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Outsourcing is the process wherein one company decides to purchase a product or service from a source, which is outside the company. Generally, it refers to those products and services that were previously produced internally, but is now being sourced externally (Hira & Hira, 2005). Similarly, outsourcing is the process of purchasing “intermediate inputs by companies or governments at arm’s length. ” It is of important notice that only purchase of intermediate products, and not raw products, will qualify as outsourcing (Kirkegaard, n. d. ).
In a more technical tone, it is the act of transferring some of the organization’s “recurring internal activities and decision rights” to providers, who are outside the company. It is important to note that not only the activities of the company are being transferred externally, but also the factors of production. Factors of production are the resources needed to facilitate such activities including people, facilities, equipment, technology, and other assets (Greaver, 1999). Another concept related to outsourcing is offshoring. It is the acquisition of intermediate inputs by companies from locations outside the consuming party.
What distinguishes offshoring from mere outsourcing is the crossing of international borders of the outsourced products (Kirkegaard, n. d. ). Organizations tend to outsource in order to better align their business processes with the goals set by the organization through the long-term transfer of the daily operations to a service provider external to a company (Rothwell, Prescott, & Taylor, 2008). The term outsourcing was invented by the information systems trade back in the late 1980s. It was coined to illustrate the growing trend of big companies transferring their information systems to providers.
Such services can be traced back to at least the World War II, when system facilities management were provided to the U. S. Federal Government (Greaver, 1999). Outsourcing is identical to subcontracting, joint venturing, and strategic partnering concepts, which date back hundreds of years. What makes outsourcing different from these concepts is the fact that “internal” activities are being transferred out, which is not the case with subcontracting and joint-venturing (Greaver, 1999). Outsourcing has become a major trend in business transactions.
Despite the promises being offered by the process of outsourcing to the companies, who engage into such practice, it has received its fair share of criticism from the public. One of the negative effects of outsourcing is the reduction in local employment. The major cost to companies that had been said to be destroying local jobs is negative public opinion. Some public relation officers believed that the news media has somehow sensationalized and overhyped the concept of outsourcing to the extent that people perceive companies engaging in outsourcing as the bad guys who are destroying the local job market (Hira & Hira, 2005).
Negative sentiments directed towards outsourcing companies are legitimate and acceptable reactions coming from local folks. It is without doubt that outsourcing contributes highly to the reduction in the local workforce. As jobs are being exported somewhere, in most cases, outside the country, chances of employment for locals diminish. This decrease in the opportunity of workers to be employed locally translates into a negative sentiment against companies engaging in the business of outsourcing. This sentiment is later on amplified by the conservative mindset of the majority of the populace.
However, corporate executives are not affected by this negative publicity. In a poll by the CFO Magazine, only 13 per cent of financial executives believed that negative publicity is a risk to their outsourcing plans. Moreover, when asked if executives would slow down in their outsourcing venture due to negative public opinion, none answered in the affirmative (Hira & Hira, 2005). Another criticism of outsourcing is the hidden cost. Perhaps one of the main reasons why companies engage in outsourcing is for its efficiency.
There is a notion that where companies engage in outsourcing, there are savings. Although this may be true at the superficial level as labor costs are indeed cheaper abroad. But actual costs are not the only ones that should be calculated, but the hidden costs as well that might arise from the process of outsourcing. In terms of offshoring, salaries abroad are indeed cheaper as compared to U. S. wages, but they often exclude the bonuses that are paid in an attempt to stabilize outsourced employee retention.
There are also other problems arising from the relocation of companies abroad. Political stability is one good case at point. A country’s stability does affect the country’s economy and in the same manner, an unstable political system would mean distractions to the business of outsourcing companies (Canwell & Sutherland, 2005). Far worse than the perception of outsourcing to be reducing local job opportunities is the reality that outsourcing does reduce local job opportunities. Government statistics show that there had been a decline in the employment rate of the United States.
Further, data show that job categories threatened by offshore outsourcing has tremendously decline by 1. 97%. This suggests that the offshore outsourcing of previously U. S. located jobs has contributed a lot to the employment rate decline (Kirkegaard, n. d. ). Many people have applauded companies’ effort to extend corporate social responsibilities. This had been an ongoing practice in U. S. labor relations. Unfortunately, outsourcing tends to limit, if not totally eradicate, the level of social responsibility that is bound to the employers to their outsourced employees.
Since these outsourced workers are not direct employees of the company, the company involved limit its social responsibility on the premise that they lack the social obligation to be responsible to employees (Kehal & Singh, 2006). In spite of criticisms, outsourcing is not devoid of any merits. As an economic principle, it poses various advantages to the economy. Companies engage in outsourcing by purchasing intermediate goods from other producers. In this light, the company’s production goal has shifted to another. This kind of shift is similar to specialization.
In economics, specialization yields to better productivity. Outsourced companies are specialized in giving the service that they are asked for. In fact, this is the only kind of product or service that they offer to their clientele, the outsourcing companies. As time goes by with these outsourced companies specializing in a particular product or service, they develop efficiency. When production is in full efficiency, it produces the most number of outputs possible, which is very healthy to the overall economy (Hira & Hira, 2005).
With the outbreak of companies outsourcing in mostly developing countries, they bring with them countless opportunities for the natives of such host countries. As companies start their business, more and more jobs are being created to cater for native employees. The exodus of outsourcing companies into developing countries is tantamount to a panacea to the continuing social ills of developing countries. These companies offer job opportunities hence, lowering the unemployment rate in the host country (Hira & Hira, 2005). As a result of employment, natives from the host countries receive compensation.
This provides locals with disposable income. Their purchasing power increases as they now have sources of income. Without a doubt, this improves their living standards. Workers now have the means to buy basic necessities, not to mention certain luxuries (Pang, 2004). Outsourcing does deliver cost saving to parent companies. Transactional and operational costs are much lower in other countries. When companies engage in outsourcing in those countries, they tend to save a lot. Also, outsourcing allows a company to lay down a restructuring plan to reorganize their manpower.
Having scrutinized both sides of outsourcing, it can be said that the benefits do outweigh the detriments. Outsourcing as an economic concept poses advantages to the whole economy. Given the economic notion of comparative advantage, like trade, outsourcing is somehow inevitable. The world economy continues to grow and the drive for efficiency becomes more uptight. As companies tend to maximize their efficiency, certain options are becoming available for them to explore their full potentials. In spite of the very strong public criticism, the potential of outsourcing to give better living standards to people should be given utmost importance.
Because of outsourcing, many previously unemployed people from developing countries have found employment under these outsourcing companies. Now that they are earning, they are far better off than what they were before. Outsourcing gives hopes to many individuals by providing employment. Aside from employment, outsourcing improves the living standards of its employees through the sharing of knowledge. As globalization continues to be the dominant paradigm, countries, despite the distance, becomes closer and closer in one way or another.
When companies outsource to foreign lands, they bring along with them valuable technological know-how that they share to the locals of the developing country. This influx of new knowledge contributes to the holistic growth of these people as individuals. Later on, equipped with new knowledge and technological know-how, these individuals can better assume their respective roles in the company. In gist, outsourcing not only gives benefits in the macroeconomic level, but also on a personal one as it improves not only the economy, but the lives of individuals as well.