Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity which otherwise is or could be carried out internally,
i.e. in-house, and sometimes involves transferring employees and assets from one
firm
A company, abbreviated as co., is a Legal personality, legal entity representing an association of people, whether Natural person, natural, Legal person, legal or a mixture of both, with a specific objective. Company members share a common p ...
to another. The term ''outsourcing'', which came from the phrase ''outside resourcing'', originated no later than 1981. The concept, which ''
The Economist
''The Economist'' is a British weekly newspaper printed in demitab format and published digitally. It focuses on current affairs, international business, politics, technology, and culture. Based in London, the newspaper is owned by The Econo ...
'' says has "made its presence felt since the time of the
Second World War
World War II or the Second World War, often abbreviated as WWII or WW2, was a world war that lasted from 1939 to 1945. It involved the vast majority of the world's countries—including all of the great powers—forming two opposin ...
", often involves the contracting of a
business process
A business process, business method or business function is a collection of related, structured activities or tasks by people or equipment in which a specific sequence produces a service or product (serves a particular business goal) for a parti ...
(e.g.,
payroll
A payroll is the list of employees of some company that is entitled to receive payments as well as other work benefits and the amounts that each should receive. Along with the amounts that each employee should receive for time worked or tasks pe ...
processing, claims processing), operational, and/or non-core functions, such as manufacturing,
facility management
Facility management or facilities management (FM) is a professional management discipline focused on the efficient and effective delivery of logistics and other support services related to real property and buildings. It encompasses multiple disc ...
,
call center
A call centre ( Commonwealth spelling) or call center (American spelling; see spelling differences) is a managed capability that can be centralised or remote that is used for receiving or transmitting a large volume of enquiries by telephone. ...
/call center support.
The practice of handing over control of public services to private enterprises (
privatization
Privatization (also privatisation in British English) can mean several different things, most commonly referring to moving something from the public sector into the private sector. It is also sometimes used as a synonym for deregulation when ...
), even if conducted on a limited, short-term basis, may also be described as outsourcing.
Outsourcing includes both foreign and domestic contracting, and sometimes includes
offshoring
Offshoring is the relocation of a business process from one country to another—typically an operational process, such as manufacturing, or supporting processes, such as accounting. Usually this refers to a company business, although state gover ...
(relocating a business function to a distant country) or
nearshoring
Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity which otherwise is or could be carried out internally, i.e. in-house, and sometimes involves transferring employees and ...
(transferring a business process to a nearby country). Offshoring and outsourcing are not mutually inclusive; one can exist without the other. They can be intertwined (offshore outsourcing), and can be individually or jointly, partially or completely reversed,
in methods including those known as reshoring, inshoring, and insourcing.
Terminology
* Offshoring is moving the work to a distant country. If the distant workplace is a foreign subsidiary/owned by the company, then the offshore operation is a
captive
Captive or Captives may refer to:
Arts, entertainment, and media Films
* ''Captive'' (1980 film), a sci-fi film, starring Cameron Mitchell and David Ladd
* ''Captive'' (1986 film), a British-French film starring Oliver Reed
* ''Captive'' (1991 ...
,
sometimes referred to as ''in-house offshore.''
* is the practice of hiring an external organization to perform some business functions ('outsourcing') in a country other than the one where the products or services are actually performed, developed or manufactured ('offshore').
[
* Insourcing entails bringing processes handled by third-party firms in-house, and is sometimes accomplished via ]vertical integration
In microeconomics, management and international political economy, vertical integration is a term that describes the arrangement in which the supply chain of a company is integrated and owned by that company. Usually each member of the suppl ...
.
* Nearshoring refers to outsource to a nearby country. Usually it takes place across national borders.
* refers to outsourcing to companies in more rural locations within the same country.
* (also known as ) is a form of IT-enabled "transfer of service industry employment from offices to home-based ... with appropriate telephone and Internet facilities". These remote work
Remote work, also called work from home (WFH), work from anywhere, telework, remote job, mobile work, and distance work is an employment arrangement in which employees do not commute to a central place of work, such as an office building, ware ...
positions may be customer-facing or back office
A back office in most corporations is where work that supports ''front office'' work is done. The front office is the "face" of the company and is all the resources of the company that are used to make sales and interact with customers and client ...
, and the workers may be employee
Employment is a relationship between two parties regulating the provision of paid labour services. Usually based on a contract, one party, the employer, which might be a corporation, a not-for-profit organization, a co-operative, or any other ...
s or independent contractor
Employment is a relationship between two parties regulating the provision of paid labour services. Usually based on a contract, one party, the employer, which might be a corporation, a not-for-profit organization, a co-operative, or any othe ...
s.
* Friendshoring
Friendshoring or Allyshoring is a concept derived from onshoring and nearshoring but it goes beyond that by limiting supply chain networks to allies and friendly countries. Allied countries are taking geopolitics into account in their risk assess ...
refers developing supply chain networks with allies and friendly countries.
* In-housing refers to hiring employees or using existing employees/resources to undo an outsourcing.
* An intermediary
An intermediary (or go-between) is a third party that offers intermediation services between two parties, which involves conveying messages between principals in a dispute, preventing direct contact and potential escalation of the issue. In law ...
is a business which provides a contract service to another organization while contracting out that same service.
Acronyms
The following terms are also referred to via acronyms:
Overview
Motivations
Global labor arbitrage
Global labor arbitrage is an economic phenomenon where, as a result of the removal of or disintegration of barriers to international trade, jobs move to nations where labor and the cost of doing business (such as environmental regulations) is inex ...
can provide major financial savings from lower international labor rates, which could be a major motivation for offshoring. Cost savings from economies of scale
In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of output produced per unit of time. A decrease in cost per unit of output enables ...
and specialization can also motivate outsourcing, even if not offshoring. Since about 2015 indirect revenue benefits have increasingly become additional motivators.[Forrester Research, Inc. ]
Another motivation is speed to market. To make this work, a new process was developed: "outsource the outsourcing process". Details of managing DuPont
DuPont de Nemours, Inc., commonly shortened to DuPont, is an American multinational chemical company first formed in 1802 by French-American chemist and industrialist Éleuthère Irénée du Pont de Nemours. The company played a major role in ...
's chief information officer Cinda Hallman Cinda A. Hallman (1944–2007) became noteworthy for her work in Y2K prior to coining the phrase "outsource the outsourcing process;" both of these were at Du Pont, prior to her nomination to The Research Board.
Biography
Arkansas-born Hallman b ...
's $4 billion 10-year outsourcing contract with Computer Sciences Corporation
Computer Sciences Corporation (CSC) was an American multinational corporation that provided information technology (IT) services and professional services. On April 3, 2017, it merged with the Enterprise Services line of business of HP Ente ...
and Accenture
Accenture plc is an Irish-American professional services company based in Dublin, specializing in information technology (IT) services and consulting. A ''Fortune'' Global 500 company, it reported revenues of $61.6 billion in 2022. Accentur ...
were outsourced, thus avoiding "inventing a process if we'd done it in-house". A term subsequently developed to describe this is '.
Outsourcing can offer greater budget flexibility and control by allowing organizations to pay for the services and business functions they need, when they need them. It is often perceived to reduce hiring and training specialized staff, to make available specialized expertise, and to decrease capital, operating expenses, and risk.
"Do what you do best and outsource the rest" has become an internationally recognized business tagline first "coined and developed" in the 1990s by management consultant Peter Drucker
Peter Ferdinand Drucker (; ; November 19, 1909 – November 11, 2005) was an Austrian-American management consultant, educator, and author, whose writings contributed to the philosophical and practical foundations of the modern business co ...
. The slogan was primarily used to advocate outsourcing as a viable business strategy. Drucker began explaining the concept of "outsourcing" as early as 1989 in his ''Wall Street Journal
''The Wall Street Journal'' is an American business-focused, international daily newspaper based in New York City, with international editions also available in Chinese and Japanese. The ''Journal'', along with its Asian editions, is published ...
'' article entitled "Sell the Mailroom".
The biggest difference between outsourcing and in-house is with regards to the difference in ownership: outsourcing usually presupposes integration of business processes under a different ownership, over which the client business has minimal or no control. This requires the use of outsourcing relationship management
Outsourcing relationship management (ORM) is the business discipline widely adopted by companies and public institutions to manage one or more external service providers as part of an outsourcing strategy. ORM is a broadly used term that encompass ...
.
Sometimes the effect of what looks like outsourcing from one side and insourcing from the other side can be unexpected; ''The New York Times
''The New York Times'' (''the Times'', ''NYT'', or the Gray Lady) is a daily newspaper based in New York City with a worldwide readership reported in 2020 to comprise a declining 840,000 paid print subscribers, and a growing 6 million paid ...
'' reported in 2001 that "6.4 million Americans .. worked for foreign companies as of 2001, utmore jobs are being outsourced than" he reverse
He or HE may refer to:
Language
* He (pronoun), an English pronoun
* He (kana), the romanization of the Japanese kana へ
* He (letter), the fifth letter of many Semitic alphabets
* He (Cyrillic), a letter of the Cyrillic script called ''He'' ...
Agreements
Two organizations may enter into a contractual agreement involving an exchange
Exchange may refer to:
Physics
*Gas exchange is the movement of oxygen and carbon dioxide molecules from a region of higher concentration to a region of lower concentration. Places United States
* Exchange, Indiana, an unincorporated community
* ...
of services
Service may refer to:
Activities
* Administrative service, a required part of the workload of university faculty
* Civil service, the body of employees of a government
* Community service, volunteer service for the benefit of a community or a pu ...
, expertise, and payments
A payment is the voluntary tender of money or its equivalent or of things of value by one party (such as a person or company) to another in exchange for goods, or services provided by them, or to fulfill a legal obligation. The party making the p ...
. Outsourcing is said to help firms to perform well in their core competencies, fuel innovation
Innovation is the practical implementation of ideas that result in the introduction of new goods or services or improvement in offering goods or services. ISO TC 279 in the standard ISO 56000:2020 defines innovation as "a new or changed entity ...
, and mitigate a shortage of skill or expertise in the areas where they want to outsource.
History
20th century
Following the adding of management layers in the 1950s and 1960s to support expansion for the sake of economy of scale, corporations found that agility and added profits could be obtained by focusing on core strengths; the 1970s and 1980s were the beginnings of what later was named outsourcing. Kodak
The Eastman Kodak Company (referred to simply as Kodak ) is an American public company that produces various products related to its historic basis in analogue photography. The company is headquartered in Rochester, New York, and is incorpor ...
's 1989 "outsourcing most of its information technology systems" was followed by others during the 1990s.
In 2013, the International Association of Outsourcing Professionals gave recognition to Electronic Data Systems
Electronic all cash BSN acc: 1311729000110205 Data Systems (EDS) was an American multinational information technology equipment and services company headquartered in Plano, Texas which was founded in 1962 by Ross Perot. The company was a subs ...
Corporation's Morton H. Meyerson who, in 1967, proposed the business model that eventually became known as outsourcing.
IT-enabled services offshore outsourcing
Growth of offshoring of IT-enabled services, although not universally accepted, both to subsidiaries and to outside companies (offshore outsourcing) is linked to the availability of large amounts of reliable and affordable communication infrastructure following the telecommunication and Internet expansion of the late 1990s. Services making use of low-cost countries included
* back-office and administrative functions, such as finance and accounting, HR, and legal
* call centers
A call centre ( Commonwealth spelling) or call center (American spelling; see spelling differences) is a managed capability that can be centralised or remote that is used for receiving or transmitting a large volume of enquiries by telephone. ...
and other customer-facing departments, such as marketing and sales services
* IT infrastructure and application development
* knowledge services, including engineering support, product design, research and development, and analytics.
Early 21st century
In the early 21st century, businesses increasingly outsourced to suppliers outside their own country, sometimes referred to as offshoring or offshore outsourcing
Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity which otherwise is or could be carried out internally, i.e. in-house, and sometimes involves transferring employees and ...
. Other options subsequently emerged: nearshoring
Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity which otherwise is or could be carried out internally, i.e. in-house, and sometimes involves transferring employees and ...
, crowdsourcing
Crowdsourcing involves a large group of dispersed participants contributing or producing goods or services—including ideas, votes, micro-tasks, and finances—for payment or as volunteers. Contemporary crowdsourcing often involves digita ...
, multisourcing, strategic alliances A strategic alliance (also see strategic partnership) is an agreement between two or more parties to pursue a set of agreed upon objectives needed while remaining independent organizations.
The alliance is a cooperation or collaboration which ai ...
/strategic partnership A strategic partnership (also see strategic alliance) is a relationship between two commercial enterprises, usually formalized by one or more business contracts. A strategic partnership will usually fall short of a legal partnership entity, agency, ...
s, strategic outsourcing.
From Drucker's perspective, a company should only seek to subcontract in those areas in which it demonstrated no special ability. The business strategy outlined by his slogan recommended that companies should take advantage of a specialist provider's knowledge and economies of scale to improve performance and achieve the service needed.
In 2009, by way of recognition, Peter Drucker posthumously received a significant honor when he was inducted into the Outsourcing Hall of Fame for his outstanding work in the field.[
]
Limitations due to growth
Inflation, high domestic interest rates, and economic growth pushed India's IT salaries 10–15%, making some jobs relatively "too" expensive, compared to other offshoring destinations. Areas for advancing within the value chain included research and development, equity analysis, tax-return processing, radiological analysis, and medical transcription
Medical transcription, also known as MT, is an allied health profession dealing with the process of transcribing voice-recorded medical reports that are dictated by physicians, nurses and other healthcare practitioners. Medical reports can be vo ...
.
Offshore alternatives
Japanese companies outsourced to China, particularly to formerly Japanese-occupied cities. German companies have outsourced to Eastern Europe
Eastern Europe is a subregion of the Europe, European continent. As a largely ambiguous term, it has a wide range of geopolitical, geographical, ethnic, cultural, and socio-economic connotations. The vast majority of the region is covered by Russ ...
an countries with German-language affiliation, such as Poland
Poland, officially the Republic of Poland, is a country in Central Europe. It is divided into 16 administrative provinces called voivodeships, covering an area of . Poland has a population of over 38 million and is the fifth-most populous ...
and Romania
Romania ( ; ro, România ) is a country located at the crossroads of Central Europe, Central, Eastern Europe, Eastern, and Southeast Europe, Southeastern Europe. It borders Bulgaria to the south, Ukraine to the north, Hungary to the west, S ...
. French companies outsource to North Africa for similar reasons.
For Australian IT companies, Indonesia
Indonesia, officially the Republic of Indonesia, is a country in Southeast Asia and Oceania between the Indian and Pacific oceans. It consists of over 17,000 islands, including Sumatra, Java, Sulawesi, and parts of Borneo and New Guine ...
is one of the major choice of offshoring destination. Near-shore location, common time zone and adequate IT work force are the reasons for offshoring IT services to Indonesia.
Growth of white-collar outsourcing
Although offshoring initially focused on manufacturing, white-collar offshoring/outsourcing has grown rapidly since the early 21st century. The digital workforce of countries like India
India, officially the Republic of India (Hindi: ), is a country in South Asia. It is the seventh-largest country by area, the second-most populous country, and the most populous democracy in the world. Bounded by the Indian Ocean on the so ...
and China
China, officially the People's Republic of China (PRC), is a country in East Asia. It is the world's most populous country, with a population exceeding 1.4 billion, slightly ahead of India. China spans the equivalent of five time zones and ...
are only paid a fraction of what would be minimum wage
A minimum wage is the lowest remuneration that employers can legally pay their employees—the price floor below which employees may not sell their labor. Most countries had introduced minimum wage legislation by the end of the 20th century. Bec ...
in the United States. On average, software engineer
Software engineering is a systematic engineering approach to software development.
A software engineer is a person who applies the principles of software engineering to design, develop, maintain, test, and evaluate computer software. The term ''p ...
s are getting paid between 250,000 and 1,500,000 rupees (US$4,000 to US$23,000) in India as opposed to $40,000–$100,000 in countries such as the U.S. and Canada
Canada is a country in North America. Its ten provinces and three territories extend from the Atlantic Ocean to the Pacific Ocean and northward into the Arctic Ocean, covering over , making it the world's second-largest country by tot ...
. Closer to the U.S., Costa Rica
Costa Rica (, ; ; literally "Rich Coast"), officially the Republic of Costa Rica ( es, República de Costa Rica), is a country in the Central American region of North America, bordered by Nicaragua to the north, the Caribbean Sea to the no ...
has become a major source for the advantages of a highly educated labor force, a large bilingual population, stable democratic government, and similar time zones as the U.S. It takes only a few hours to travel between Costa Rica and U.S. Companies such as Intel
Intel Corporation is an American multinational corporation and technology company headquartered in Santa Clara, California. It is the world's largest semiconductor chip manufacturer by revenue, and is one of the developers of the x86 seri ...
, Procter & Gamble
The Procter & Gamble Company (P&G) is an American multinational consumer goods corporation headquartered in Cincinnati, Ohio, founded in 1837 by William Procter and James Gamble. It specializes in a wide range of personal health/consumer hea ...
, HP, Gensler
Gensler is a global design and architecture firm founded in San Francisco, California, in 1965.
In 2021, Gensler generated $1.235 billion in revenue, the most of any architecture firm in the U.S. As of 2021, Gensler operated offices in 49 citi ...
, Amazon
Amazon most often refers to:
* Amazons, a tribe of female warriors in Greek mythology
* Amazon rainforest, a rainforest covering most of the Amazon basin
* Amazon River, in South America
* Amazon (company), an American multinational technology c ...
and Bank of America
The Bank of America Corporation (often abbreviated BofA or BoA) is an American multinational investment bank and financial services holding company headquartered at the Bank of America Corporate Center in Charlotte, North Carolina. The bank w ...
have big operations in Costa Rica.
Unlike outsourced manufacturing, outsourced white collar workers have flextime
Flextime (also spelled flexitime ( BE) or flex-time) is a flexible hours schedule that allows workers to alter their workday and decide/adjust their start and finish times. In contrast to traditional work arrangements that require employees to wo ...
and can choose their working hours, and for which companies to work. Clients benefit from remote work
Remote work, also called work from home (WFH), work from anywhere, telework, remote job, mobile work, and distance work is an employment arrangement in which employees do not commute to a central place of work, such as an office building, ware ...
, reduced office space, management salary, and employee benefits as these individuals are independent contractor
Employment is a relationship between two parties regulating the provision of paid labour services. Usually based on a contract, one party, the employer, which might be a corporation, a not-for-profit organization, a co-operative, or any othe ...
s.
Ending a government outsourcing arrangement poses difficulties.
Reasons for outsourcing
While U.S. companies do not outsource to reduce high top level executive or managerial costs, they primarily outsource to reduce peripheral and "non-core" business expenses. Further reasons are higher taxes, high energy costs, and excessive government regulation or mandates.
Mandated benefits like social security
Welfare, or commonly social welfare, is a type of government support intended to ensure that members of a society can meet basic human needs such as food and shelter. Social security may either be synonymous with welfare, or refer specificall ...
, Medicare, and safety protection (e.g. Occupational Safety and Health Administration
The Occupational Safety and Health Administration'' (OSHA ) is a large regulatory agency of the United States Department of Labor that originally had federal visitorial powers to inspect and examine workplaces. Congress established the agenc ...
regulations) are also motivators. By contrast, executive pay in the U.S. in 2007, which could exceed 400 times more than average workers—a gap 20 times bigger than it was in 1965, is not a factor.
Other reasons include reducing and controlling operating costs, improving company focus, gaining access to world-class capabilities, tax credits, freeing internal resources for other purposes, streamlining or increasing efficiency for time-consuming functions, and maximizing use of external resources. For small businesses, contracting/subcontracting/"outsourcing" might be done to improve work-life balance.
Outsourcing models
There are many outsourcing models, with variations by country, year and industry.
Another approach is to differentiate between tactical and strategic outsourcing models. Tactical models include:
* Staff augmentation
* Project-based
* To gain expertise not available in-house.
Strategic consultancy includes for business process improvement
Business process re-engineering (BPR) is a business management strategy originally pioneered in the early 1990s, focusing on the analysis and design of workflows and business processes within an organization. BPR aims to help organizations fundam ...
.
Innovation outsourcing
When offshore outsourcing knowledge work, firms heavily rely on the availability of technical personnel at offshore locations. One of the challenges in offshoring engineering innovation is a reduction in quality.
Co-sourcing
Co-sourcing is a hybrid of internal staff supplemented by an external service provider. Co-sourcing can minimize sourcing risks, increase transparency, clarity and lend toward better control than fully outsourced.
Co-sourcing services can supplement internal audit staff with specialized skills such as information risk management or integrity services, or help during peak periods, or similarly for other areas such as software development or human resources.
Identity management co-sourcing
Identity management co-sourcing is when on-site hardware interacts with outside identity services.
This contrasts with an "all in-the-cloud" service scenario, where the identity service is built, hosted and operated by the service provider in an externally hosted, cloud computing
Cloud computing is the on-demand availability of computer system resources, especially data storage ( cloud storage) and computing power, without direct active management by the user. Large clouds often have functions distributed over mul ...
infrastructure.
Offshore Software R&D Co-sourcing
Offshore Software R&D is the provision of software development
Software development is the process of conceiving, specifying, designing, programming, documenting, testing, and bug fixing involved in creating and maintaining applications, frameworks, or other software components. Software development invol ...
services by a supplier (whether external or internal) located in a different country from the one where the software will be used. The global software R&D services market, as contrasted to information technology outsourcing (ITO) and business process outsourcing
Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity which otherwise is or could be carried out internally, i.e. in-house, and sometimes involves transferring employees and ...
(BPO), is rather young and currently is at a relatively early stage of development.
=Countries involved in outsourced software R&D
=
Canada, India, Ireland
Ireland ( ; ga, Éire ; Ulster Scots dialect, Ulster-Scots: ) is an island in the Atlantic Ocean, North Atlantic Ocean, in Northwestern Europe, north-western Europe. It is separated from Great Britain to its east by the North Channel (Grea ...
, and Israel
Israel (; he, יִשְׂרָאֵל, ; ar, إِسْرَائِيل, ), officially the State of Israel ( he, מְדִינַת יִשְׂרָאֵל, label=none, translit=Medīnat Yīsrāʾēl; ), is a country in Western Asia. It is situated ...
were the four leading countries as of 2003. Although many countries have participated in the Offshore outsourcing of software development, their involvement in co-sourced and outsourced Research & Development (R&D) was somewhat limited. Canada, the second largest by 2009, had 21%
As of 2018, the top three were deemed by one "research-based policy analysis and commentary from leading economists" as China, India and Israel."
Gartner
Gartner, Inc is a technological research and consulting firm based in Stamford, Connecticut that conducts research on technology and shares this research both through private consulting as well as executive programs and conferences. Its clients ...
Group adds in Russia
Russia (, , ), or the Russian Federation, is a List of transcontinental countries, transcontinental country spanning Eastern Europe and North Asia, Northern Asia. It is the List of countries and dependencies by area, largest country in the ...
, but does not make clear whether this is pure R&D or run-of-the-mill IT outsourcing.
Usability issues in offshore development
The main driver for offshoring development work has been the greater availability of developers at a lower cost than in the home country. However, the rise in offshore development has taken place in parallel with an increased awareness of the importance of usability, and the user experience, in software. Outsourced development poses special problems for development, i.e. the more formal, contractual relationship between the supplier and client, and geographical separation place greater distance between the developers and users, which makes it harder to reflect the users' needs in the final product. This problem is exacerbated if the development is offshore. Further complications arise from cultural differences, which apply even if the development is carried out by an in-house offshore team.
Historically offshore development concentrated on back office functions but, as offshoring has grown, a wider range of applications have been developed. Offshore suppliers have had to respond to the commercial pressures arising from usability issues by building up their usability expertise. Indeed, this problem has presented an attractive opportunity to some suppliers to move up market and offer higher value services.
Legal issues
Offshore Software R&D means that company A turns over responsibility, in whole or in part, of an in-house software development to company B whose location is outside of company A's national jurisdiction. Maximizing the economic value of an offshore software development asset critically depends on understanding how best to use the available forms of legal regulations to protect intellectual rights. If the vendor cannot be trusted to protect trade secrets, then the risks of an offshoring software development may outweigh its potential benefits. Hence, it is critical to review the intellectual property policy of the potential offshoring supplier. The intellectual property protection policy of an offshore software development company must be reflected in these crucial documents: General Agreement; Non-Disclosure Agreement; Employee Confidentiality Contract.
2000-2012 R&D
As forecast in 2003, R&D is outsourced. Ownership of intellectual property
Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual property, and some countries recognize more than others. The best-known types are patents, cop ...
by the outsourcing company, despite outside development, was the goal. To defend against tax-motivated cost-shifting, the U.S. government passed regulations in 2006 to make outsourcing research harder. Despite many R&D contracts given to Indian universities and labs, only some research solutions were patented.
While Pfizer
Pfizer Inc. ( ) is an American multinational pharmaceutical and biotechnology corporation headquartered on 42nd Street in Manhattan, New York City. The company was established in 1849 in New York by two German entrepreneurs, Charles Pfizer ...
moved some of its R&D from the UK to India, a ''Forbes
''Forbes'' () is an American business magazine owned by Integrated Whale Media Investments and the Forbes family. Published eight times a year, it features articles on finance, industry, investing, and marketing topics. ''Forbes'' also re ...
'' article suggested that it is increasingly more dangerous to offshore IP-sensitive projects to India, because of India's continued ignorance of patent regulations. In turn, companies such as Pfizer
Pfizer Inc. ( ) is an American multinational pharmaceutical and biotechnology corporation headquartered on 42nd Street in Manhattan, New York City. The company was established in 1849 in New York by two German entrepreneurs, Charles Pfizer ...
and Novartis, have lost rights to sell many of their cancer medications in India because of lack of IP protection.
Future trends
A 2018 University of Chicago Law School
The University of Chicago Law School is the law school of the University of Chicago, a private research university in Chicago, Illinois. It is consistently ranked among the best and most prestigious law schools in the world, and has many dist ...
article titled "The Future of Outsourcing" begins with "The future of outsourcing is digital." According to other sources, the "Do what you do best and outsource the rest"[ approach means that "integration with retained systems"][ is the new transition challenge; people training still exists, but is merely an "also."
There is more complexity than before, especially when the outside company may be an integrator.][
While the number of technically skilled labor grows in India, Indian offshore companies are increasingly tapping into the skilled labor already available in Eastern Europe to better address the needs of the Western European R&D market.
]
Changed government outsourcing focus
''Forbes'' considered the 2016 U.S. presidential election
The 2016 United States presidential election was the 58th quadrennial United States presidential election, presidential election, held on Tuesday, November 8, 2016. The Republican Party (United States), Republican ticket of businessman Donald ...
"the most disruptive change agent for the outsourcing industry", especially the renewed "invest in America" goal highlighted in campaigning, but the magazine tepidly reversed direction in 2019 as to the outcome for employment.
Furthermore, there are growing legal requirements for data protection
Information privacy is the relationship between the collection and dissemination of data, technology, the public expectation of privacy, contextual information norms, and the legal and political issues surrounding them. It is also known as data pr ...
, where obligations and implementation details must be understood by both sides.[ This includes dealing with customer rights.
]
Implications
Performance measurement
Focusing on software quality
In the context of software engineering, software quality refers to two related but distinct notions:
* Software functional quality reflects how well it complies with or conforms to a given design, based on functional requirements or specification ...
metrics is a good way to maintain track of how well a project is performing.
Management processes
Globalization and complex supply chains, along with greater physical distance between higher management and the production-floor employees often requires a change in management methodologies, as inspection and feedback may not be as direct and frequent as in internal processes. This often requires the assimilation of new communication methods such as voice over IP
Voice over Internet Protocol (VoIP), also called IP telephony, is a method and group of technologies for the delivery of speech, voice communications and multimedia sessions over Internet Protocol (IP) networks, such as the Internet. The terms In ...
, instant messaging
Instant messaging (IM) technology is a type of online chat allowing real-time text transmission over the Internet or another computer network. Messages are typically transmitted between two or more parties, when each user inputs text and trigge ...
, and issue tracking system
An issue tracking system (also ITS, trouble ticket system, support ticket, request management or incident ticket system) is a computer software package that manages and maintains lists of issues. Issue tracking systems are generally used in coll ...
s, new time management
Time management is the process of planning and exercising conscious control of time spent on specific activities, especially to increase effectiveness, efficiency, and productivity. It involves of various demands upon a person relating to Employme ...
methods such as time tracking software
Time-tracking software is a category of computer software that allows its employees to record time spent on tasks or projects. The software is used in many industries, including those who employ freelancers and hourly workers. It is also used by p ...
, and new cost- and schedule-assessment tools such as cost estimation software.
The term transition methodology describes the process of migrating knowledge, systems, and operating capabilities between the two sides.
Communications and customer service
In the area of call-center outsourcing, especially when combined with offshoring, agents may speak with different linguistic
Linguistics is the scientific study of human language. It is called a scientific study because it entails a comprehensive, systematic, objective, and precise analysis of all aspects of language, particularly its nature and structure. Linguis ...
features such as accents Accent may refer to:
Speech and language
* Accent (sociolinguistics), way of pronunciation particular to a speaker or group of speakers
* Accent (phonetics), prominence given to a particular syllable in a word, or a word in a phrase
** Pitch acce ...
, word use and phraseology, which may impede comprehension.[The words "100% U.S.Based Customer Service" (followed by "Talk to a real person any time") are on the back of envelopes mailed by a major USA corporation.]
Governance
In 1979, Nobel laureate Oliver E. Williamson
Oliver Eaton Williamson (September 27, 1932 – May 21, 2020) was an American economist, a professor at the University of California, Berkeley, and recipient of the 2009 Nobel Memorial Prize in Economic Sciences, which he shared with Elinor Ostro ...
wrote that the governance
Governance is the process of interactions through the laws, social norm, norms, power (social and political), power or language of an organized society over a social system (family, tribe, formal organization, formal or informal organization, a ...
structure is the "framework within which the integrity of a transaction is decided", and that "because contracts are varied and complex, governance structures vary with the nature of the transaction". University of Tennessee
The University of Tennessee (officially The University of Tennessee, Knoxville; or UT Knoxville; UTK; or UT) is a public land-grant research university in Knoxville, Tennessee. Founded in 1794, two years before Tennessee became the 16th state, ...
researchers have been studying complex outsourcing relationships since 2003. Emerging thinking regarding strategic outsourcing is focusing on creating a contract structure in which the parties have a vested interest in managing what are often highly complex business arrangements in a more collaborative, aligned, flexible, and credible way.
Security
Reduced security, sometimes related to lower loyalty may occur, even when 'outsourced' staff change their legal status but not their desk. While security and compliance issues are supposed to be addressed through the contract between the client and the suppliers, fraud cases have been reported.
In April 2005, a high-profile case involved the theft of $350,000 from four Citibank
Citibank, N. A. (N. A. stands for " National Association") is the primary U.S. banking subsidiary of financial services multinational Citigroup. Citibank was founded in 1812 as the City Bank of New York, and later became First National City ...
customers when call-center workers acquired the passwords to customer accounts and transferred the money to their own accounts opened under fictitious names. Citibank did not find out about the problem until the American customers noticed discrepancies with their accounts and notified the bank.
Information technology
Richard Baldwin's 2006 ''The Great Unbundling'' work was followed in 2012 by ''Globalization's Second Acceleration (the Second Unbundling)'' and in 2016 by ''The Great Convergence: Information Technology and the New Globalization''. It is here, rather than in manufacturing, that the bits economy can advance in ways that the economy of atoms and things can't: an early 1990s Newsweek had a half page cartoon showing someone who had just ordered a pizza online, and was seeking help to download it.
Step-in rights
If both sides have a contract clause permitting step-in rights, then there is a right, though not an obligation, to take over a task that is not going well, or even the entire project.
Issues and reversals
A number of outsourcings and offshorings that were deemed failures[ led to reversals] signaled by use of terms such as insourcing
Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity which otherwise is or could be carried out internally, i.e. in-house, and sometimes involves transferring employees and ...
and reshoring
Offshoring is the relocation of a business process from one country to another—typically an operational process, such as manufacturing, or supporting processes, such as accounting. Usually this refers to a company business, although state gove ...
. ''The New York Times'' reported in 2017 that IBM "plans to hire 25,000 more workers in the United States over the next four years," overlapping India-based Infosys
Infosys Limited is an Indian Multinational corporation, multinational information technology company that provides business consulting, information technology and outsourcing services. The company was founded in Pune and is headquartered in Ba ...
's "10,000 workers in the United States over the next two years." A clue to a tipping point having been reached was a short essay titled "Maybe You Shouldn't Outsource Everything After All" and the longer "That Job Sent to India May Now Go to Indiana."
Among problems encountered were supply-and-demand induced raises in salaries and lost benefits of similar-time-zone. Other issues were differences in language and culture. Another reason for a decrease in outsourcing is that many jobs that were subcontracted abroad have been replaced by technological advances.[
According to a 2005 ]Deloitte Consulting
Deloitte Touche Tohmatsu Limited (), commonly referred to as Deloitte, is an international professional services network headquartered in London, England. Deloitte is the largest professional services network by revenue and number of profession ...
survey, a quarter of the companies which had outsourced tasks reversed their strategy.
These reversals, however, did not undo the damage. New factories often:
* were in different locations
* needed different skill sets
* used more automation.[
Public opinion in the U.S. and other Western powers opposing outsourcing was particularly strengthened by the drastic increase in unemployment as a result of the 2007–2008 financial crisis. From 2000 to 2010, the U.S. experienced a net loss of 687,000 jobs due to outsourcing, primarily in the computers and electronics sector. Public disenchantment with outsourcing has not only stirred political responses, as seen in the 2012 U.S. presidential campaigns, but it has also made companies more reluctant to outsource or offshore jobs.][
A counterswing depicted by a 2016 Deloitte survey suggested that companies are no longer reluctant to outsource. Deloitte's survey identified three trends:
* Companies are broadening their approach to outsourcing as they begin to view it as more than a simple cost-cutting play
* Organizations are "redefining the ways they enter into outsourcing relationships and manage the ensuing risks".
* Organizations are changing the way they are managing their relationships with outsourcing providers to "maximize the value of those relationships".
]
Insourcing
Insourcing is the process of reversing an outsourcing, possibly using help from those not currently part of the inhouse staff.
Outsourcing has gone through many iterations and reinventions, and some outsourcing contracts have been partially or fully reversed. Often the reason is to maintain control of critical production or competencies, and insourcing is used to reduce costs of taxes, labor and transportation.[Shermon, G (2017). "Digital Talent – Business Models and Competencies" Page 190]
''Regional insourcing'', a related term, is when a company assigns work to a subsidiary that is within the same country. This differs from ''onshoring'' and ''reshoring'', which may be either inside or outside the company.
Regional insourcing
Regional insourcing is a process in which a company establishes satellite locations for specific entities of their business, making use of advantages one state may have over another This concept focuses on the delegating or reassigning of procedures, functions, or jobs from production within a business in one location to another internal entity that specializes in that operation. This allows companies to streamline production, boost competency, and increase their bottom line.
This competitive strategy applies the classical argument of Adam Smith
Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——— ...
, which posits that two nations would benefit more from one another by trading the goods that they are more proficient at manufacturing.
Net effect on jobs
To those who are concerned that nations may be losing a net number of jobs due to outsourcing, some point out that insourcing also occurs. A 2004 study in the U.S., the UK, and many other industrialized countries more jobs are insourced than outsourced. ''The New York Times'' disagreed, and wrote that free trade with low-wage countries is win-lose for many employees who find their jobs offshored or with stagnating wages.
The impact of offshore outsourcing, according to two estimates published by ''The Economist
''The Economist'' is a British weekly newspaper printed in demitab format and published digitally. It focuses on current affairs, international business, politics, technology, and culture. Based in London, the newspaper is owned by The Econo ...
'', showed unequal effect during the period studied 2004 to 2015, ranging from 150,000 to as high as 300,000 jobs lost per year.
In 2010, a group of manufacturers started the Reshoring Initiative, focusing on bringing manufacturing jobs for American companies back to the country. Their data indicated that
140,000 American jobs were lost in 2003 due to offshoring. Eleven years later in 2014, the U.S. recovered 10,000 of those offshored positions; this marked the highest net gain in 20 years. More than 90% of the jobs that American companies "offshored" and outsourced manufacturing to low cost countries such as China, Malaysia
Malaysia ( ; ) is a country in Southeast Asia. The federation, federal constitutional monarchy consists of States and federal territories of Malaysia, thirteen states and three federal territories, separated by the South China Sea into two r ...
and Vietnam
Vietnam or Viet Nam ( vi, Việt Nam, ), officially the Socialist Republic of Vietnam,., group="n" is a country in Southeast Asia, at the eastern edge of mainland Southeast Asia, with an area of and population of 96 million, making i ...
did not return.[
]
Insourcing crossbreeds
The fluctuation of prefixes and names give rise to many more "cross-breeds" of insourcing. For example, "offshore insourcing" is "when companies set up their own "" process centers overseas, sometimes called a ''Captive Service'', taking advantage of their cheaper surroundings while maintaining control of their back-office work and business processes." "" refers to hiring developers to work in-house from virtual (remote) facilities.
In the U.S.
A 2012 series of articles in ''The Atlantic
''The Atlantic'' is an American magazine and multi-platform publisher. It features articles in the fields of politics, foreign affairs, business and the economy, culture and the arts, technology, and science.
It was founded in 1857 in Boston, ...
''[January: ][February: ][June:][December: ] highlighted a turning of the tide for parts of the U.S.'s manufacturing industry. Specific causes identified include rising third-world wages, recognition of hidden off-shoring costs, innovations in design/manufacture/assembly/time-to-market, increasing fuel and transportation costs, falling energy costs in the U.S., increasing U.S. labor productivity, and union flexibility. Hiring at GE's giant Appliance Park
GE Appliances is an American home appliance manufacturer based in Louisville, Kentucky. It has been majority owned by Chinese multinational home appliances company Haier since 2016. It is one of the largest appliance companies in the United Stat ...
in Louisville, Kentucky
Louisville ( , , ) is the largest city in the Commonwealth of Kentucky and the 28th most-populous city in the United States. Louisville is the historical seat and, since 2003, the nominal seat of Jefferson County, on the Indiana border ...
, increased 90% during 2012.
Standpoint of labor
From the standpoint of labor, outsourcing may represent a new threat, contributing to worker insecurity, and is reflective of the general process of globalization
Globalization, or globalisation (Commonwealth English; see spelling differences), is the process of interaction and integration among people, companies, and governments worldwide. The term ''globalization'' first appeared in the early 20t ...
and economic polarization.
* ''Low-skilled work'': Low-skill work outsourced to contractors who tend to employ migrant labor is causing a revival of radical trade union activity. In the UK, major hospitals, universities, ministries and corporations are being pressured.
* ''In-housing'': In January 2020, Tim Orchard, the CEO of Imperial College Healthcare Trust, stated that the in-housing of over 1,000 Sodexo
Sodexo (formerly Sodexho Alliance) is a French food services and facilities management company headquartered in the Paris suburb of Issy-les-Moulineaux. It has 412,088 employees as of 2021, operates in 55 countries and serves 100 million custome ...
cleaners, caterers and porters across five NHS
The National Health Service (NHS) is the umbrella term for the publicly funded healthcare systems of the United Kingdom (UK). Since 1948, they have been funded out of general taxation. There are three systems which are referred to using the " ...
hospitals in London "will create additional cost pressures next year but we are confident that there are also benefits to unlock, arising from better team working, more co-ordinated planning and improved quality."
* ''U.S. base'': On June 26, 2009, Jeff Immelt
Jeffrey Robert Immelt (born February 19, 1956) is an American business executive currently working as a venture partner at New Enterprise Associates. He previously served as the CEO of General Electric from 2001 to 2017, and the CEO of GE's Medi ...
, the CEO of General Electric
General Electric Company (GE) is an American multinational conglomerate founded in 1892, and incorporated in New York state and headquartered in Boston. The company operated in sectors including healthcare, aviation, power, renewable energ ...
, called for the U.S. to increase its manufacturing base employment to 20% of the workforce, commenting that the U.S. has outsourced too much and can no longer rely on consumer spending to drive demand.
Standpoint of government
Western governments may attempt to compensate workers affected by outsourcing through various forms of legislation. In Europe, the Acquired Rights Directive attempts to address the issue. The directive is implemented differently in different nations. In the U.S., the Trade Adjustment Assistance
Trade Adjustment Assistance (TAA) is a federal program of the United States government to act as a way to reduce the damaging impact of imports felt by certain sectors of the U.S. economy. The current structure features four components of Trade Ad ...
Act is meant to provide compensation for workers directly affected by international trade agreements. Whether or not these policies provide the security and fair compensation they promise is debatable.
Government response
In response to the recession, U.S. president Barack Obama
Barack Hussein Obama II ( ; born August 4, 1961) is an American politician who served as the 44th president of the United States from 2009 to 2017. A member of the Democratic Party, Obama was the first African-American president of the U ...
launched the SelectUSA
SelectUSA is a summit held by the U.S. Department of Commerce's International Trade Administration
:
The International Trade Administration (ITA) is an agency in the United States Department of Commerce that promotes United States exports o ...
program in 2011. In January 2012, Obama issued a Call to Action to Invest in America at the White House "Insourcing American Jobs" Forum. Obama met with representatives of Otis Elevator
Otis Worldwide Corporation ( branded as the Otis Elevator Company, its former legal name) is an American company that develops, manufactures and markets elevators, escalators, moving walkways, and related equipment.
Based in Farmington, Connec ...
, Apple
An apple is an edible fruit produced by an apple tree (''Malus domestica''). Apple fruit tree, trees are agriculture, cultivated worldwide and are the most widely grown species in the genus ''Malus''. The tree originated in Central Asia, wh ...
, DuPont, Master Lock
Master Lock is an American company that develops padlocks, combination locks, safes, and related security products. Now a subsidiary of Fortune Brands Home & Security, Master Lock Company LLC was formed in 1921 by locksmith-inventor Harry E. S ...
, and others which had recently brought jobs back or made significant investments in the U.S.
Policy-making strategy
A main feature of outsourcing influencing policy-making is the unpredictability it generates regarding the future of any particular sector or skill-group. The uncertainty of future conditions influences governance approaches to different aspects of long-term policies.
In particular, distinction is needed between
* ''cyclical unemployment'' – for which ''pump it up'' solutions have worked in the past, and
* ''structural unemployment'' – when "businesses and industries that employed them no longer exist, and their skills no longer have the value they once did."
=Competitiveness
=
A governance that attempts adapting to the changing environment will facilitate growth and a stable transition to new economic structures until the economic structures become detrimental to the social, political and cultural structures.
Automation increases output and allows for reduced cost per item. When these changes are not well synchronized, unemployment or underemployment is a likely result. When transportation costs remain unchanged, the negative effect may be permanent;[ jobs in protected sectors may no longer exist.][Stiglitz, J. And Charlton, A., (2005). "Trade can be Good for Development," Ch. 2 in Fair Trade for All, Oxford University Press, Oxford, NY.]
Studies suggest that the effect of U.S. outsourcing on Mexico is that for every 10% increase in U.S. wages, north Mexico cities along the border
Borders are usually defined as geographical boundaries, imposed either by features such as oceans and terrain, or by political entities such as governments, sovereign states, federated states, and other subnational entities. Political borders c ...
experienced wage rises of 2.5%, about 0.69% higher than in inner cities.
By contrast, higher rates of saving and investment in Asian countries, along with rising levels of education, studies suggest, fueled the 'Asian miracle' rather than improvements in productivity and industrial efficiency. There was also an increase in patenting and research and development expenditures.
=Industrial policy
=
Outsourcing results from an internationalization of labor markets as more tasks become tradable. According to leading economist Greg Mankiw
Nicholas Gregory Mankiw (; born February 3, 1958) is an American macroeconomist who is currently the Robert M. Beren Professor of Economics at Harvard University. Mankiw is best known in academia for his work on New Keynesian economics.
Mankiw h ...
, the labour market functions under the same forces as the market of goods, with the underlying implication that the greater the number of tasks available to being moved, the better for efficiency under the gains from trade. With technological progress, more tasks can be offshored at different stages of the overall corporate process.
The tradeoffs are not always balanced, and a 2004 viewer of the situation said "the total number of jobs realized in the United States from insourcing is far less than those lost through outsourcing."
=Environmental policy
=
Import competition has caused a de facto ‘race-to-the-bottom’ where countries lower environmental regulations to secure a competitive edge for their industries relative to other countries.
As Mexico competes with China over Canadian and American markets, its national Commission for Environmental Cooperation
The Commission for Environmental Cooperation (CEC; es, Comisión para la Cooperación Ambiental; french: Commission de coopération environnementale) was established by Canada, Mexico, and the United States to implement the North American Agree ...
has not been active in enacting or enforcing regulations to prevent environmental damage from increasingly industrialized Export Processing Zones. Similarly, since the signing of the North American Free Trade Agreement
The North American Free Trade Agreement (NAFTA ; es, Tratado de Libre Comercio de América del Norte, TLCAN; french: Accord de libre-échange nord-américain, ALÉNA) was an agreement signed by Canada, Mexico, and the United States that crea ...
, heavy industries have increasingly moved to the U.S., which has a comparative advantage due to its abundant presence of capital and well-developed technology. A further example of environmental de-regulation with the objective of protecting trade incentives have been the numerous exemptions to carbon taxes in European countries during the 1990s.
Although outsourcing can influence environmental de-regulatory trends, the added cost of preventing pollution does not majorly determine trade flows or industrialization.
Success stories
Companies such as ET Water Systems (now a Jain Irrigation Systems
Jain Irrigation Systems, or Jains, is an Indian multinational conglomerate based in Jalgaon. It develops, manufactures, supports and sells diversified products, including drip and sprinkler irrigation systems and its components, integrated ir ...
company), GE Appliances
GE Appliances is an American home appliance manufacturer based in Louisville, Kentucky. It has been majority owned by Chinese multinational home appliances company Haier since 2016. It is one of the largest appliance companies in the United Stat ...
and Caterpillar
Caterpillars ( ) are the larval stage of members of the order Lepidoptera (the insect order comprising butterflies and moths).
As with most common names, the application of the word is arbitrary, since the larvae of sawflies (suborder Sym ...
found that with the increase of labor costs in Japan and China, the cost of shipping and custom fees, it cost only about 10% more to manufacture in America.[ Advances in technology and automation such as ]3D printing
3D printing or additive manufacturing is the Manufacturing, construction of a three-dimensional object from a computer-aided design, CAD model or a digital 3D modeling, 3D model. It can be done in a variety of processes in which material is ...
technologies have made bringing manufacturing back to the U.S., both cost effective and possible. Adidas
Adidas AG (; stylized as adidas since 1949) is a German multinational corporation, founded and headquartered in Herzogenaurach, Bavaria, that designs and manufactures shoes, clothing and accessories. It is the largest sportswear manufactur ...
, for example, plans producing highly customized shoes with 3D printers in the U.S.
Globalization and socio-economic implications
Industrialization
Outsourcing has contributed to further levelling of global inequalities as it has led to general trends of industrialization in the Global South and deindustrialization in the Global North.
Not all manufacturing should return to the U.S. The rise of the middle class in China, India and other countries has created markets for the products made in those countries. Just as the U.S. has a Made in USA
A Made in USA mark is a country of origin label affixed to homegrown, American-made products that indicates the product is "all or virtually all" domestically produced, manufactured and assembled in the United States of America. The label is regu ...
program, other countries support products being made domestically. Localization, the process of manufacturing products for the local market, is an approach to keeping some manufacturing offshore and bringing some of it back. Besides the cost savings of manufacturing closer to the market, the lead time for adapting to changes in the market is faster.
The rise in industrial efficiency which characterized development in developed countries has occurred as a result of labor-saving technological improvements. Although these improvements do not directly reduce employment levels but rather increase output per unit of work, they can indirectly diminish the amount of labor required for fixed levels of output.
Growth and income
It has been suggested that "workers require more education and different skills, working with software rather than drill presses" rather than rely on limited growth labor requirements for non-tradable services.[
]
By location
United States
Protection of some data involved in outsourcing, such as about patients (HIPAA
The Health Insurance Portability and Accountability Act of 1996 (HIPAA or the Kennedy– Kassebaum Act) is a United States Act of Congress enacted by the 104th United States Congress and signed into law by President Bill Clinton on August 21, 1 ...
) is one of the few federal protections.
"Outsourcing" is a continuing political issue in the U.S., having been conflated with offshoring during the 2004 U.S. presidential election. The political debate centered on outsourcing's consequences for the domestic U.S. workforce. Democratic U.S. presidential candidate John Kerry
John Forbes Kerry (born December 11, 1943) is an American attorney, politician and diplomat who currently serves as the first United States special presidential envoy for climate. A member of the Forbes family and the Democratic Party (Unite ...
called U.S. firms that outsource jobs abroad or that incorporate overseas in tax haven
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
s to avoid paying their "fair share" of U.S. taxes "Benedict Arnold
Benedict Arnold ( Brandt (1994), p. 4June 14, 1801) was an American military officer who served during the Revolutionary War. He fought with distinction for the American Continental Army and rose to the rank of major general before defect ...
corporations".
A Zogby International
John J. Zogby (born September 3, 1948) is an American public opinion pollster, author, and public speaker. He is founder of the Zogby International poll, and he serves as a senior partner at John Zogby Strategies, a full-service marketing and ...
August 2004 poll found that 71% of American voters believed "outsourcing jobs overseas" hurt the economy while another 62% believed that the U.S. government should impose some legislative action against these companies, possibly in the form of increased taxes. President Obama promoted the Bring Jobs Home Act to help reshore jobs by using tax cuts and credits for moving operations back to the U.S. The same bill was reintroduced in the 113th U.S. Congress
The 113th United States Congress was a meeting of the legislative branch of the United States federal government, from January 3, 2013, to January 3, 2015, during the fifth and sixth years of Presidency of Barack Obama, Barack Obama's presiden ...
.
While labor advocates claim union busting
Union busting is a range of activities undertaken to disrupt or prevent the formation of trade unions or their attempts to grow their membership in a workplace.
Union busting tactics can refer to both legal and illegal activities, and can range ...
as one possible cause of outsourcing, another claim is high corporate income tax rate in the U.S. relative to other OECD nations, and the practice of taxing revenues earned outside of U.S. jurisdiction, a very uncommon practice. Some counterclaim that the actual taxes paid by U.S. corporations may be considerably lower than "official" rates due to the use of tax loopholes, tax havens, and "gaming the system".
Sarbanes-Oxley has also been cited as a factor.
Europe
Council Directive 77/187 of 14 February 1977 protects employees' rights in the event of transfers of undertakings, businesses or parts of businesses (as amended 29 June 1998, Directive 98/50/EC & 12 March 2001's Directive 2001/23). Rights acquired by employees with the former employer are to be safeguarded when they, together with the undertaking in which they are employed, are transferred to another employer, i.e., the contractor.
Case subsequent to the European Court of Justice's Christel Schmidt v. Spar- und Leihkasse der früheren Ämter Bordesholm, Kiel und Cronshagen, Case C-392/92 994
Year 994 ( CMXCIV) was a common year starting on Monday (link will display the full calendar) of the Julian calendar.
Events
By place
Byzantine Empire
* September 15 – Battle of the Orontes: Fatimid forces, under Turkish gener ...
have disputed whether a particular contracting-out exercise constituted a transfer of an undertaking (see, for example, Ayse Süzen v. Zehnacker Gebäudereinigung GmbH Krankenhausservice, Case C-13/95 997
Year 997 (Roman numerals, CMXCVII) was a common year starting on Friday (link will display the full calendar) of the Julian calendar.
Events
By place
Japan
* 1 February: Empress Teishi gives birth to Princess Shushi - she is the first ...
. In principle, employees may benefit from the protection offered by the directive.
Asia
Countries that have been the focus of outsourcing include India, Pakistan, and the Philippines for American and European companies, and China and Vietnam for Japanese companies.
The Asian IT service market is still in its infancy, but in 2008 industry think tank Nasscom-McKinsey predicted a $17 billion IT service industry in India alone.
A China-based company, Lenovo
Lenovo Group Limited, often shortened to Lenovo ( , ), is a Chinese Multinational corporation, multinational technology company specializing in designing, manufacturing, and marketing consumer electronics, Personal computer, personal computers, ...
, outsourced/reshored manufacturing of some time-critical customized PCs to the U.S. since "If it made them in China they would spend six weeks on a ship."
Article 44 of Japan's Employment Security Act implicitly bans the domestic/foreign workers supplied by unauthorized companies regardless of their operating locations. The law will apply if at least one party of suppliers, clients, labors reside in Japan, and if the labors are the integral part of the chain of command by the client company, or the supplier.
* No person shall carry out a labor supply business or have workers supplied by a person who carries out a labor supply business work under his/her own directions or orders, except in cases provided for in the following Article.
** A person who falls under any of the following items shall be punished by imprisonment with work for not more than one year or a fine of not more than one million yen. (Article 64)
* Unless permitted by act, no person shall obtain profit by intervening, as a business, in the employment of another.
Victims can lodge a criminal complaint against the CEO of the suppliers and clients. The CEO risks arrest, and the Japanese company may face a private settlement with financial package in the range between 20 and 100 million JPY ($200,000 – US$1 million).
Nearshoring
According to the 1913 ''New York Times'' article "Near Source of Supplies the Best Policy", the main focus was then on "cost of production."
Although transportation cost was addressed, they did not choose among:
* transporting supplies to place of production
* transporting finished goods to place(s) of sale
* cost and availability of labor
Nearshoring or nearsourcing is having business process
A business process, business method or business function is a collection of related, structured activities or tasks by people or equipment in which a specific sequence produces a service or product (serves a particular business goal) for a parti ...
es, especially information technology
Information technology (IT) is the use of computers to create, process, store, retrieve, and exchange all kinds of data . and information. IT forms part of information and communications technology (ICT). An information technology system (I ...
processes such as application maintenance and development or testing, in a nearby country, often sharing a border with the target country. Commonalities usually include: geographic, temporal (time zone), cultural, social, linguistic, economic, political, or historical linkages.
The term ''nearshoring'' is a derivative of the business term offshoring. The hybrid term "nearshore outsourcing" is sometimes used as an alternative, since nearshore workers are not employees of the company for which the work is performed. It can also be a reversal, by contracting a development partner in a different country but in close proximity (same or nearby time zone), facilitating communication and allowing frequent visits. This is a business strategy to place some or all of its operations close to where its products are sold. Typically, this is contrasted with the trend to outsource low-wage manufacturing operations to developing nations (offshoring), and reflects a reversal of that trend. Sometime, the work is done by an outside contracted company rather than internally (insourcing), but unlike offshore outsourcing, the work is done in fairly close proximity to either the company headquarters or its target market.
In Europe, nearshore outsourcing relationships are between clients in larger European economies and various providers in smaller European nations. The attraction is lower-cost skilled labor forces, and a less stringent regulatory environment, but crucially they allow for more day to day physical oversight. These countries also have strong cultural ties to the major economic centers in Europe as they are part of EU. For example, as of 2020 Portugal is considered to be the most trending outsourcing destination as big companies like Mercedes, Google, Jaguar, Sky News, Natixis and BNP Paribas opening development centers in Lisbon and Porto, where labor costs are lower, talent comes from excellent Universities, there's availability of skills and the time zone is GMT (the same as London).
In the US, American clients nearshore to Canada and Mexico, as well as to many nations in Central and South America.
Reasons to nearshore
Culture
Cultural alignment with the business is often more readily achieved through near-sourcing due to there being similarities between the cultures in which the business is located and in which services are sub-contracted, including for example proficiency with the language used in that culture.[
]
Communication
Constraints imposed by time zones can complicate communication; near-sourcing or nearshoring offers a solution. English language skills are the cornerstone of Nearshore and IT services. Collaboration by universities, industry, and government has slowly produced improvements. Proximity also facilitates in-person interaction regularly and/or when required.
Other advantages
Software development nearshoring is mainly due to flexibility when it comes to upscale or downscale teams or availability of low cost
skilled developers. The nearshoring of call centers, shared services centers, and business process outsourcing (BPO) rose as offshore outsourcing was seen to be relatively less valuable. More recently, companies have explored nearshoring as a risk mitigation strategy for operational and supply chain weaknesses uncovered during the COVID-19 global pandemic crisis, when offshore BPOs experienced sudden closures and disruptive quarantine restrictions which hampered their ability to conduct day-to-day business operations.
The complexities of offshoring stem from language and cultural differences, travel distances, workday/time zone mismatches, and greater effort for needed for establishing trust and long-term relationships. Many nearshore providers attempted to circumvent communication and project management barriers by developing new ways to align organizations. As a result, concepts such as remote insourcing were created to give clients more control in managing their own projects. Nearshoring still has not overcome all barriers, but proximity allows more flexibility to align organizations.
Visa requirements
The U.S. has a special visa
Visa most commonly refers to:
*Visa Inc., a US multinational financial and payment cards company
** Visa Debit card issued by the above company
** Visa Electron, a debit card
** Visa Plus, an interbank network
*Travel visa, a document that allows ...
, the H-1B, which enables American companies to temporarily (up to three years, or by extension, six) hire foreign worker
Foreign workers or guest workers are people who work in a country other than one of which they are a citizen. Some foreign workers use a guest worker program in a country with more preferred job prospects than in their home country. Guest worker ...
s to supplement their employees or replace those holding existing positions. In hearings on this matter, a U.S. senator called these "their outsourcing visa."
Examples
* In 2003 Procter & Gamble
The Procter & Gamble Company (P&G) is an American multinational consumer goods corporation headquartered in Cincinnati, Ohio, founded in 1837 by William Procter and James Gamble. It specializes in a wide range of personal health/consumer hea ...
outsourced their facilities' management support, but it did not involve offshoring.
* Dell
Dell is an American based technology company. It develops, sells, repairs, and supports computers and related products and services. Dell is owned by its parent company, Dell Technologies.
Dell sells personal computers (PCs), servers, data ...
offshored to India in 2001 but reversed since "customers were not happy with the prior arrangement ..."[
]
Print and mail outsourcing
Print and mail outsourcing is the outsourcing of document printing and distribution.
The Print Services & Distribution Association was formed in 1946, and its members provide services that today might involve the word outsource. Similarly, members of the Direct Mail Marketing Association
The Data & Marketing Association (formerly, Direct Marketing Association), also known as the DMA, is a trade organization for marketers. In 2017 their web site stated "Yes, 100 years ago we were the Direct Mail Marketing Association and then the Di ...
(established 1917) were the "outsourcers" for advertising agencies and others doing mailings.
The term "outsourcing" became very common in the print and mail business during the 1990s, and later expanded to be very broad and inclusive of most any process by 2000. Today, there are web based print to mail solutions for small to mid-size companies which allow the user to send one to thousands of documents into the mail stream, directly from a desktop or web interface.
Marketing outsourcing
The term outsource marketing has been used in Britain to mean the outsourcing of the marketing function. The motivation for this has been:
* cost reduction
Cost reduction is the process used by companies to reduce their costs and increase their profits. Depending on a company’s services or products, the strategies can vary. Every decision in the product development process affects cost: design i ...
* specialized expertise
* speed of execution
* short term staff augmentation
While much of this work is the "bread and butter" of specialized departments within advertising agencies, sometimes specialist are used, such as when ''The Guardian
''The Guardian'' is a British daily newspaper. It was founded in 1821 as ''The Manchester Guardian'', and changed its name in 1959. Along with its sister papers ''The Observer'' and ''The Guardian Weekly'', ''The Guardian'' is part of the Gu ...
'' outsourced most of its marketing design in May 2010.
Business process outsourcing
Business process outsourcing (BPO) is a subset of outsourcing that involves the contract
A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tran ...
ing of the operations and responsibilities of a specific business process
A business process, business method or business function is a collection of related, structured activities or tasks by people or equipment in which a specific sequence produces a service or product (serves a particular business goal) for a parti ...
to a third-party service provider
A service provider (SP) is an organization that provides services, such as consulting, legal, real estate, communications, storage, and processing services, to other organizations. Although a service provider can be a sub-unit of the organization t ...
. Originally, this was associated with manufacturing
Manufacturing is the creation or production of goods with the help of equipment, labor, machines, tools, and chemical or biological processing or formulation. It is the essence of secondary sector of the economy. The term may refer to a r ...
firms, such as Coca-Cola
Coca-Cola, or Coke, is a carbonated soft drink manufactured by the Coca-Cola Company. Originally marketed as a temperance drink and intended as a patent medicine, it was invented in the late 19th century by John Stith Pemberton in Atlanta ...
that outsourced large segments of its supply chain
In commerce, a supply chain is a network of facilities that procure raw materials, transform them into intermediate goods and then final products to customers through a distribution system. It refers to the network of organizations, people, acti ...
.
BPO is typically categorized into back office
A back office in most corporations is where work that supports ''front office'' work is done. The front office is the "face" of the company and is all the resources of the company that are used to make sales and interact with customers and client ...
and front office
The front office is the part of a company that comes in contact with clients, such as the marketing, sales, and service departments. The term has more specific meaning in different industries.
Types
General offices
The function of front office ...
outsourcing. BPO can help your business remain competitive and efficient by leveraging the expertise of other companies that are more specialized in certain functions.
BPO can be offshore outsourcing, near-shore outsourcing to a nearby country, or onshore outsourcing to the same country. Information technology
Information technology (IT) is the use of computers to create, process, store, retrieve, and exchange all kinds of data . and information. IT forms part of information and communications technology (ICT). An information technology system (I ...
-enabled service (ITES-BPO), knowledge process outsourcing (KPO) and legal process outsourcing
Legal outsourcing, also known as legal process outsourcing (LPO), refers to the practice of a law firm or corporation obtaining legal support services from an outside law firm or legal support services company (LPO provider). When the LPO provider ...
(LPO) are some of the sub-segments of BPO.
Although BPO began as a cost-reducer, changes (specifically the move to more service-based rather than product-based contracts), companies now choose to outsource their back-office increasingly for time flexibility and direct quality control. Business process outsourcing enhances the flexibility of an organization in different ways:
BPO vendor charges are project-based or fee-for-service, using business models such as remote in-sourcing or similar software development and outsourcing models. This can help a company to become more flexible by transforming fixed into variable costs
Variable costs are costs that change as the quantity of the good or service that a business produces changes.Garrison, Noreen, Brewer. Ch 2 - Managerial Accounting and Costs Concepts, pp 48 Variable costs are the sum of marginal costs over all u ...
. A variable cost structure helps a company responding to changes in required capacity and does not require a company to invest in assets, thereby making the company more flexible.
BPO also permits focusing on a company's core competencies
A core competency is a concept in management theory introduced by C. K. Prahalad and Gary Hamel.Prahalad, C.K. and Hamel, G. (1990)The core competence of the corporation", Harvard Business Review (v. 68, no. 3) pp. 79–91. It can be define ...
.
Supply chain management with effective use of supply chain partners and business process outsourcing can increase the speed of several business processes.
BPO caveats
Even various contractual compensation strategies may leave the company as having a new "single point of failure" (where even an after the fact payment is not enough to offset "complete failure of the customer's business"). Unclear contractual issues are not the only risks; there's also changing requirements and unforeseen charges, failure to meet service levels, and a dependence on the BPO which reduces flexibility. The latter is called lock-in; flexibility may be lost due to penalty clauses and other contract terms. Also, the selection criteria may seem vague and undifferentiated.
Security risks can arise regarding both from physical communication and from a privacy perspective. Employee attitude may change, and the company risks losing independence.
Risks and threats of outsourcing must therefore be managed, to achieve any benefits. In order to manage outsourcing in a structured way, maximizing positive outcome, minimizing risks and avoiding any threats, a business continuity management
Business continuity may be defined as "the capability of an organization to continue the delivery of products or services at pre-defined acceptable levels following a disruptive incident", and business continuity planning (or business continuity a ...
(BCM) model is set up. BCM consists of a set of steps, to successfully identify, manage and control the business processes that are, or can be outsourced.
Analytic hierarchy process
In the theory of decision making, the analytic hierarchy process (AHP), also analytical hierarchy process, is a structured technique for organizing and analyzing complex decisions, based on mathematics and psychology. It was developed by Tho ...
(AHP) is a framework of BPO focused on identifying potential outsourceable information systems. L. Willcocks, M. Lacity and G. Fitzgerald identify several contracting problems companies face, ranging from unclear contract formatting, to a lack of understanding of technical IT processes.
Technological pressures
Industry analysts have identified robotic process automation
Robotic process automation (RPA) is a form of business process automation technology based on metaphorical software robots (bots) or on artificial intelligence (AI)/digital workers. It is sometimes referred to as ''software robotics'' (not to be ...
(RPA) software and in particular the enhanced self-guided RPAAI based on artificial intelligence
Artificial intelligence (AI) is intelligence—perceiving, synthesizing, and inferring information—demonstrated by machines, as opposed to intelligence displayed by animals and humans. Example tasks in which this is done include speech re ...
as a potential threat to the industry and speculate as to the likely long-term impact. In the short term, however, there is likely to be little impact as existing contracts run their course: it is only reasonable to expect demand for cost efficiency and innovation to result in transformative changes at the point of contract renewals. With the average length of a BPO contract being 5 years or more – and many contracts being longer – this hypothesis will take some time to play out.
On the other hand, an academic study by the London School of Economics
, mottoeng = To understand the causes of things
, established =
, type = Public research university
, endowment = £240.8 million (2021)
, budget = £391.1 millio ...
was at pains to counter the so-called 'myth' that RPA will bring back many jobs from offshore. One possible argument behind such an assertion is that new technology provides new opportunities for increased quality, reliability, scalability and cost control, thus enabling BPO providers to increasingly compete on an outcomes-based model rather than competing on cost alone. With the core offering potentially changing from a "lift and shift" approach based on fixed costs to a more qualitative, service based and outcomes-based model, there is perhaps a new opportunity to grow the BPO industry with a new offering.
Industry size
One estimate of the worldwide BPO market from the BPO Services Global Industry Almanac 2017, puts the size of the industry in 2016 at about US$140 billion.
India, China and the Philippines are major powerhouses in the industry. In 2017, in India, the BPO industry generated US$30 billion in revenue according to the national industry association. The BPO industry is a small segment of the total outsourcing industry in India. The BPO industry workforce in India is expected to shrink by 14% in 2021.
The BPO industry and IT services industry in combination are worth a total of US$154 billion in revenue in 2017. The BPO industry in the Philippines generated $26.7 billion in revenues in 2020, while around 700 thousand medium and high skill jobs would be created by 2022.
In 2015, official statistics put the size of the total outsourcing industry in China, including not only the BPO industry but also IT outsourcing services, at $130.9 billion.
See also
* Outstaffing
* Collaboration
Collaboration (from Latin ''com-'' "with" + ''laborare'' "to labor", "to work") is the process of two or more people, entities or organizations working together to complete a task or achieve a goal. Collaboration is similar to cooperation. Most ...
* Banking BPO services {{no footnotes, date=October 2010
Banking business process outsourcing or banking BPO is a highly specialized sourcing strategy used by banks and lending institutions to support the business acquisition and account servicing activities associated w ...
* BPO security Information security has emerged as a significant concern for banks, mobile phone companies and other businesses that use call centers or business process outsourcing, or BPO. There have been instances of theft of personal data reported from call c ...
* Business process outsourcing to India
Business process outsourcing to India refers to the business process outsourcing services in the outsourcing industry in India, catering mainly to Western operations of multinational corporations (MNCs).
As of 2012, around 2.8 million people w ...
* Business process outsourcing in the Philippines
One of the most dynamic and fastest growing sectors in the Philippines is the information technology–business process outsourcing (IT-BPO) industry. The industry is composed of eight sub-sectors, namely, knowledge process outsourcing and back ...
* Business process outsourcing in China
The business process outsourcing industry in China including IT and other outsourcing services for onshore and export markets surpassed 1 trillion yuan (about $145 billion) in 2016 according to the Ministry of Commerce (MOC).
History
The outsour ...
* Call center industry in the Philippines
Call centers began in the Philippines as providers of email response and managing services then broadened to industrial capabilities for almost all types of customer relations, ranging from travel services, technical support, education, customer ...
* Call center industry in Bangladesh
The call center industry in Bangladesh was worth around $12 million in 2013, of which 50 percent was accounted for by the country's domestic market. In 2013, national mobile operators Airtel and Citycell outsourced their call centers to local com ...
* Contract manufacturer
A contract manufacturer (CM) is a manufacturer that contracts with a firm for components or products (in which case it is a turnkey supplier). It is a form of outsourcing. A contract manufacturer performing packaging operations is called copacker ...
* Contingent workforce
Contingent work, casual work, or contract work, is an employment relationship with limited job security, payment on a piece work basis, typically part-time (typically with variable hours) that is considered non-permanent. Although there is less jo ...
* Facilities management
Facility management or facilities management (FM) is a professional management discipline focused on the efficient and effective delivery of logistics and other support services related to real property and buildings. It encompasses multiple disc ...
* Freelance marketplace
''Freelance'' (sometimes spelled ''free-lance'' or ''free lance''), ''freelancer'', or ''freelance worker'', are terms commonly used for a person who is self-employed and not necessarily committed to a particular employer long-term. Freelance w ...
* Globality
Globality is the consciousness of the world as a single place. The concept of globality was introduced in the social sciences by British sociologist Roland Robertson. It signifies the spreading and deepening consciousness of the world-as-a-whole an ...
* Global sourcing Global sourcing is the practice of sourcing from the global market for goods and services across geopolitical boundaries. Global sourcing often aims to exploit global efficiencies in the delivery of a product or service. These efficiencies include ...
* Globally Integrated Enterprise
* Licensed production Licensed production is the production under license of technology developed elsewhere. The licensee provides the licensor of a specific product with legal production rights, technical information, process technology, and any other proprietary compon ...
* Offshore custom software development
In software engineering, offshore custom software development consists in offshoring the software development process in a country where production costs are lower, thus decreasing budget spending.
Background Early days
Since the 1960s and t ...
* Offshoring Research Network
The Offshoring Research Network is an international network of researchers and practitioners studying organizations in their transition to globalizing their business functions, processes and administrative services. The ORN conducts annual survey ...
* Outsourced document processing
Document processing is a field of research and a set of production processes aimed at making an analog document digital. Document processing does not simply aim to photograph or scan a document to obtain a digital image, but also to make it digital ...
* Professional Employer Organization
* Recruitment
Recruitment is the overall process of identifying, sourcing, screening, shortlisting, and interviewing candidates for jobs (either permanent or temporary) within an organization. Recruitment also is the processes involved in choosing individual ...
* Selfsourcing
Self-service is the practice of serving oneself, usually when making purchases. Aside from Automated Teller Machines, which are not limited to banks, and customer-operated supermarket check-out, labor-saving of which has been described as self- ...
* Software testing outsourcing Software Testing Outsourcing is software testing carried out by an independent company or a group of people not directly involved in the process of software development.
Software testing is an essential phase of software development. However, it i ...
* Telecentre
A telecentre is a public place where people can access computers, the Internet, and other digital technologies that enable them to gather information, create, learn, and communicate with others while they develop essential digital skills. Telecent ...
* Theory of the firm#Economic theory of outsourcing
* Virtual assistance
References
Further reading
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External links
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Business terms
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Information technology management
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International trade
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