run profits from cheaper overseas labor and currency mainly in wealth consuming sectors at the long run expense of an economy's wealth producing sectors straining the home county's tax base, income growth, and increasing the debt burden. When companies offshore products and services, those jobs may leave the home country for foreign countries at the expense of the weatlth producing sectors.[2] Outsourcing may increase the risk of leakage, reduce confidentiality, as well as introduce additional privacy and security concerns.;[16][17]

Implications

Management, the corporation and consumers

Management processes

Greater physical distance between higher management and the production floor employees often requires a change in management methodologies, as inspection and feedback may not be as direct and frequent as in internal processes. This often requires the assimilation of new communication methods such as Voice over ip, Instant messaging, and Issue Tracking Systems, new Time management methods such as Time Tracking Software, and new cost and schedule assessment tools such as Cost Estimation Software.

Quality of service

Quality of service is best measured through customer satisfaction questionnaires which are designed to capture an unbiased view.[18]

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 offshoring to regions where the first language and culture are different.[19]

Foreign Call center agents may speak with different linguistic features such as accents, word use and phraseology, which may impede comprehension. The visual clues that are missing in a telephone call may lead to misunderstandings and difficulties.[20]

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 are no longer 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.[citation needed]

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.[21]

Qualifications of outsourcers

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).[22][23]

Companies looking to outsource their engineering activities should evaluate the capabilities of the providers. There are many bench marking reports by independent research and consulting firms which analyze the vendors' capabilities.[citation needed]

Diversification

The early trend in outsourcing was manifest in a financial construct where a function's associated capital and personnel were sold to a vendor and then rented back over a series of years. Early benefits were a boost in expertise and efficiency as outsource vendors had more focus and capability in their specialization. As time progressed, the year 0 benefit was off the books, customer needs evolved and contracts generally aged poorly. Rigid contracts hampered the ability of customers to respond to emerging business drivers, and simultaneously tied the hands of the vendor's team who was focused on increased efficiencies for static problems. The result tended to be additional "project" contracts for incremental changes in a monopoly environment. Many deals became contentious, and many customers have become very uncomfortable surrendering so much power to a single vendor. As the contract aged, it became increasingly difficult to even negotiate with vendors with confidence, because the customer began to lack any real knowledge of the cost structure of the function, or the competitive situation of the vendor.

Industry leaders turned to each other, trade journals and management consultants to try to regain control of the situation, and the next answer that grabbed hold of the industry was labor cost arbitration; leveraging cheap, offshore resources to replace or pressure increasingly expensive legacy outsource vendors. Pressure led incumbent vendors to move resources offshore, or to be replaced wholesale. As this renegotiation was under way, many customers seized the opportunity to restructure to gain more control, transparency and negotiating power. The end result has been fragmentation of outsource contracts and a decline in mega-deals. Many companies are now relying on several vendors who each offer specialization and / or lowest cost.

Insourcing

As mentioned above, outsourcing has gone through many iterations and reinventions. Some outsourcing deals have been partially or fully reversed citing an inability to execute strategy, lost transparency & control, onerous contractual models, a lack of competition, recurring costs, hidden costs, etc... Many companies are now moving to more tailored models where along with outsource vendor diversification, key parts of what was previously outsourced has been insourced. Insourcing has been identified as a means to ensure control, compliance and to gain competitive differentiation through vertical integration or the development of shared services [commonly called a 'center of excellence']. Insourcing at some level also tends to be leveraged to enable organizations to undergo significant transformational change.[citation needed]

Further, the label outsourcing has been found to be used for too many different kinds of exchange in confusing ways. For example, global software development, which often involves people working in different countries, it cannot simply be called outsourcing. The outsourcing-based market model fails to explain why these development projects are jointly developed, and not simply bought and sold in the marketplace. Recently, a study has identified an additional system of governance, termed algocracy, that appears to govern global software projects along side bureaucratic and market-based mechanisms. The study[24] distinguishes code-based governance system from bureaucracy and the market and underscores the prominent features of each organizational form in terms of its ruling mechanism: bureaucracy (legal-rational), the market (price), and algocracy (programming or algorithm). So, global software development projects, though not insourced, are not outsourced either. They are in-between, in a process that is sometimes termed Remote In-Sourcing. Projects are developed together where a common software platform allows different teams around the world to work on the same project together.

Standpoint of labor

From the standpoint of labor, outsourcing may represent a new threat, contributing to worker insecurity, and reflective of the general process of globalization.[25]

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.[26]

Standpoint of government

Western governments may attempt to compensate workers affected by outsourcing through various forms of legislation. In Europe, the Acquired Rights Directive attempts to address the issue. The Directive is implemented differently in different nations. In the United States, the Trade Adjustment Assistance Act is meant to provide compensation for workers directly affected by international trade agreements. Whether or not these policies provide the security and fair compensation they promise is debatable.

By country

United States

"Outsourcing" became a popular political issue in the United States, having been confounded with offshoring, 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".[27]

Criticism of outsourcing, from the perspective of U.S. citizens, generally 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.[28]

Union busting is one possible cause of outsourcing. As unions are disadvantaged by union busting legislation, workers lose bargaining power and it becomes easier for corporations to fire them and ship their job overseas.[29]

Another given[by whom?] rationale is the high corporate income tax rate in the U.S. relative to other OECD nations,[30][31][32] and the practice of taxing revenues earned outside of U.S. jurisdiction, a very uncommon practice. However, outsourcing is not solely a U.S. phenomenon as corporations in various nations with low tax rates outsource as well, which means that high taxation can only partially, if at all, explain US outsourcing. For example, the amount of corporate outsourcing in 1950 would be considerably lower than today, yet the tax rate was actually higher in 1950.[33]

It is argued[by whom?] 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. However, while the US has a high official tax rate, the actual taxes paid by US corporations may be considerably lower due to the use of tax loopholes, tax havens, and "gaming the system".[34] Rather than avoiding taxes, outsourcing may be mostly driven by the desire to lower labor costs (see standpoint of labor above). Sarbanes-Oxley has also been cited as a factor for corporate flight from U.S. jurisdiction.

European Union

Where outsourcing involves the transfer of an undertaking, it is subject to Council Directive 77/187 of 14 February 1977, on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of businesses (as amended by Directive 98/50/EC of 29 June 1998; consolidated in Directive 2001/23 of 12 March 2001).[35] Under that directive, rights acquired by employees with the former employer are to be safeguarded when they, together with the undertaking in which they are employed, are transferred to another employer, i.e. the contractor. An example of a case involving such contracting-out was the decision of the European Court of Justice in Christel Schmidt v. Spar- und Leihkasse der früheren Ämter Bordesholm, Kiel und Cronshagen, Case C-392/92 [1994]. Although subsequent decisions have disputed whether a particular contracting-out exercise constituted a transfer of an undertaking (see, for example, Ayse Süzen v. Zehnacker Gebäudereinigung GmbH Krankenhausservice, Case C-13/95 [1997]), in principle, employees of an enterprise outsourcing part of its activities in which they are employed may benefit from the protection offered by the directive.

Seeking to implement the cost-cutting solutions, many Western European firms have been transferring tech projects eastward. For example, Deutsche Bank has some of its software developed in Ukraine, Siemens possess R&D center in Romania. Europe Outsourcing has produced outstanding results and henceforward they are increasing them in numbers.[citation needed]

Despite unfavorable economic conditions from 2007 to 2009, the outsourcing services market continued to flourish in Central and Eastern European. In 2008 when the inflow of investment in Western Europe was down by 48%, it fell by only 9% in Central and Eastern Europe. In Poland alone, during 2009, the year following the global economic downturn, approximately 10,000 jobs were created in business process outsourcing (BPO).[citation needed]

Co-sourcing

Co-sourcing is a business practice where a service is performed by staff from inside an organization and also by an external service provider.[36][37] It can be a service performed in concert with a client's existing internal audit department. The scope of work may focus on one or more aspects of the internal audit function. Co-sourcing can serve to minimize sourcing risks, increase transparency, clarity and lend toward better control over the processes outsourced.[citation needed]

Examples of co-sourcing services are supplementing the in-house internal audit staff with specialised skill such as information risk management or integrity services, providing routine assistance to in-house auditing for operations and control evaluations in peak period activity and conduct special projects such as fraud investigation or plant investment appraisals. Another example of co-sourcing is outsourcing part of software development or software maintenance activities to an external organization, while keeping part of the development in-house.

Identity management co-sourcing

It is an approach to enterprise identity management in which the identity service interacts directly or through some technical footprint with an organization’s Information Technology (IT) identity backend infrastructure (directories, databases, and other identity repositories). The organization and the external service provider typically have a shared responsibility for building, hosting and operating the identity service. The balance of this responsibility can vary depending on the service levels required, and span from an all on-premise deployment, where the identity service is built, hosted and operated within the organization’s IT infrastructure and managed on-premise by the external service provider. This equates to an "all in-the-cloud" scenario, where the identity service is built, hosted and operated by the service provider in an externally hosted, cloud computing infrastructure.

The main outsourcing is Fusty Normans in Switzerland.

See also

References

  1. ^ "Terms and Definitions". ventureoutsource.com. Retrieved 2007-10-05.
  2. ^ a b c Hira, Ron, and Anil Hira. Outsourcing America: What's behind Our National Crisis and How We Can Reclaim American Jobs? New York: AMACOM, 2008. Print # 67-96. Cite error: The named reference "Hira, Ron 2008" was defined multiple times with different content (see the help page).
  3. ^ Davies, Paul. What's This India Business?: Offshoring, Outsourcing, and the Global Services Revolution. London: Nicholas Brealey International, 2004. Print.
  4. ^ Overby, S (2007) ABC: An Introduction to Outsourcing. CIO.com.
  5. ^ (Q4 2006)Mandatory Multisourcing Discipline Business Trends Quarterly
  6. ^ (2006) Mandatory Multisourcing Discipline
  7. ^ see Holcomb & Hitt, 2007
  8. ^ Olive, B (2004). "Outsourcing Growing, Despite Controversy". Power: 148(4), 19–20. {{cite journal}}: |access-date= requires |url= (help)
  9. ^ Weidenbaum, Murray. Outsourcing : Pros and Cons 19.1 (2004): 23-37. America: History and Life. Web. 13 Mar. 2012.
  10. ^ Buchholz, Todd G. Bringing the Jobs Home: How the Left Created the Outsourcing Crisis - and How We Can Fix It. New York: Sentinel, 2004. Print 97-118.
  11. ^ Hunt, Albert R. "Letter From Washington: As U.S. rich-poor gap grows, so does public outcry" NY Times 2/18/2007
  12. ^ Condon, Bernard. "Study: Tax code slashes tax for hugely profitable companies" USA Today 8/16/2012.
  13. ^ Forey, Gail, and Jane Lockwood. Globalization, Communication and the Workplace: Talking across the World. New York: Continuum, 2011. Electronic Book #21-26.
  14. ^ The Future Of Outsourcing
  15. ^ Koulopoulos, Thomas M.: Driving Innovation and Growth through Outsourcing. Avon, MA: Platinum/Adams Media, 2006. Print.
  16. ^ Lawrence, Robert Z. Single World, Divided Nations: International Trade and OECD Labor Markets. Washington, DC: Brookings Institution 1996. Print #89-102.
  17. ^ Parry, G. and Roehrich, J.K. (2009). Strategic outsourcing of core competencies in the automotive industry: Threat or opportunity? International Journal of Automotive Technology and Management. 9(1): 40-53.
  18. ^ Maddock, B. & Warren, C. & Worsley A. (2005) Survey of canteens and food services in Victorian schools.
  19. ^ Nadeem, S (2009) Macaulay’s (Cyber) Children: The Cultural Politics of Outsourcing in India. Cultural Sociology.
  20. ^ Alster, N (2005) Customer Disservice. www.CFO.com.
  21. ^ Ribeiro, J (2005) Indian call center workers charged with Citibank fraud. www.infoworld.com
  22. ^ Wadhwa, V (2005) About That Engineering Gap. www.businessweek.com
  23. ^ Gereffi, G. & Wadhwa, V. Framing the Engineering Outsourcing Debate: Placing the United States on a Level Playing Field with China and India. Duke University.
  24. ^ Aneesh, A. Global Labor: Algocratic Modes of Organization, Sociological Theory 27:4 December 2009
  25. ^ Krugman, Paul (2006). "Feeling No Pain." New York Times, March 6, 2006.
  26. ^ Bailey, David and Soyoung Kim (June 26, 2009).GE's Immelt says U.S. economy needs industrial renewal.UK Guardian.. Retrieved on June 28, 2009.
  27. ^ Croghan, Lore (February 23, 2004). "Kerry Targets N.Y. Firms: 'Benedict Arnold' move sending jobs overseas". Daily News. Retrieved March 7, 2011.
  28. ^ Zogby International survey results online at zogby.com
  29. ^ "Tell Xerox to Stop Unionbusting and Shipping Jobs Overseas". American Rights at Work. Retrieved 2011-03-09.
  30. ^ "Veronique de Rugy on Corporate Flight & Taxes on NRO Financial". Nationalreview.com. 2002-04-18. Retrieved 2010-03-15.
  31. ^ "U.S. Lagging Behind OECD Corporate Tax Trends". The Tax Foundation. 2006-05-05. Retrieved 2010-03-15.
  32. ^ Tamny, John. "John Tamny on Hillary Clinton Economics on NRO Financial". Article.nationalreview.com. Retrieved 2010-03-15.
  33. ^ Joel Friedman (October 24, 2003). "The Decline of Corporate Income Tax Revenues" (pdf). Center on Budget and Policy Priorities. Retrieved 2011-03-09.
  34. ^ "High Corporate Tax Rate Is Misleading at". Smartmoney.com. Retrieved 2010-03-15.
  35. ^ "Council Directive 2001/23/EC". EUR-Lex. Retrieved 2011-03-09.
  36. ^ McIlvaine, Andrew R. (March 16, 2008). "'Co-Sourcing' and More". Human Resources Executive Magazine. Retrieved May 23, 2012. {{cite web}}: External link in |publisher= (help)
  37. ^ Khirallah, Diane Rezendes (September 2, 2002). "Out With 'Outsourcing' And In With 'Co-Sourcing'". Information Week Magazine. Retrieved May 23, 2012. {{cite web}}: External link in |publisher= (help)

Additional sources

Look up outsourcing in Wiktionary, the free dictionary.


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