Outsourcing Pros and Cons

Outsourcing and off-shoring are often used synonymously. However, there are subtle differences between the two. Both outsourcing and off-shoring are a consequence of capitalism. Outsourcing refers to sub-contracting a process to a vendor who may be located within the geographical boundaries of the same country. Off-shoring, on the other hand, refers to the situation wherein the sub-contractor and the outsourcing company are situated in different countries. The desire to reduce costs and focus on core activities propelled the companies to concentrate on activities that were intrinsic to the company while outsourcing/off-shoring activities that were not central to their existence. In keeping with the norms, we have used the term outsourcing to refer to off-shoring.

The History of Outsourcing

In the early 1960s and 70s, a few American textile companies began sub-contracting the production of textiles and garments to Asia. This was followed by the outsourcing of the production of shoes, toys, electronic items and auto parts. In fact, major auto producers started setting up assembly plants in foreign countries. In the late 1990s, American companies began outsourcing services to countries like India. Jobs, that did not require a great deal of skill, were outsourced to countries with a huge English speaking workforce. Banks and insurance companies off-shored most of their back-office work. Outsourcing software development work also caught on in a big way. Accounting and law firms also started using firms, located overseas, for expediting routine work. Payroll processing, medical billing, paperwork and benefits administration are the latest in the series of jobs to be outsourced. In fact, licensed radiologists in foreign countries have been entrusted with the task of reading X-rays at night and on weekends, when local radiologists are unavailable.

It's evident that the process of outsourcing has gathered momentum over the years. However, most people feel that outsourcing has resulted in a number of Americans losing their jobs to foreigners. The following outsourcing pros and cons can help understand the need to outsource and the opposition that the companies/countries are likely to face on account of outsourcing.

Outsourcing Pros and Cons

Lower Operating Costs: Outsourcing to countries, like India that have a well-educated population, where people are more than willing to provide the desired service for a fraction of the cost as compared to the domestic workers has been instrumental in lowering operating costs. Companies have reaped huge profits on account of lower operating costs.

Corporate Tax Breaks: According to US laws, a company can defer paying taxes on profits earned abroad as long as the profits are not remitted to the parent company located in the US. Moreover, the deferral period can be extended indefinitely. Corporates have thus managed to reap the benefits of outsourcing.

The Theory of Comparative Advantage: This theory was proposed by the famous economist David Ricardo who advocated free trade by theorizing its positive effects on the GDP of a country. It was his belief that by trading, irrespective of boundaries, a country could focus on the production of a good for which it had a comparative advantage and barter those with goods produced by other countries. This in turn would result in maximizing the GDP of the country.

Theory of Core Competence: According to the theory of core competence, an organization would do well to focus on its main or core operations and outsource activities that are of an operational nature. This would help the company maintain its competitive advantage, improve efficiency and consequently increase profits. This theory has been discussed in the article titled, 'Reasons to Outsource'.

Rising Unemployment: Outsourcing manufacturing activities has rendered a number of blue collar workers jobless. The laid off workers have found it exceedingly difficult to seek alternate employment on account of the decreasing demand for their skills.

Off-shoring White Collar Jobs: It has been estimated that by the year 2015 nearly 3.3 million U.S. white-collar jobs will be off-shored, by the US, and nearly $136 billion worth of wages will be lost.

Deteriorating Quality: Deteriorating quality is an oft-proclaimed argument against outsourcing. People believe that outsourcing white collar jobs, that require a certain skill set, has resulted in deteriorating quality. The efficacy of outsourcing, in delivering results, has thus been questioned.

The dispute between the proponents and the opponents of outsourcing is yet to be resolved. The difficulty in reaching a consensus can be attributed to the aforementioned pros and cons of outsourcing that have made off-shoring a double-edged sword.