Outsourcing is the delegation of tasks or jobs from internal production to an external entity (such as a subcontractor). Most recently, it has come to mean the elimination of native staff to staff overseas, where salaries are markedly lower. This is despite the fact that the majority of outsourcing that occurs today still occurs within country boundaries, especially in North America. It became a popular buzzword in business and management in the 1990s.
Outsourcing and out-tasking involve transferring a significant amount of management control to the supplier. Buying products from another entity is not outsourcing or out-tasking, but merely a vendor relationship. Likewise, buying services from a provider is not necessarily outsourcing or out-tasking. Outsourcing always involves a considerable degree of two-way information exchange, co-ordination, and trust.
The concept started with Ross Perot when he founded Electronic Data Systems in 1962. EDS would tell a prospective client, "You are familiar with designing, manufacturing and selling furniture, but we're familiar with managing information technology. We can sell you the information technology you need, and you pay us monthly for the service with a minimum commitment of two to ten years."
Organizations that deliver such services feel that outsourcing requires the turning over of management responsibility for running a segment of business. In theory, this business segment should not be mission-critical, but practice often dictates otherwise. Outsourcing business is characterized by expertise not inherent to the core of the client organization.
A related term is out-tasking: turning over a narrowly-defined segment of business to another business, typically on an annual contract, or sometimes a shorter one. This usually involves continued direct or indirect management and decision-making by the client of the out-tasking business.
The international context
With the rise of Globalisation, many companies are turning to either offshoring or offshore outsourcing. Offshore outsourcing more and more takes the shape of Business Process Outsourcing, where whole business processes (such as support and development) are outsourced. The client is usually free to choose who provides the outsourced business processes, while stock markets press the company to do more for less. This requires that managers search out the cheapest sources they can find. In countries like India and China (primarily Bangalore in India), companies like IBM, Microsoft, Hewlett Packard, and Novell choose to get services from sub-contractors in these countries or move many development and support jobs there. Smaller businesses can also take advantage of freelancing on the Internet to get smaller projects done by offshore developers at minimum cost.
This practice became even more popular after the dot-com crash of the early 21st century. As many businesses struggled with cash-flow problems, many investors were leary in investing money in high-tech companies, which many felt were still vulnerable to the dot-com effect. Struggling to do more with less, companies looked for less expensive avenues of development and support. For the United States, India seemed like a perfect resource for these needs since most nationals spoke English—a side-effect of several decades of British colonial rule. A company can hire an engineer in India, for example, for US$10,000 a year where an equally qualified engineer in the U.S. could cost $60,000-$90,000 a year.
A side effect of this practice led to the domestic unemployability of thousands of high-tech professionals, many of whom were new college graduates. Many of these new graduates studied high-tech fields specifically because a few years earlier, they were told there was an earnest need for people with the skills they actively acquired. Many companies required their employees to train their off-shore replacements, after which they were downsized (laid off).
In practice, this trend has experienced mixed results. Some companies, which were required to hire off-shore talent by investors, reported communication barriers and high foreign personnel turnover rates. They would often ask for one thing, but be delivered a different item. Communication between onsite and offshore teams is a must. Attrition in the offshore company is another issue. One company in Pleasanton, California specializes in fixing jobs that were botched due to offshoring.
Because of the outsourcing of many jobs from the United States to India, the prominence of Bangalore as a high-tech region has caused the rise of the term "Don't Get Bangalored" in American business. The term refers to loss of American jobs overseas. There are several US websites that sell "Don't Get Bangalored" T-shirts.
Some companies report favorable results . One company said that the low cost of his Indian development team allows him to hire higher-paid American lead developers. Major companies doing outsourcing include Microsoft, Cisco Systems and IBM to name a few.
Outsourcing, especially BPO (Business Process Outsourcing), has long been a factor in American business, but the trend is beginning to reach Europe. More outsourcing deals were signed there last quarter than in any single quarter since 2000. According to a recent Zogby International poll, 71% of Americans feel that outsourcing is bad for the nation's economy. But most economists feel that it will inevitably remain a part of global trade.
Outsourcing is not just related to the services sector. A lot of manufacturing of products is also outsourced to countries like China and Taiwan. Consumer products including clothes and computer hardware are manufactured in these countries due to cheap labor. These products in turn lead to a cheaper prices in the consuming nations.
California Governor Arnold Schwarzenegger vetoed a bill that would have barred state contractors or agencies from outsourcing jobs offshore. Democratic Presidential candidate John Kerry, who had earlier denounced as "traitors" CEOs of US companies outsourcing to countries like India and China, acknowledged that the practice is here to stay but promised a level-playing field for the American worker.
From: The Milken Institute Review - December 2004
We looked into what happens to a dollar of U.S. corporate spending when a company moves a service job to India. We found that, far from being a zero-sum game, offshoring is a story of mutual gain, benefiting both countries.
The receiving economy (India) captures 33 cents, in the form of wages paid to local workers, profi ts earned by local outsourcing providers and their suppliers, and taxes collected from second- and third-tier suppliers to the outsourcing companies.
But the gains to the U.S. economy are much larger. The most obvious source of value is the cost savings enjoyed by U.S. companies. Thus, far from being bad for the United States, offshoring creates net value for the economy – to the tune of $1.12 to $1.14 for every dollar that goes abroad.
Many of the costs of offshore outsourcing are not taken into account by U.S. companies when making a total cost comparison between domestic and foriegn sources of supply. For example, ramp-up speed and time to market are critical in electronics manufacturing. Fast reaction time, change orders, etc. are the pacing item when a product is not yet in mature production cycles.
Savings on unit cost is quickly lost in scrapped circuit boards or reworked circuit boards and circuit board assemblies that failed to incorporate the latest revision. The dumpsters and salvage dealers in California are loaded with evidence of this inability at times to control the process.
Costs of travel are usually not figured in the comparison.
Negotiating price, terms, delivery, level-loading production and other items for consideration with a local supplier can shrink the difference in cost further, often negating any anticipated savings from offshore suppliers.
Why go to Taiwan to build a machined part when the best machinists in the world are available in the San Fernando Valley and vicinity?
- OpenOutsource Forums (http://www.openoutsource.com/outsourcing-forums.phtml) Popular Outsourcing, BPO and Freelancing forums with a focus on working online
- The Official Outsourcing and BPO Forum (http://www.bpoforum.org)
- Outsourcing Community Forums (http://www.outsourcingforum.net)
- The Outsourcing Times (http://www.blogsource.org)
- Software stays put (http://www.legadoassociates.com/softwareoutsource.htm) - an optimistic view of software outsourcing
- The New Face of the Silicon Age (http://www.wired.com/wired/archive/12.02/india.html) - Wired Magazine
- MilkenInstitute.Org > Publications > MIR 4th Qtr 2004 (http://www.milkeninstitute.org/publications/publications.taf?function=detail&ID=295&cat=MIR) (see "Is Your Job Headed for Bangalore?")
- Jobs in India and California (http://news.com.com/Jobs+in+India+and+California/2061-1022_3-5519787.html?part=rss&tag=5519787&subj=news.1022.20) reporting on a company that specializes in cleaning up messes caused by offshoring
- Indian outsourcing: an alternative view (http://www.theage.com.au/news/Soapbox/Indian-outsourcing-an-alternative-view/2004/12/21/1103391741596.html) Dispels common myths about Indian outsourcing
- Outsourcing: one size does not fit all (http://www.smh.com.au/news/Soapbox/Outsourcing-one-size-does-not-fit-all/2004/12/10/1102625524441.html) Argues for a professional service approach to outsourcing