In business , OUTSOURCING involves the contracting out of a business
process (e.g. payroll processing, claims processing) and operational,
and/or non-core functions (e.g. manufacturing, facility management ,
call center support) to another party (see also business process
outsourcing ). The concept "outsourcing" came from the American
Glossary 'outside resourcing' and it dates back to at least 1981.
In contrast, insourcing entails bringing processes handled by third-party firms in-house, and is sometimes accomplished via vertical integration . However, a business can provide a contract service to another organization without necessarily insourcing that business process.
* 1 Overview
* 1.1 Reasons for outsourcing * 1.2 Digital outsourcing
* 2 Implications
* 2.1 For business
* 2.1.1 Management processes * 2.1.2 Communications and customer service * 2.1.3 Governance * 2.1.4 Security
* 2.2 Insourcing * 2.3 Standpoint of labor
* 2.4 Standpoint of government
* 2.4.1 Policy-making strategy
* 188.8.131.52 Competitiveness strategy * 184.108.40.206 Education strategy * 220.127.116.11 Welfare state strategy * 18.104.22.168 Industrial policy * 22.214.171.124 Environmental policy
* 2.5.1 Global inequality and development
* 126.96.36.199 Industrialization * 188.8.131.52 Growth and income * 184.108.40.206 Urbanization
* 2.5.2 Trade * 2.5.3 Migration * 2.5.4 Domestic inequality
* 3 By country
* 3.1 United States * 3.2 European Union
* 5 Counterwave outsourcing * 6 See also * 7 Notes and references * 8 External links
Two organizations may enter into a contractual agreement involving an
exchange of services , expertise, and payments .
In the early 21st century, businesses increasingly outsourced to suppliers outside their own country, sometimes referred to as offshoring or offshore outsourcing . Several related terms have emerged to refer to various aspects of the complex relationship between economic organizations or networks , such as nearshoring , crowdsourcing , multisourcing , strategic alliances /strategic partnerships , strategic outsourcing., and vested outsourcing .
"Do what you do best and outsource the rest" has become an internationally recognized business tagline first "coined and developed" in the 1990s by the "legendary management consultant" Peter Drucker . The slogan was primarily used to advocate outsourcing as a viable business strategy. It has been said that Mr. Drucker began explaining the concept of "Outsourcing" as early as 1989 in his Wall Street Journal article entitled "Sell the Mailroom."
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.
Recently, innovative business models have been developed to help reduce the cost for outsourcing. In particular, these business models may leverage on group bargaining power by aggregating similar outsourcing demands from various organizations when negotiating with external contractors. This potentially presents a win-win situation for both the outsourcer and outsorcee; while the outsourcee offers their services at lower rates to the outsourcer, it is still advantageous to the outsourcee because the project volume is increased.
REASONS FOR OUTSOURCING
Companies primarily outsource to reduce certain costs, which may include peripheral or "non-core" business expenses, high taxes, high energy costs, excessive government regulation or mandates, and production or labor costs. The incentive to outsource may be greater for U.S. companies due to unusually high corporate taxes and mandated benefits like social security , Medicare , and safety protection (OSHA regulations). At the same time, it appears U.S. companies do not outsource to reduce executive or managerial costs. For instance, executive pay in the United States in 2007 was more than 400 times more than average workers—a gap 20 times bigger than it was in 1965.
Many think of outsourcing as it relates to manufacturing (e.g. the
Communications And Customer Service
In the area of call center outsourcing, organizations that are not experienced in working with outsourced call centers may suffer from lower end-user-experience as a result of outsourcing. This is exacerbated when outsourcing is combined with offshoring in regions where the first language and culture are different.
For example, foreign call center agents may speak with different linguistic features such as accents , word use and phraseology, which may impede comprehension. The visual cues that are missing in a telephone call may lead to misunderstandings and difficulties.
In 1979, Nobel laureate
Oliver E. Williamson
Before outsourcing, an organization is responsible for the actions of their entire staff, sometimes a substantial liability. When these same people are transferred to an outsource service provider, they may not even change desks. But their legal status changes. They are no longer directly employed by (and responsible to) the organization. This creates legal, security and compliance issues that are often addressed through the contract between the client and the suppliers. This is one of the most complex areas of outsourcing and sometimes involves a specialist third-party adviser.
Fraud is a specific security issue as well as criminal activity,
whether it is by employees or the supplier staff. However, it can be
disputed that fraud is more likely when outsourcing is involved. For
example, in April 2005, a high-profile case involved the theft of
$350,000 from four
Negative welfare effects of outsourcing have gathered substantial public attention. The possibility of outsourcing has internationalized labour markets which used to be local, opening up jobs which were traditionally non-traded to international competition. The resulting combination of lower wages and unemployment for certain jobs has driven the perceived ‘losers’ to engage in heated political debate.
Labour unions in the European Union have succeeded in pushing through protectionist policies in favour or lower-skilled groups throughout the 1970s and 1980s, including the Common Agricultural Policy on farming. Interest groups opposing outsourcing have been more active to voice their disapproval because the negative outcomes of the phenomenon are more concentrated on specific groups of people, namely those losing jobs to external competition, whereas the benefits from it become dissipated among the population at large. Overall lower prices and greater quality and variety of goods in domestic markets are some of the benefits of exploiting a country's comparative advantage through outsourcing.
Unlike the alleged ‘losers’ from outsourcing, those affected positively by it lack the motivation to organize to voice their support. There has been a wave of protectionism concerned with deep changes in the social structure allegedly imposed on the global system through globalization and outsourcing. The activists see a readjustment of class systems and highlight an increased fracture in societies between the ‘haves’ and the ‘have-nots’ as different groups adjust to increasingly or decreasingly advantageous positions in the system of outsourcing. Opponents of outsourcing have also denounced it as a threat to local cultural integrity.
The argument on cultural disintegration points to the standardization of practices and norms as multinational corporations become involved with industries in regions culturally different from those in the country of origin. The alleged diffusion of culture has raised concern over the endurance of cultural norms and values, sociopolitical institutions and frameworks, or even cultural preferences and traditions in a context of increasing foreign presence.
Increased uncertainty regarding future socioeconomic security ought to be met with policies promoting equality and a fair redistribution of economic gains for a government to maintain its voters’ favour. Because of overall unpredictability, governments will likely need to reassure civilians that the burden of employment jobs resulting from outsourcing will be shared among taxpayers.
The fluctuations in employment levels are determined by the types of jobs which can be profitably outsourced or offshored. Domestic jobs become offshored or outsourced when lower productivity in other regions is compensated by lower wages, making outsourcing profitable even despite the added costs of transportation. The overall cost-effectiveness of the spatial unbundling of the industrial process thus depends on the cost of transporting specific services or ideas given the available technology. Because of this technological advancements such as the telecommunications revolution, air shipping or the Internet have deeply accelerated outsourcing and may continue to boost this process.
The future results of technological ingenuity and innovation are unknown, as are its potential impacts employment levels on any given task or job across regions. In the Global South , policies attracting multinational corporations can help increase employment levels and promote growth. Governments that pursue these policies facilitate welfare protection given the context of increased unemployment in industries which cannot compete with the international market due to trade liberalization policies.
There are widespread claims that outsourcing has pushed environmental
standards down in developing regions as countries compete to attract
foreign projects and investment. Similar to lower wages, lower health
and environmental regulations contribute to giving a country a
comparative advantage over another due to lower production costs. The
controversy this raises, however, is that unlike wages, lower health
or environmental standards does benefit the new employees joining the
workforce. 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
GLOBALIZATION AND SOCIO-ECONOMIC IMPLICATIONS
Global Inequality And Development
Even though outsourcing has promoted a movement of industrial sites from the Global North to Global South regions, it has not been the only reason for the concurrent deindustrialization and industrialization of the North and South respectively. Deindustrialization in more economically and technologically developed regions has also been affected by increased industrial productivity.
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. Likewise, a trending shift in demand towards non-tradable services such as those in the health-care or government sectors has further accelerated deindustrialization in the Global North. Since these tasks cannot be outsourced, the demand for them needs to be met domestically abiding by the local market price. Consequently, a shift in the labor force towards fulfilling these profitable services has mostly taken place at the expense of industry since the agricultural sector in the early industrializing Global North had already been maximizing its labour capacity.
Despite the variety of domestic and international factors affecting deindustrialization in the Global North, those concerning the external influence of the global market have been the most influential ones since 1994.
The recent industrialization process outsourcing has encouraged in the Global South has taken place at a much faster pace than it did during its beginnings in the North, given that the well-developed technology was already developed, and merely spread to further regions.
Growth And Income
The almost simultaneous industrialization of the developing Global South and deindustrialization of the more developed Global North resulted in an international convergence of incomes.
The pace of urbanization in the Global North decreased considerably relative to its high levels following the Industrial Revolution. Rates of urban growth have been higher in the Global South.
The level of migration has remained relatively low, particularly compared to the mass migratory trends which characterized the Industrial Revolution roughly between 1850 and 1914., probably because labor markets are not free now. Countries now have discrimination labor laws, only allow people with citizenship cards live and work free in their territories, even getting a citizenship card is difficult for some one not born in their territory. Free labor markets, discrimination based with a person skills would help reduce outsourcing problems, letting people freely follow their jobs in other countries.
"Outsourcing" has become a continuing political issue in the United
States, 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.
Criticism of outsourcing, from the perspective of U.S. citizens ,
generally revolves around the costs associated with transferring
control of the labor process to an external entity in another country.
Zogby International poll conducted in August 2004 found that 71% of
American voters believed that "outsourcing jobs overseas" hurt the
economy while another 62% believed that the U.S. government should
impose some legislative action against companies that transfer
domestic jobs overseas, possibly in the form of increased taxes on
companies that outsource. One prediction (from 2010) claims that, by
2014, more than 1.3 million positions will disappear because of "the
accelerated movement of work to
Another rationale is the 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. However, outsourcing is not solely a U.S. phenomenon as corporations in various nations with low tax rates outsource as well, which means that high taxation can only partially, if at all, explain US outsourcing. For example, the amount of corporate outsourcing in 1950 would be considerably lower than today, yet the tax rate was actually higher in 1950.
It is also suggested that lowering the corporate income tax and
ending the double-taxation of foreign-derived revenue (taxed once in
the nation where the revenue was raised, and once from the U.S.) will
alleviate corporate outsourcing and make the U.S. more attractive to
foreign companies. However, while the US has a high official tax rate,
the actual taxes paid by US corporations may be considerably lower due
to the use of tax loopholes, tax havens, and "gaming the system".
Rather than avoiding taxes, outsourcing may be mostly driven by the
desire to lower labor costs (see standpoint of labor above).
Where outsourcing involves the transfer of an undertaking, it is subject to Council Directive 77/187 of 14 February 1977, on the approximation of the laws of the Member States relating to the safeguarding of employees’ rights in the event of transfers of undertakings, businesses or parts of businesses (as amended by Directive 98/50/EC of 29 June 1998; consolidated in Directive 2001/23 of 12 March 2001). Under that directive, 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. An example of a case involving such contracting-out was the decision of the European Court of Justice in Christel Schmidt v. Spar- und Leihkasse der früheren Ämter Bordesholm, Kiel und Cronshagen, Case C-392/92 . Although subsequent decisions 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 ), in principle, employees of an enterprise outsourcing part of its activities in which they are employed may benefit from the protection offered by the directive.
Seeking to implement the cost-cutting solutions, many Western European firms have been transferring tech projects eastward. For example, Deutsche Bank has some of its software developed in Ukraine, Siemens possess R">
Despite unfavorable economic conditions from 2007 to 2009, the
outsourcing services market continued to flourish in Central and
Eastern European. In 2008 when the inflow of investment in Western
Europe was down by 48%, it fell by only 9% in Central and Eastern
CO-SOURCING is a business practice where a service is performed by
staff from inside an organization and also by an external service
provider. It can be a service performed in concert with a client 's
existing internal audit department. The scope of work may focus on one
or more aspects of the internal audit function.
Examples of co-sourcing services are supplementing the in-house internal audit staff with specialized skills such as information risk management or integrity services, providing routine assistance to in-house auditing for operations and control evaluations in peak period activity and conducting special projects such as fraud investigation or plant investment appraisals. Another example of co-sourcing is outsourcing part of software development or software maintenance activities to an external organization , while keeping part of the development in-house. Other internal business activities such as HR and administrative tasks can also be co-sourced by employee leasing companies.
IDENTITY MANAGEMENT CO-SOURCING
It is an approach to enterprise identity management in which the
identity service interacts directly or through some technical
footprint with an organization's
Some firms have reversed the decision to outsource because the results were not entirely as expected. The circumstances which allow firms to unbundle the different tasks or stages of its manufacturing process into different locations have not been fully determined. Though the nature of the tasks plays a role determining their interconnectedness, other factors such as innovation in the manufacturing process or advances in transport and communication technology also affect the need for direct contact among employees. As the process which ties tasks together within firms remains unclear, there is a degree of uncertainty about which tasks need to remain geographically clustered together. In many cases firms took risks experimenting with outsourcing while lacking a firm understanding of the relationship among internal tasks and its spatial implications.
Despite saving money, companies have often faced unexpected drawbacks from outsourcing, such as miscommunication or lower quality of intermediate products, which end up delaying the overall production process. Another reason for a decrease in outsourcing is that many jobs that were subcontracted abroad have been replaced by technological advances.
According to a Deloitte Consulting survey carried out in 2005, a quarter of the companies which had outsourced tasks reversed their strategy. Many big companies like Lenovo considered turning around outsourcing strategies of outsourcing.
Public opinion in the US and other Western powers opposing outsourcing was particularly strengthened by the drastic increase in unemployment as a result of the 2007-2008 financial crisis. In the first decade from 2000 to 2010, the US 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 US presidential campaigns , but it has also made companies more reluctant to outsource or offshore jobs.
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
Application Management Services Framework
NOTES AND REFERENCES
* ^ "outsourcing".
Oxford English Dictionary
* The dictionary