Outsourcing
In business, outsourcing involves the contracting out of a business process to another party (compare business process outsourcing). The concept "outsourcing" came from American Glossary 'outside resourcing' and it dates back to at least 1981.[1][2] Outsourcing sometimes involves transferring employees and assets from one firm to another, but not always.[3] Outsourcing is also the practice of handing over control of public services to for-profit corporations.[4]
Outsourcing includes both foreign and domestic contracting,[5] and sometimes includes offshoring (relocating a business function to another country).[6] Financial savings from lower international labor rates can provide a major motivation for outsourcing or offshoring. The opposite of outsourcing, insourcing, entails bringing processes handled by third-party firms in-house, and is sometimes accomplished via vertical integration. However, a business can provide a contract service to another business without necessarily insourcing that business process. Contents [hide]
1 Overview
1.1 Reasons for outsourcing
1.2 Digital outsourcing
2 Implications
2.1 For business
2.1.1 Management processes
2.1.2 Communications and customer service
2.1.3 Security
2.2 Insourcing
2.3 Standpoint of labor
2.4 Standpoint of government
2.4.1 Policy-making strategy
2.4.1.1 Competitiveness strategy
2.4.1.2 Education strategy
2.4.1.3 Welfare state strategy
2.4.1.4 Industrial policy
2.4.1.5 Environmental policy
2.5 Globalization and socio-economic implications
2.5.1 Global inequality and development
2.5.1.1 Industrialization
2.5.1.2 Growth and income
2.5.1.3 Urbanization
2.5.2 Trade
2.5.3 Migration
2.5.4 Domestic inequality
3 By country
3.1 United States
3.2 European Union
4 Co-sourcing
4.1 Identity management co-sourcing
5 Counterwave outsourcing
6 See also
7 Notes and references
8 External links
Overview[edit]
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.[7]
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[8][9] and strategic outsourcing.[10]
Outsourcing can offer greater budget flexibility and control. It also reduces the need to hire and train specialized staff, brings in fresh engineering expertise, and reduces capital and operating expenses.[11]
“Do what you do best and outsource the rest” has become an internationally recognized business tagline first “coined and developed”[12] in the 1990s by the “legendary management consultant” Peter Drucker.[13] The slogan was primarily used to advocate outsourcing as a viable business strategy. It has been said that Mr. Drucker began explaining the concept of “Outsourcing” as early as 1989 in his Wall Street Journal (WSJ) article entitled “Sell the Mailroom.”
From Drucker’s perspective, a company should only seek to subcontract in those areas in which it demonstrated no special ability.[14] The business strategy outlined by his slogan recommended that companies should take advantage of a specialist provider’s knowledge and economies of scale to improve performance and achieve the service needed.[15]
In 2009 by way of recognition, Peter Drucker posthumously received a significant honor, when he was inducted into the Outsourcing Hall of Fame for his outstanding work in the field.[16]
Reasons for outsourcing[edit]
Companies primarily outsource to reduce certain costs — such as peripheral or "non-core" business expenses,[17] high taxes, high energy costs, excessive government regulation/mandates, production and/or labor costs. The incentive to outsource may be greater for U.S. companies due to unusually high corporate taxes and mandated benefits, like social security, Medicare, and safety protection (OSHA regulations).[18] At the same time, it appears U.S. companies do not outsource to reduce executive or managerial costs. For instance, 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.[19] In 2011, twenty-six of the largest US corporations paid more to CEO's than they paid in federal taxes.[20]
Digital outsourcing[edit]
The digital workforce of countries like India and China are only paid a fraction of what would be minimum wage in the US. On average, software engineers are getting paid between 250,000 to 1,500,000 rupees ($4,000 to $23,000) in India as opposed to the $40,000-$100,000 in countries like US and Canada.[21] However, unlike typical sweatshops and manufacturing plants, most of the digital workforce in developing countries have the flexibility to choose their working hours and which companies to work for. With many individuals telecommuting from home, the companies that require this type of work do not need to allocate additional funds for setting up of office space, management salary, and employee benefits as these individuals are contracted workers.[22]
Implications[edit]
For business[edit]
Management processes[edit]
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. Communications and customer service[edit]
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.[23]
Foreign call center agents may speak with different linguistic features such as accents, word use and phraseology, which may impede comprehension. The visual cues that are missing in a telephone call may lead to misunderstandings and difficulties.[24]
Security[edit]
Before outsourcing, an organization is responsible for the actions of their entire staff, sometimes a substantial liability. When these same people are transferred to an outsourcer, they may not even change desks. But their legal status changes. They are no longer directly employed by (and responsible to) the organization. This creates legal, security and compliance issues that are often addressed through the contract between the client and the suppliers. This is one of the most complex areas of outsourcing and sometimes involves a specialist third-party adviser. Fraud is a specific security issue as well as criminal activity, whether it is by employees or the supplier staff. However, it can be disputed that fraud is more likely when outsourcers are involved, for example credit-card theft when there is the opportunity for fraud by credit card fraud. 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.[25]
Insourcing[edit]
Outsourcing has gone through many iterations and reinventions. Some outsourcing contracts 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, and so on. 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 exchanges in confusing ways. For example, global software development, which often involves people working in different countries, 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 alongside bureaucratic and market-based mechanisms. The study[26] 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".[citation needed] Projects are developed together where a common software platform allows different teams around the world to work on the same project together.
