Definition: The transfer of day-to-day business functions to an external third-party service provider located overseas
Significance: Advances in technology have allowed U.S. companies to transfer some functions previously done within the country to overseas contractors or vendors. This has reduced costs for these companies but also eliminated many jobs in the United States.
Overseas outsourcing has seen a huge growth, beginning during the 1990’s. The lowering of trade and political barriers and major technical advances have made it possible to do business almost anywhere, and at any time, instantly around the globe. Although many companies outsource business functions such as information technology, human resources, and accounting, they can also outsource customer support, Web site design, telemarketing, marketing, and content writing. Consequently, companies can often experience unheard-of savings, as much as 30 to 40 percent, in labor costs during the first year—thus vastly improving their annual cash flow.
The Upside and Downside
Experts argue that overseas outsourcing helps globalization by raising the standard of living in countries to which jobs are outsourced and that this improves the American economy by providing low cost products and services to American consumers. In the end, they argue, this will lead to higher paying service jobs within the United States. American companies benefit not only from lower labor costs but also from offshore tax benefits. Small companies that outsource jobs can position themselves to be far more competitive against larger corporations. However, although overseas outsourcing is viewed by many companies as an extremely profitable business venture, for workers with well-paying jobs in the United States who lose their jobs to professionals in such countries as India and China, it is an economic and psychological nightmare. Simply put, big layoffs follow when companies outsource service jobs to developing countries.
Outsourcing is a business practice used by many of the Fortune 500 companies, such as Microsoft, IBM, Hewlett-Packard, and American Telephone and Telegraph Company (AT&T), but it has become a point of contention because Americans continue to lose jobs when companies contract with overseas vendors that provide low-paying labor in such countries as India, China, Brazil, the Philippines, and Mexico. The jobs that are lost are not lower-paying manufacturing jobs: Highly educated professionals find themselves having to compete against people with comparable college degrees willing to work harder for a fraction of the pay in developing countries. A poll during the 2004 elections revealed that 71 percent of voters believed that outsourcing hurts the American economy and wanted government intervention through increased taxes on companies that outsource. For small towns, overseas outsourcing can be particularly destructive because the workers in a small town may not be able to find comparable work unless they leave the area.
Outsourcing can be highly risky for American businesses because service providers may be disreputable or simply may not be able to perform vital work to American standards. In addition, huge layoffs by companies can lead to heavy financial losses as a result of poor planning on the part of the company and the lowered motivation levels of the remaining workers. After companies outsource services, they often find it more difficult to retain well trained, experienced staff in the United States and, as a result, can lose key personnel to their competitors. Similarly, the contractor providing the outsourced function can experience high turnover, causing it to replace its staff with less-qualified workers, and may purchase inferior technology. Often contractors fail to live up to the promises they initially make to the client company, leading to poorer quality service. In particular, customer satisfaction questionnaires reveal that call centers that are expected to provide professional customer service are problematic when inferior language skills prevent smooth communications between the service provider and the customer.
Some critics insist that outsourcing exploits lower-paid overseas workers, but supporters of the practice note that it benefits these workers by giving them relatively well-paid employment and enriching their quality of life. However, although they enjoy a higher standard of living, workers at the outsource company remain insecure because they realize their jobs are only temporary and that their jobs could be easily moved to another developing country, where wages are even lower. Critics also note that highly skilled workers such as accountants and computer programmers are being exploited because they are being paid far lower wages than their American counterparts.
Businesses that choose not to outsource overseas run the risk of failing because their competition can offer similar services at far lower prices. In this regard, customers who frequent businesses that practice overseas outsourcing are often blamed as the ultimate cause of the problems caused by outsourcing.
Past, Present, and Future
Economists see outsourcing as an evolutionary process that happened first in the manufacturing industry, when companies relocated factories to such areas as Canada, Mexico, and South America to cut costs. During the 1990’s, outsourcing heavy industrial low-skilled work to developing nations allowed Americans to specialize in higher-paying technical jobs. Later, it was these higher-paying information technology (IT) jobs that became affected by overseas outsourcing. In the past, outsourcing took place at a slower pace, with factories often taking years to fully relocate. In addition, the movement of large amounts of equipment and raw materials to the new factory created new jobs. However, in the age of the digital revolution, white-collar jobs can be moved overseas very quickly, with no additional job creation involved.
Jobs in the United States involving information technology, marketing, human resources, customer services, and accounting have been lost to outsourcing. Vendors in other countries such as India, China, the Philippines, and Romania, which have become known as outsourcing centers, employ large numbers of qualified people to handle a variety of service jobs required by client businesses in the United States. These jobs involve such personnel as software engineers, computer staff, editorial workers, and credit-card bill collectors. Recruiting and training personnel for a telemarketing operation in the United States is cost prohibitive, while contracting for telemarketing services from a company with the latest equipment and lower-paid but qualified staff already in place is much more cost effective.
Health care companies often outsource medical billing to India to cut costs. India’s advanced and stable governmental network and strong economy make the nation a particularly appealing outsource destination. In addition, India, which can boast of a computer-literate and English-speaking labor force, has become the preferred site for mainframe operations that involve computer systems, monitoring and systems recovery, and business operations necessitating high-level salaried employees.
Many American companies have engaged outsourcing companies to perform accounting functions and business processes for far less than these services would cost in the United States. In particular, many companies are outsourcing accounts-payable management functions. Another fast-growing sector in the outsource business is human resources, where outsource companies handle functions such as payroll, benefits, and the hiring and training of personnel. High-end research and design jobs have been outsourced as well.
Much has been said and written about the financial and psychological mayhem created in the United States as a result of overseas outsourcing. Some people view outsourcing as the reason for the demise of traditionally good-paying American jobs. However, economists maintain that transformational outsourcing, in which corporations use outsourcing not just to save money but also to promote corporate growth, will have a positive effect on the U.S. economy. American corporations can become much more efficient, increase their pace of innovation, and raise productivity. Therefore, they will be able to hire more Americans and make far better use of their skilled staff in the United States by freeing them from routine office tasks. Indeed, some economists view outsourcing as a catalyst for a larger plan to reinvent outdated American office operations and as an effective means of creating radical business models to overtake competition.
Bendor-Samuel, Peter. Turning Lead into Gold: The Demystification of Outsourcing. Provo, Utah: Executive Excellence Publishing, 2000. Written for companies interested in contracting with outsource companies to save money and companies interesting in providing outsource services to make money. Uses statistics and case studies.
Carmel, Erin, and Paul Tjia. Offshoring Information Technology: Sourcing and Outsourcing to a Global Workforce. New York: Cambridge University Press, 2006. Written by an expert in global information technology for college students and business executives, this work provides insights into outsourcing information technology. Covers such subjects as managing contractors and legal issues in addition to cultural and language problems.
Dobbs, Lou. Exporting America: Why Corporate Greed Is Shipping American Jobs Overseas. New York: Business Plus, 2004. The host of the television show Lou Dobbs Tonight on Cable News Network (CNN) argues that free trade through outsourcing jobs overseas has led to runaway trade deficits and the loss of hundreds of thousands of jobs in the United States. Dobbs negates twelve “myths” associated with outsourcing jobs.
Friedman, Thomas L. The World Is Flat: A Brief History of the Twenty-first Century. New York: Farrar, Straus and Giroux, 2005. The author, who won a Pulitzer Prize as a New York Times foreign correspondent, discusses how the partial dismantling of trade and political barriers along with advances in digital technology have so changed the planet that it is possible to do business instantly across the planet.
Kern, Thomas, and Leslie P. Willcocks. The Relationship Advantage; Information Technologies, Sourcing, and Management. New York: Oxford University Press, 2002. Academic work focusing on five longitudinal case studies that address factors involved in outsourcing to improve relationships between clients and outsource companies.
See also: Federal Emergency Management Agency; Internet; printing industry; privatization; Service industries.