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History of Offshoring

Updated on June 10, 2012

At some point we will have equalization, where an employer will be indifferent between hiring someone in Bangalore or Chicago. - Paul Kasriel

Globalization
Globalization | Source

Enyclopedia Britannica defines Off shoring as - the practice of outsourcing operations overseas, usually by companies from industrialized countries to less-developed countries, with the intention of reducing the cost of doing business. Chief among the specific reasons for locating operations outside a corporation’s home country are lower labour costs, more lenient environmental regulations, less stringent labour regulations, favourable tax conditions, and proximity to raw materials.


What

The aim of every business is to make profits and to cut costs. Ever since firms have been in the business of ‘business’ they have been constantly finding newer ways to increase their profit margins. Off shoring has been a result of nothing else but these innovative ideas that led to the trials and experiments of cutting costs by dissecting core and non core work. What the firms really do is define those tasks that are not what they essentially do, but do as a requirement to their core business processes. That secondary work then is given to other firms for whom it becomes the primary or core business.


Why

Off shoring as a practice is not new. It has been happening for a long time. The modes of off shoring and the complexity of the model have undergone significant changes. Earlier it was something as simple as imports and exports. The question asked was -Why import goods when we can produce them ourselves? All that firms had to do was up skill, learn, adapt or even copy and start doing the work themselves, so that the higher import costs could be avoided. This is what American firms did post the Revolutionary War; they started to manufacture good themselves instead of importing them from England.

Years later America faced a similar situation that England did, when Asian countries started producing those goods at lower costs.


How

During the 70s and 80s, companies tried various techniques of re engineering and innovation labs in order to cut costs. But later on these methodologies took a new turn, especially during the mid 90s to start of the new millennium where they decided to open an extension arm of their business in other less developed countries. This helped achieve economies of scale as well as ensure a similar culture, work environment and rigour of work practices which was maintained in the new operating facility. Thus was Off Shoring born. These were called Captive Arms or Captive Off shore.

Just like any experiment, the work that was initially off shored was low skilled and transactional work. Later as this experiment gained confidence, success and approval, the level of work off shored also saw a shift from low end to mid and higher end work such as Information Technology support, medical transcription, tax and legal support etc. Basically work that could be done remote and off a computer, could be off shored, it didn’t warrant the worked to be onsite or client facing , the worker could practically be anywhere in the world, it wasn’t really relevant! All of us have experienced, calling up a support center and having absolutely no clue that we were talking to somebody thousands of miles away!


Source

Why

Was it all smooth sailing and easy? No. But what facilitated and helped this trend was the improved infrastructure & technology, better internet connectivity and enhanced modes of communication that also fostered the growth of off shoring higher end work to other countries.

In the year 2000, dawn of a new century- the world was faced with a new dilemma of updating all their computer programs to ensure they were not hit by the Y2K bug. This was a must do and it gave the opportunity to the many software engineers especially in India to carry out these projects for firms all over the world. With English being a commonly spoken language and with labour costs being much lower than in developed countries, Y2K work gave them the chance of displaying their talent and skill in an off shored environment. Since then companies have continued to tap into the many talents and skills (and cost savings) made available by not only Indian but other countries like Philippines, Malaysia, Sri Lanka, Chile, Brazil and other offshore service providers.


2011 Best Outsourcing Advisors:

1. Alsbridge

2. KPMG (Equaterra was acquired by KPMG in early 2011)

3. TPI

4. Kirkland & Ellis

5. PwC

6. Booz & Company

Source : International Association of Outsourcing Professionals (IAOP)

Growth

Once set into pace, this industry has grown to dizzying heights. With the rapid rise in demand for work being off shored or near shored, most major business consulting firms started a division that focussed primarily on business outsourcing.

Most manufacturing firms around the world realized that in order to be competitive, they had to cut costs and had to increase efficiency. Many had heard about off shoring or giving out work to third parties but yet were unsure how to go about it. It was a mammoth task to even figure who the major off shoring players were out there, what is the process to initiate talks and how to get into win-win contract agreements. In the last seven to eight years we have seen the rise of Global Outsourcing Advisors such as the TPIs, Equaterra’s and Everests of the world, gain prominence in this very arena.

These firms liaise with the major Off shoring business firms all over the world and keep themselves abreast of the latest and best happening in the off shoring industry, Armed with this knowledge, they can help companies who are looking to offshore some part of their work and help them to do so in a professional, organized and secure manner. For large deals they have dedicated resources who hand hold the firm and take them all through the bidding, contracting, negotiations, transitions and Go Live stage of the partnership. They ensure that the best interests of the firm off shoring as well as the service providers (who take on the outsourced work) is taken into account.


Plethora of books written on the Off Shoring Trend

So where does this all leave us?

Today, we see almost every type of company is looking to off shore and remain competitive. This cuts across industries and is not just restricted to manufacturing companies. Huge retail & pharmaceutical companies, as well as major financial and banking institutions off shore their non tactical work.

The world has shrunk, distances don’t seem as far and globalization has taken a new meaning altogether. Off shoring has facilitated the mixing of cultures, the sharing of experiences, the enhancement of opportunities and the chance for greater interactions between the human race. On the flip side, as this trend has expanded, it has led to bitterness and derangement for those who are part of the unemployed labour force and blame it on the off shoring policies of the business corporation. The argument is twin sided and ongoing. It rather helps for everybody to keep an open mind and try to understand that off shoring is not new, nor is it inherently good or bad. It is the result of economic forces, of competition, of free trade and that it has been thriving in the business world for a long time now.

It is also important to understand that off shoring is not spearheaded by ‘bad cops" in the sense that there are not evil executives high up in the echelons of boardrooms who are racking their brains to find ways to fire people. Though it may also be true that neither are they really bothered about what happens to local jobs which are lost when it makes business sense to off shore especially due to the pressures of global competition. Their sole concern has always been “show me the money”, and it will always be.....


Opinion

Do we understand the dynamics behind the decision to Off Shore?

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    • Riverfish24 profile image
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      Riverfish24 5 years ago from United States

      Thanks for the feedback Simone!

    • Simone Smith profile image

      Simone Haruko Smith 5 years ago from San Francisco

      What a fantastic discussion of the subject. I love the different sections into which you've broken this Hub.

    • Riverfish24 profile image
      Author

      Riverfish24 5 years ago from United States

      Thanks watergeek for your contribution, great points!

    • watergeek profile image

      watergeek 5 years ago from Pasadena CA

      It is a good article - well explained. I have some observations about the practice of offshoring.

      1) I have been able to tell easily when I'm referred to a customer service rep in India or Ireland. Many times the people hired know nothing - only the very simple things that I could figure out myself - that's assuming I can understand their accent. Their main job is to get people to pay for someone to offer help that should be free.

      2) I have lived in countries where factory work was offshorn (lol) and noticed that the goods they make are seldom made available for purchase by the local people. This is a shame. That's one of the things that makes us onshore people cry "exploitation," another being that they're usually given wages that even they can't afford.

      3) Many of these same multi-nationals also offshore their profits so they don't have to pay US taxes. That results in them using our infrastructure without contributing to its maintenance. Not good.

      What I do like is that some smart workers in those overseas factories figure out how to make the goods for themselves. Then they go off and improve them and start a business of their own in competition with us. That way their country benefits and we are called to task to keep innovating.

    • Riverfish24 profile image
      Author

      Riverfish24 5 years ago from United States

      Thanks Robert for visiting and commenting. Yes, very true, it has certainly been a topic of much debate.

    • Robert Erich profile image

      Robert Erich 5 years ago from California

      Fantastic article! I have outsourced business to offshore companies before myself. There are a lot of serious discussions about whether it hurts or helps a nations current economy. I know that many people in America, Europe, and Australia hate the idea of losing our jobs to India and China. However, the other thought is why should we be able to live such a better lifestyle for doing the exact same job.

      Great article. Thanks for posting.

    • Riverfish24 profile image
      Author

      Riverfish24 5 years ago from United States

      Thanks spartucusjones for taking the time to read!

    • Riverfish24 profile image
      Author

      Riverfish24 5 years ago from United States

      Yes Leah, the way business boundaries are dissipating is just incredible.

    • leahlefler profile image

      Leah Lefler 5 years ago from Western New York

      This is a very interesting hub - we worked in Ireland because our company was acquired by an Irish company, but now the manufacturing is performed in China. One of the biggest markets for the tests the company developed was in Africa, and the kits simply could not be made cheaply enough for that market in Europe or America. When the manufacturing process was moved to China, the kits were affordable to the African marketplace. We are truly in a global economy!

    • spartucusjones profile image

      CJ Baker 5 years ago from Parts Unknown

      Well researched and thoroughly explained hub! You explained a subject that I knew very little about in an easily understood way.