Outsourcing: Dilemma of the Modern Market, Essay Example
“More than 1.3 million additional Western jobs will vanish by 2014 due to the accelerated movement of work to India and other offshore locations,” warns a study on published in December 2010. In 2012, trends in outsourcing are just as controversial and fear-inducing. Does it give us a leg up on competitors? Is it necessary in our global economy or is it depriving our own workforce of the jobs they need to sustain themselves? In this paper I will explore the pros and cons of outsourcing in the modern economy using the opposing viewpoints presented in Brown and Wilson’s book, The Black Book of Outsourcing: How to Manage the Changes, Challenges, and Opportunities and Ron and Anil Hira’s Outsourcing America: What’s Behind Our National Crisis and How We Can Reclaim American Jobs. To fully understand the ramifications of the practice of outsourcing we must first define it.
Outsourcing is the process or strategic objective of a business unit to take an internal business process and taking the responsibility of the output of the process and moving it outside of its internal process. Outsourcing is normally associated with moving business processes from a domestic nature and have the services or jobs completed offshore through other countries that do not have the costs associated with production of the good or service that the domestic parent company has. The basic concept of outsourcing can be broken down into looking at any job task, business operation or complete job in the business that is contracted out to a third party vendor for a long period of time. This can be the outsourcing of entire assembly lines as Toyota did when they created an assembly plant in Georgetown, Kentucky or it could be a small subset that is not necessarily a core business practice but essential to the value chain such as customer support as in the case for Dell Computers and Sanyo of America.
In the United States, prior to World War II the United States was predominately self-sufficient. That is, the U.S. produced much of what it needed and did not rely upon outside sources for goods or services. Without an intrinsic need, the U.S. did not need to develop overseas transportation and communication. Without a demand for products or services from abroad, there was not a motivating factor to develop a feasible process for goods transfer. After WWII, in order to speed up the recovery of war-torn nations, goods and services were provided overseas. As the needs for flexible, reliable and fast transportation increased so did the opportunities for international trade. However, outsourcing as it is known today did not come into play until the 1980’s when the global market opened up due to technological advancements (Brown 2005). Lower wages of prevailing countries and increased communication made it easier to conduct business globally.
Brown and Wilson say this trend was for the best. Their take is that outsourcing is a tool to facilitate expansion and increased opportunity. Promoting outsourcing as a way to cut cost and eliminate waste from the final good or service is exactly why it has been so popular. Outsourcing can be used to create a competitive advantage in business which helps illustrate why people in leadership roles in various companies choose to outsource certain aspects of their business. Using outsourcing to facilitate the growth of an area of business, when used properly, can expand the opportunities for success and ultimately bring increased prosperity to the company.
Input costs to a product or service could be reduced if the company receiving the outsourced work can complete the same product or service at a greatly reduced cost. Lower wages, proximity to resources and expertise allow companies to drive down cost to the finished product. Outside of direct cost there could be an increase in efficiency that the outsourcing company is looking for. When conducting a cost benefit analysis, the parent company may realize that it would require too many additional resources to conduct the same business practice than it would to have the good or service outsourced. For example, outsourcing technology help lines has made it possible to have run them 24 hours a day.
Other reasons for outsourcing could include fulfilling a strategic gap between a needed resource and those available internally. This could be a knowledge gap or a physical resource gap (Brown 2005). By outsourcing this secondary or tertiary business process the company can focus on their core business. This is another benefit to outsourcing. Outsourcing can also be used as a tool to clean up operational segments that have lost sight of their business objectives or have become unwieldy or unmanageable. A way to reorganize and clean up business processes that are draining limited resources is to develop a plan with requirements and outsource those functions. This provides only the core functions required by the business and eliminates the area that is poorly managed.
A new and final reason for outsourcing is simply to keep up with the competition. As Lee Kuan Yew famously said- “If you deprive yourself of outsourcing and your competitors do not, you’re putting yourself out of business.”
If that is true then why do some businesses choice to hold out on outsourcing? Well, there are disadvantages that, for some, outweigh the positive aspects. Both Ron and Anil Hira focus on the devastating and negligent aspects of outsourcing. They argue that business processes that are moved outside of the country create a broader destruction of financial stability than is gained through outsourcing, a short term solution. In their book, Mr. and Mrs. Hira depict the overall degradation of core business practices that result from farming out critical aspects of the business. Sometimes the negative aspects result in the mismanagement and over-utilization of outsourcing to the point of core business decimation.
The first is loss of control over the inputs to the company’s goods or services. No matter how good a relationship the parent company has with the company providing the goods or services, neither will ever have their business intentions fully in line with each other. Both companies are working to build shareholder and company wealth at the highest rates with the lowest costs. Both companies have competing interests at the very beginning of the relationship. There are also risks on the dependency of one company on another. The financial success of the outsourcing company becomes dependent on the ability of the other company to run and manage itself.
We have explored some of the pros and cons of outsourcing in general but what are its implications for the economy here at home in the U.S.? Should we promote outsourcing in the hopes of increasing company profits or reverse the trend back towards a more self-sufficient economy in order to protect our own workers?
There are a multitude of factors at play but ultimately outsourcing will be harmful to our economy. Irresponsible outsourcing involves making long term decisions based on short term results. Initially the cost of doing business could be lower but overall the business will suffer due to issue with quality, hidden costs, inability to move business processes and increased risk exposure due to involving more business partners to critical business processes (Hira and Hira 2005). As the global economy ebbs and flows the United States will be at its mercy rather than being able to predict and control its own markets. Outsourcing is also just plain unpopular. The negative public perception of moving work from the home of operations to overseas locations could negatively impact the business by reducing sales and potentially driving a reduction in demand for a good or service.
In conclusion, outsourcing can be used as a business multiplier if used correctly but in order for that to occur, strong leadership and business decisions as well as research into the actual and real cost of doing business must be thought out. Outsourcing can be used as a business tool but should not be used as a core business practice. This management and leadership tool has a fine line between cost reduction and business erosion.
Brown, D., and S. Wilson. The black book of outsourcing, how to manage the changes, challenges, and opportunities. Wiley, 2005.
Hira, Ron, and Anil Hira. Outsourcing America: What’s Behind Our National Crisis and How We Can Reclaim American Jobs. New York: Amacom Books, 2005
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