This article discusses Global Outsourcing, the transfer of an organization's internal functions to a foreign country. Outsourcing is often undertaken as a way to procure skilled labor at a lower rate than it is available in developed economies. The transfer of manufacturing functions from developed nations like the United States to developing nations began in the 1950s. Technological advances have accelerated the ability of firms to procure and source products across the globe. Commonly outsourced functions include information technology tasks such as microchip development as well as many business services such as finance and accounting, human resources, data entry, and customer support centers. Global outsourcing has had a tremendous impact on how companies do business. This article examines the evolution of global outsourcing and its effect on business and labor.
Keywords Business Process Outsourcing; Captive Model; Comparative Advantage; Core Responsibilities; Direct Foreign Investment; Global Marketplace; Global Outsourcing; Information Technology Outsourcing; Market Opportunity; Offshoring; Outsourcing; Outsource Model
International Business: Global Outsourcing
The concept of outsourcing began when large companies decided to eliminate routine work that could be performed by third parties at a lower cost. Initially, many businesses started outsourcing everything but core business activities to other companies within the same national boundaries. But as the global economy started to evolve, businesses in developing countries began offering services to perform functions that companies had been outsourcing domestically. Transferring an organization's internal functions to a foreign country is known as Global Outsourcing, while the entities that are set up to perform these functions are part of what's called offshoring.
Growth of Outsourcing
Outsourcing continues to be a rapidly growing segment of the global economy, with spending surpassing the $5 trillion mark. It is estimated that more than 3 million jobs and approximately $135 billion in wages will be outsourced abroad over the next 7 years (Clott, 2004). Global outsourcing encompasses a variety of transactions including those focusing on both goods and services. A U.S. firm, for example, can outsource the production of goods, such as car parts, as well as services, including customer service positions. Companies that rely on outsourcing benefit from reduced labor costs and increased profits while the foreign countries that acquire outsourced jobs are enticed by the economic advancement. Another benefit to global outsourcing is that a company is able to focus more on its core responsibilities by transferring non-critical operations to a company that is better equipped to handle them. By outsourcing ancillary functions, businesses deliver products and services to the market more efficiently, thus enhancing their profits (Clott, 2004).
Generally, there are two basic models used in outsource strategies: The outsource model and the captive model.
The Outsource Model
Within the outsource model, functions are transferred overseas and performed mostly by third-party providers. There are two subgroups within the outsource model: Information technology outsourcing and business process outsourcing.
- Information technology outsourcing, or ITO, is the transfer of the development and processing of information technology systems such as help desk functions, systems administration, network management and web development.
- Business process outsourcing, or BPO, is the transfer of the management and processes of certain business operations like accounting, human resource functions (in particular payroll processing and health benefits management), and customer service call centers (Sen, 2005).
ITO transfers do not require an organization to establish a presence in a foreign country since third-party providers normally perform these functions. BPO transfers, however, sometimes require a company to establish an overseas subsidiary in order to control the functions being transferred. In addition to establishing a foreign subsidiary, some companies may opt to invest in an overseas company to which functions are being transferred. An investment of 10% or more in a foreign enterprise is considered direct foreign investment (Sen, 2005).
The Captive Model
BPO and direct foreign investments form the basis for yet another method — the captive model. Under this model, the outsourcing company establishes a foreign subsidiary, bypassing reliance on a third party. Under this model, a company maintains control of the operations being transferred, as well as the hiring process and management of the workers performing the work. Because there is less risk for a company to establish a foreign subsidiary, a larger percentage of global outsourcing occurs following this method (Sinnett, 2006).
Global outsourcing has also caused a ripple effect on labor markets throughout the world. As jobs shift overseas, permanent jobs disappear, giving way to an increase in part-time, temporary and freelance workers.
When a business decides to enter the global outsourcing market, there are a number of factors that contribute to that decision. These include, but are not limited to: Risk, cost, and market opportunity.
Some of the risks involved in outsourcing are geopolitical and economic. In certain "hot spot" areas where there is a great deal of conflict and political turmoil, transferring functions to these regions can pose a threat to the health and safety of the employees as well as the economic well being of the organization (Minevich, 2005). The terrorist attacks on certain subsidiaries of oil companies and service providers in Saudi Arabia is evidence of the geopolitical risks just as the nationalization of the oil industry in Venezuela is evidence of economic risk. Other risk factors that a business must consider are quality of service, loss of operations control and security of data and stored information (Sinnett, 2006).
In addition to understanding the risks associated with a particular outsource market, organizations must also consider the cost of outsourcing and must be familiar with foreign wage structures. To be sure, there are skilled workers in many areas of the world who are willing to work for lower wages than workers in the U.S., but as companies tap into these markets, competition eventually results in turnover as workers in those markets seek higher wages. Other costs include infrastructure costs, taxes and regulatory fees. Finally, a company needs to determine market opportunity and identify those countries that provide workers in their particular industry. A skilled workforce and established infrastructure will allow a company to expediently bring products and services to a market without sacrificing quality. Conversely, a company needs to also be ready to cease the operation in the event that the demand for the outsourced product or service declines (Minevich, 2006).
Before entering a global outsourcing market a business needs to determine what types of products and services are best suited for outsourcing. When global outsourcing first came into play, the production of labor-intensive products and manufactured goods was transferred abroad. At the time, labor-intensive products and manufactured goods were some of the only products that could be produced more efficiently in other countries. However, as time went on, advancements in the overseas economies and technologies made it possible to outsource products and services that required more advanced technology and know-how. This constant shifting and advancement allows for the creation and emergence of other outsource markets that specialize in different types of production. For example, consumer goods and textile manufacturing were some of the first products to be outsourced to China. However, as that market matured and economic development expanded, China as well as other Asian markets became outsource locations for products and services that required more advanced technology. In particular, electronic components, telecommunications equipment, microchips, and computer boards were produced in China, Taiwan and Hong Kong. This left the textile and other labor-heavy markets for other countries where such products could be produced in a similarly efficient manner.
The industry that has been most affected by global outsourcing has been information technology. India has become a leader in this area because as demand for technology and its inherent complexities and costs grew, so did India's ability to provide low-cost, but capable assistance. During the 1990s, many U.S....
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