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An Overview of Outsourcing

Updated on October 30, 2015

An Intro

Outsourcing wasn’t formally recognized as a strategy in business until the year of 1989. Outsourcing can alleviate the national economy, conserve expenses for companies, and decrease product cost for consumers. Outsourcing has its disadvantages also; outsourcing can be a gamble to companies, rapidly increases the unemployment rate, and have immense unknown costs for firms. Outsourcing can be both beneficial and hazardous.

Background

Outsourcing is when a company hires another business for a specified service. This is done mainly in large firms; who have ties in both national and international markets (A Brief History of Outsourcing). The Merriam Webster dictionary defines outsourcing as, “to procure (as some goods or services needed by a business or organization) under contract with an outside supplier.”

Computer companies were the first to outsource. By the 1980’s, billing accounting, and word processing were being outsourced. To illustrate, Eastman Kodak was one of the first major companies to outsource in 1989 (A Brief History of Outsourcing). In the year of 2013, over 2 million occupations were outsourced. A great number went to developing economies such as China and India. In 2013, 43 percent of the IT sector, which is known as information technology, was being outsourced. Currently, 26 percent of distribution is handled overseas; 38 percent of research and development jobs are placed overseas. Followed by 12 percent of call center jobs are being outsourced (Selvaggio). Outsourcing has been rapidly progressing in the global market.

Benifits

The first reason outsourcing benefits America is by raising both national and international markets. According to Global Insight hired by the Information Technology Association of America, “The cost savings and use of offshore resources, lower inflation, increase productivity and lower interest rates.” These savings created about 90,000 total new jobs, at the end of 2003. This study claims outsourcing contributed $33.6 billion to the United States gross domestic product (Outsourcing Creates Jobs, Study Says). A study in 2009 by economist, Desai, C. Fritz Foley, and James Hines concluded a 10 percent increase of foreign investment associated with a 2.6 percent increase in domestic investment. While outsourcing benefits foreign economies it also increases the U.S market. The Wall Street Journal, in February 2010, claims that successful foreign operations of U.S. multinationals enlarge foreign and domestic employment (Outsourcing Jobs and Taxes). According to Federal Reserve System: Background, Analysis and Bibliography by George B. Grey, “The U.S. economy and the world economy are linked in many ways. Economic developments in this country have a major influence on production, employment, and prices beyond our borders; at the same time, developments abroad significantly affect our economy.” Therefore, increases in the global market have been correspondent with advances of the United States economy.

The next reason is outsourcing helps companies grow. To begin with, twenty to thirty percent of net expenses decrease during a three to five year period if outsourcing is implied (Korn). If this is the case, the company will grow and have the capability to invest in more U.S. citizen employees. For instance, if a company is expanding it will require corporate headquarters or upper management to oversee new projects. Thus increasing the United States economy and lowering the unemployment rate. If companies outsource, they have the capability to save 60 percent on the fees of the outsourced task (Benefits of Outsourcing). Another reason companies outsource is labor costs. Manufacturing laborers in the U.S. average $27 per hour. Eastern Europeans make around $8 per hour; East Asians (Japanese excluded) mean $13 per hour. Manufacturing labor averages $2 per hour in the Philippines. Brazilian standards are $8 per hour. The hourly direct pay is based on the 2011 U.S. Bureau Labon Statistics (Correnti). Regarding these facts it’s less costly for companies to outsource.

Finally, outsourcing benefits the consumer. According to Madison Correnti, “Foreign economies are boosted by demand for products by U.S. consumers and the economy benefits as well. The U.S. economy engages in international trade and obtains needed goods at lower costs, which results in better returns on investment and more economically priced goods for U.S. citizens.” In other words, if a product is inexpensive to produce, the product will be low priced for customers (Correnti). For example, outsourcing caused computer prices to decrease by 10 to 20 percent making them more affordable (Laksin). Outsourcing benefits the consumer by decreasing costs.

Hazards

The first reason outsourcing is harming the United States is it can be a significant gamble on companies. First of all, outsourcing has the ability to lower product quality. If foreign workers are forced to take quantity over quality, this could cause a company to have a poor image. Next, outsourcing can reduce management control. So negative or poorly planned events are more likely to take place without the company’s consent. Lastly, outsourcing threatens a company’s security. If there is a leak of information the company could lose thousands of dollars (Examples of Lower Quality with outsourcing).

The next reason outsourcing is harming the U.S. is that it temporarily increases the unemployment rate. The U.S. Department of Commerce’s data conveys, “U.S. multinational corporations, the big brand-name companies that employ a fifth of all American workers… cut their workforces in the U.S. by 2.9 million during the 2000’s while increasing employment overseas by 2.4 million.” A 2012 survey created and analyzed by the Duke's Fuqua School of Business contends that three quarters of responders said that labor cost savings are a major driver of outsourcing (5 facts About Outsourcing). A University of California study affirms that 14 million white collar jobs are in danger of being outsourced (Roberts, Paul, Craig, PhD). These numbers show an alarming quantity of jobs are affected negatively by outsourcing.

Lastly, outsourcing can have secluded costs. This is the case because a company financially binds themselves to another business. The company needs to find a vendor, to perform the specified outsourced task. This is extremely important because the company will trust the other company with important assets. If the vendor has an oversight the other company’s image could be destroyed. a lawyer must be hired to verify the contract. This can cost anywhere from 0.2 percent to 2 percent of the annual cost, which is very significant when speaking of billions of dollars. Sequentially, the most expensive part of this process is the transition period; which can last anywhere for three months to a year (Hidden Cost of Outsourcing).

My Opinion

In my opinion, outsourcing is harming the United States. Outsourcing has the risks of low quality goods, reduced management control, and threatens companies’ security. Outsourcing has already destroyed 2.9 million jobs. If large firms, which employ 20 percent of the full time workforce, fail, then our economy fails. Who knows what will happen to America If companies keep gambling?


Conclusion

Outsourcing is both benefiting and harming the United States. Outsourcing can aid in product availability, help companies grow, and benefit consumers with inexpensive prices. Outsourcing can harm a large firm’s image, skyrocket the unemployment rate, and have large hidden cost for firms. The question is do the benefits outweigh the harm, or does the harm outweigh the benefits?



Works Cited

Merriam-Webster. Merriam-Webster, n.d. Web. 31 Oct. 2015.N.p., n.d. Web. 30 Oct. 2015.N.p., n.d. Web. 30 Oct. 2015."Supply Chain Management, SCM, SCRC Supply Chain Resource Cooperative, Poole College of Management, North Carolina State University." A Brief History of Outsourcing. N.p., n.d. Web. 31 Oct. 2015.

Helping or Harming???

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    • littlething profile image

      Jackie S 21 months ago

      Great hub! You should try adding some photos on the break up the text. Wiki commons has some good free photos. Very well thought out hub!