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off-shoring and out-sourcing examined

Updated on January 11, 2015

Many people confuse the meanings of the terms out-sourcing and off-shoring, or use these terms interchangeably. They both involve a company using a third party to manage parts of the business process, but the reasons for doing so and the ramifications of doing so are quite different.

In short, out-sourcing is the hiring of people from another company or individuals, all from the same country, to work on a permanent basis. Off-shoring is the practice of moving entire business functions to another country. Both practices have been in existence since World War Two, and claim to save costs, but in recent years they have become rampant and the effects on the populace have become a cause for concern.

This article will concentrate on businesses in the United States for simplicity’s sake, but the practices are equally present in other western countries, particularly Europe. We will refer to the company which is doing the off-shoring or out-sourcing as the client company and the company performing the services as the contractor.

Out-sourcing

Out-sourcing is the act of one company contracting another to provide services. Smaller companies do so because they cannot afford, particularly in starting up, to keep employees full time to perform these services. These services are overhead, and not usually a part of the main business mission. NCR is probably the most well-known contractor, handling payroll and the management of payroll funds. Other services usually out-sourced are janitorial, information technology, billing, data entry, claims processing, landscaping, catering, telephony, even human resources. In all cases, the client company pays by the hour of work, does not pay for sick days or holidays, and covers no other benefits such as a paid vacation, dental or health insurance. If these benefits are offered to the employees at all, they are offered by the contracting company. The contractor charges the client by the hours the employee works, and adds a percentage above the employee’s rate for its own profit and costs. With technical employees, the contractor not only pays a larger per-hour rate for the employee, but often doubles the cost to the client. This is justified by the amount of expertise, education and certification the employee needs to have.

The function to be outsourced has expanded to many areas of specialty, including network management, sales, call centers, accounting, shipping and e-mail service. The contractors can even be covering business-mission work that can be separated. Certainly, if the work is temporary (as in an upgrade project) and not part of the standard business processes, a client company can maintain the productivity of their employees by out-sourcing such projects. In the pharmaceutical companies, contractors are hired to run clinical trials, analyze clinical trial data, and present the data to the FDA for drug approval.

Client companies claim that out-sourcing saves money, time and aggravation. Management wants to concentrate on acquisitions, production and the business mission rather than overseeing whether all the waste paper baskets were emptied. Clients also claim that you can add $200,000 a year for benefits when using an FTE (full-time employee). Beyond medical insurance, there is the overhead of human resources to manage employee training on such things as how to select benefits, stock plans and business-related training. Accounting expands for FTEs, as the client maintains separate tax and withholding accounts. The client may not have the correct personnel to perform a special project, or their personnel are already fully occupied. Contractors are “expendable”; they can be cancelled at will without going through union-protected systems, if only to make another acquisition. Stockholders are supportive because contractors are overhead rather than a standing expense. Some companies are actually laying off specialized personnel then offering to hire them back as contractors.

Another advantage of out-sourcing is that the contracting company specializes in its own field, thereby having more high-quality employees specially trained. Often the contractor will add training which is specific to the client’s needs. The contractor is streamlined for its business and up to the minute on advances in its field. Contractors would be personally responsible for all equipment and tools necessary. Examples of contracting companies include IBM, HP, and ACS. Efficiency saves money. By this definition, out-sourcing is still keeping jobs in the country.

But it must be understood that there are many disadvantages to out-sourcing. Employees must be rotated in and out of the client company to avoid federal regulations which demanded that anyone working for the client for over a year must be hired in to receive the same benefits as FTEs. Many client companies do not specify the citizenship of the employees contracted, so they may be inadvertently hiring from outside the country. Many contractors are handling company-confidential information, without the incentive of full-time employment to keep their interest in maintaining this confidentiality. Knowing that they are only going to be at the client for three to eleven months, employees do much lower-quality work. The client companies tolerate that in favor of the cost savings unless it has an impact on the core business mission. The practice of hiring the lowest bidder can often lower the quality of the product. Employees working for contracting companies may have no benefits at all, and there can be months between contracts. Originally the employees of a contracting company were hired by that contractor as FTEs and therefore got benefits and paid “down time”, but that is no longer true. This puts a strain on the unemployment budget of both the contracting company and the government. It is entirely possible that a client company out-sources just about everything, but even if only parts are out-sourced, there is no employee loyalty, poor communication (everything has to go through the contracting company) and a distinct loss of control.

Off-shoring

Of even greater concern is the practice of off-shoring. This is defined as moving business functions over to another country, sending a lot of revenue the other country. While businesses claim greater profits and productivity, a recent study by Businessweek raises a lot of doubt about the advantages to the client country. A lot of the statistics claimed by the client companies cannot be verified. While labor is certainly cheaper, profits appear to be going to the upper management rather than a lowered price for the consumer.

For the client company there are many advantages. Labor is certainly so much cheaper that it negates any tariff costs. Contracting companies can offer even lower costs because they are not required to protect workers as completely as they are in the western countries, even to the point of running “sweat shops”. Certain consumer-protection quality assurance can be skirted. Clients can redirect costs to higher-skilled American workers for the specialties they are better at and pay them better with the saved costs of non-core, mundane labor overseas. Countries such as India, China, Brazil, Russia, the Philippines and Mexico bid against each other to bring the revenue into their contracting companies. Products are manufactured cheaper and faster. Thanks to the Internet, communications all over the world are faster and virtually transparent. Off-shoring is a good way for a company to gain a foothold in a global market.

Just as the savings may be significant in off-shoring, so are the disadvantages. For the client company, there are still communication limitations, and regularly management needs to travel to the contracting country to guide and correct production. Company-sensitive information is not as secure. Customer satisfaction and the client company’s reputation can plummet. A few years ago, lead was discovered in Disney toddler toys. Disney was held to task for the sick children and circumventing US quality control laws not only by the federal government but also by the consumers. The publicity from such an occurrence could destroy a client company altogether, whether the error was intentional or not. Prospective workers in the client country are in an uproar because they are losing so many jobs, running out of unemployment income, and cannot afford to have both parents working at low-rate jobs and still afford child care. Despite early education in contracting companies in English, the language barrier is a serious detriment to accomplishing anything internally or with the consumer. Even in English-speaking contractors, differences in idioms and culture can affect the efficiency of the work.

Consumers and displaced workers can still impact a decision for off-shoring.

In Canada very recently, the Royal Bank of Canada brought in temporary foreign workers from India and had existing Canadian workers train their replacements. The Canadian workers were then laid off because they “didn’t know the work”. The movement of Indian workers into Canada as well as the off-shoring of work to India became well publicized. In response, large numbers of Canadians are moving their money, mortgages and other financial business out of big banks and into credit unions. Canadian unions are footing the bill for a class action lawsuit on behalf of the displaced workers that want it, and offering to help the other workers in whatever way they can. Boycotting is indeed the most common and most effective method consumers have to protest and influence businesses to stop off-shoring.

There are a great many examples of off-shoring and its impact. Small and not-so-small companies are being driven out of business, citizens are losing job opportunities. Contracting companies are educating their workers in this country, then bringing them home to compete with the cost of living for equally-educated and skilled labor in this country. The contracting countries have workers willing to work twice as hard for one-fifth the pay.

Off-shoring is becoming the way to do business in the western world, and its impact is far worse than it appears. Both out-sourcing and off-shoring can be a good idea if handled wisely, both for the client company, the employee and the consumer. Increased profits should be redirected into creating local jobs in which the client country is strong. Some of those profits should go into educating the populace in the work that is needed and which pays in a range that would allow a worker to support a family and a home.

Some American companies are seeing the reward of advertising “made in America”.

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    • profile image

      Lorren 2 years ago

      I could read a book about this without finding such real-world aposapcher!

    • Bonnie-Jean Rohne profile image
      Author

      Bonnie-Jean Rohner 2 years ago from Williamson, New York

      A little common sense can go a long way.

    • profile image

      Rochi 2 years ago

      Great common sense here. Wish I'd thgohut of that.

    • profile image

      Ireland 2 years ago

      A perfect reply! Thanks for taking the trluboe.

    • Bonnie-Jean Rohne profile image
      Author

      Bonnie-Jean Rohner 2 years ago from Williamson, New York

      Glad to be of help.

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