Outsourcing and Its Effect on US Economy - Research Paper Example

Outsourcing and its effect on US economy The aim of this research is to explore the impact of outsourcing on the US economy, in terms of advantages and dark sides, its dynamics and future trends based on past experience. In the last decade, outsourcing developed with an exponential speed and it will further increase, being more and more perceived as a necessary path in order to survive and grow regardless of the activity, size or company’s core competencies. The need for flexibility has generated a multitude of outsourcing options, applied to all areas of interest, bringing major benefits in terms of long-term partnerships, competitive advantages, product diversification, goods and services used to enhance the fulfillment of primary objectives and properly met the various consumers’ requirements, more and more sophisticated and complex (Sarbu 2). Outsourcing has become one of the most extensive and profitable activities in the world. Companies in India, Canada and Ireland are global leaders in offering outsourcing services, while other countries such as China, Poland and Russia have proven in recent years as main alternative to such services. Moreover, the market for countries with less tradition in this sector, such as the Philippines, Hungary and Mexico is now also open. Under crisis conditions, outsourcing seems the optimal solution for many companies looking to provide the same quality services, but to significantly reduce the budgets of certain business segments. Theoretically, it offers high quality at a low price. But that does not mean the absence of risk or of hot spots when talking about the concept. How effective outsourcing really is? To what extent a company entrusted with parts of other organization activities sets the same goals and objectives as the latter? How strong the employees of outsourcing companies identify with the values​​ and scope of the company they offer their services to? All these open questions remain controversial and will be long discussed. A textbook definition may look outsourcing as the delegation of tasks or objectives to certain organizational segments belonging to foreign entities, which offer an excellent quality, better prices and have strong expertise in certain fields (Levine). Another definition shows that outsourcing is a strategy applied by a company to entrust major functions to external providers specialized in various areas, making them valued business partners (Bank of International Settlements). In short: outsourcing works faster, better and cheaper. Let us analyze the three elements. Why faster? Because time is money (and the scope of every company is to make profits as fast as possible), because they are professionals with solid experience capable to complete projects in an excellent time sequence, they already have the necessary resources and is very easy to mobilize them in a short period (it is a fact that every outsourcing company has some main interest areas). Why better? As stated above, they are professionals in the fields of contracting. Most likely, they had many similar projects and know exactly what to do so their work results to be immediately noticed. Why cheaper? - Because otherwise nobody would practice outsourcing. But this is not the only reason. Think how difficult would it be for a not very large company to organize a call center, for example. They would need a viable project, specialists to manage it, people with expertise in the field to form teams and to channel activity. The company would also require technical resources for IT professionals, data operating systems and labor force work implying massive selections, interviews and training. All of these mean enormous costs and fees, not to mention the human resources or the time spent. Thus, it is more convenient, practical and cheaper to let experts work for you. There is a rich literature presenting a stack of reasons and explaining why companies turn to outsourcing. Interestingly, before displaying the motivations, it highlights a very solid argument: the financial one. Recent research has shown that, globally, companies save between 30% and 60% of revenues as a result of outsourcing certain departments or fields (International Association of Outsourcing Professionals, Petecila 1). Having in mind these figures, the reasons top places on the second position. However, there is no general consensus on the nature of outsourcing impact on the US economy. Academics and practitioners who advocate its positive effects on the economic environment point out increased savings, the opening of significant job opportunities, cheaper imports and enhanced exports. Below is an overview of the main elements encouraging large companies to outsource parts of their activity: Cost control and reduction. This is the most important reason for choosing outsourcing. Unless, the company would spend large sums on research, development, marketing and launch. External supplier can offer the same service in a much more financially effective manner. Improve company focus. An institution that leaves operational details to an expert can better focus on its core competency and widen its business range. Access to resources, modern technologies, and expertise. In order to gain the profile market, outsourcing companies invest more to specialize in their field. This means that they provide all invested resources to anyone willing to pay for them. Assurance of quality services; Risk sharing and risk reduction. Several researches (inter alia, Dumitrescu, Bank of International Settlements) found that when turning to an external supplier, companies become more flexible and thus are able to handle the challenges of modern economy. The likelihood of an unprofitable investment decreases as a result of outsourcing entity expertise and of the possibility to renounce the project without major losses. Speed up reengineering benefits; Free internal resources serving other purposes; Not all technical or other nature resources are available "in house"; Cash infusion; Gain access to world-class capabilities. An increasingly number of companies insists on the advantages of outsourcing certain segments of their activity, so they can focus on core competencies. The main areas subject to outsourcing are research, IT, marketing, public relations, sales, or human resources. There is an upward trend of US venture capitalists expecting new IT companies to include an outsourcing component. Recent studies on the international market for outsourcing information and communications technology (ICT) report that in the last decade supplying markets (both nearshore, and offshore) have adapted their capabilities to growing demand, especially to the one that comes from the US and Western Europe. India and Canada continue to dominate these services, followed by a series of states that seek to gain a larger "slice" of the global outsourcing market. European Union and the US are the main opening markets for IT outsourcing companies, followed at great distance by Japan, Canada, Brazil, China and India. Of the US imports of ICT services in 2005, no less than 94% were in the field of computer science; for the EU this percentage is 92% (Dumitrescu 8, International Association of Outsourcing Professionals). Available data shows that over the last years, US imports of IT outsourcing services have grown exponentially, from a level of about $ 1.8 billion in 1997 to nearly $ 9 billion in 2005 to over $ 11 billion in 2006 (Dumitrescu 8). A parallel study conducted by Global Insight for the Information Technology Association of America points out that outsourcing of software and information technology services has generated huge financial benefits for the US economy. According to Global Insight, in addition to these opportunities, national economic environment has witnessed the creation of new jobs, higher wages and an increase in gross domestic product (GDP). Over the past 10 years, US imports of services have increased exponentially- particularly computer and information services- whose values ​​have multiplied by no less than seven times between 1997 and 2006 (Dumitrescu 7). As illustrated by recent statistical data mentioned above, software industry represents 2.8% (Dumitrescu 1) of US services industry and it is one of the most dynamic sectors of the country. In addition, it strongly uses outsourcing services and heavily invests by opening aboard units (offshoring). Bureau of Labor Statistics (U.S. Office of Labor Statistics or BLS) estimates that over the next decade, considering the growth rate, software industry will be the third US industry. Despite difficulties related to global economic recession, by 2014 the projected wage increase will be of 60%, which is almost five times higher than the 14% forecasted value for the rest of the economy (Global Futures and Foresight, Dumitrescu 1). The software industry includes system design companies, data processing companies and software publishing corporations. Service businesses are the main clients of IT outsourcing companies, followed by financial services firms, manufacturing, wholesale trade and transportation, among others. Statistical analyses indicate that in the medium and long-run all the above mentioned entities will display an upward trend in terms of using outsourcing services. IT outsourcing is the economic solution to the crisis and to cost reduction/optimization, with significant benefits and easy to reach by all entities. Thus, every company’s efficiency program should include an outsourcing strategy. In the present, the US practices IT outsourcing on a large scale; the same is true for Europe, South America and Pacific Asia, where the strategic management teams of multinational companies believe that outsourcing is one of the most important determinant of profit and performance (as indicated by the conclusions of Global Top Decision Makers Study of Business Process Outsourcing, sponsored by PricewaterhouseCoopers and carried out in 1998 by Yankelovich Partners, a market research firm). Supporters of the concept argue that, from a macro perspective, outsourcing has a positive impact on the US economy. Customers and investors drive businesses; the first ones look for lower prices, while the second are in a search of higher profits. In their effort to redesign the cost structure, companies outsource non-essential activities, to free labor force and resources possible to use in other fields, getting the most value for their money. As a result of operated price reductions, millions of customers enjoy benefits, investors get higher profits and better return on their investment projects. By outsourcing parts of their competencies, US companies enhance the creation of new jobs in less developed countries, thus offering economic support, and in the same time, increasing trade for national products. Another important aspect is the opportunity gained by these states to repay their debts to the US. Although outsourcing creates new jobs in other countries, the marketplace is not a zero-sum game (Arrison). The losing of a job is always a great discomfort, similar to the evolution from an agriculture-based to a modern economy; under certain conditions, outsourcing is responsible for that, as it temporarily displace workers. It is even more challenging when a decent job in the US is already difficult to find, and it may seem strange to think of the rationale for outsourcing precious jobs. One of the key variables taken into account when choosing a location is the salary level; however, as differences between countries offering outsourcing services tend to decrease, new opportunities appear for other countries looking to enter the profile market. There are two important issues to be noted here. In the first place, numerous American jobs are export-related, as part of president Obama ambitious plan to double its levels in the next four years. The US is a great choice for building large passenger aircrafts, designing sophisticated machine tools or computer software (Levy). However, it can be an expensive option to create shoes or assemble electronics. If the US were to broke free trade principles and renounce to this type of outsourcing, other states would reply by blocking the acquisition of American-made goods, costing national economy even more jobs. The other factor explaining the complicated inter-linkage between outsourcing and jobs is that freed resources from outsourcing can be used to enhance the creation of new ones (in the US). Outsourcing is the child of globalization and has offered millions of jobs. Companies cannot be blamed for global competition. Because of the critical features of regulation and existing requirements, many of them are left with no choice but to leave the US and enjoy global competing. The cons of outsourcing underline the risk of reducing US residents’ employment opportunities, which in cascade would hurt the national economy and lower the quality of life for its people. Once a company decides to outsource a part of its business operations, the government loses the taxes that he could have raised if considered entity maintained the whole number of facilities in the US. So, other negative consequences of outsourcing are the loss of income by local, state and federal authorities, a small number of payroll tax receipts and diluted contributions to Social Security and Medicare, payments corresponding to unemployment supportive plans. This is also true in case of sales and other tax revenue. Outsourcing is a multifaceted process; while it is good for some business, it could harm the Americans. In the same line, almost always companies that practice outsourcing enjoy important savings, and thus the possibility to cut the price of their offerings or maintain them much lower than main competitors, hurting small firms that cannot outsource. According to Scott Paul, member of Alliance for American Manufacturing, outsourcing is really bad for the US economy. Mr. Paul offers various arguments for his belief. First, after losing jobs to outsourcing, people engage in substantially lower paid activities (new jobs), with potential negative impact on the quality of life. Second, as a result of downward pressures on the US wages following the competition between Americans and foreigners in terms of salary levels, retribution for many US employees will no longer support middle-class lives. Third, outsourcing translates into a limited plethora of choices for the residents and a potential loss of know-how as a result. Fourth, it has raised the trade deficit, defined by the gap between the higher values of imports over exports. In other words, US is buying more than it’s selling, so the country needs to borrow to cover the difference, just like in case of any other debt. Finally, the impact of outsourcing isn’t always a positive one, benefiting companies that apply the concept. To separate innovation and production could prove inefficient, shipping costs are increasing and it is easier to control inventories and the quality of products in-house (Paul). Another matter of concern is the shift to foreign outsourcing in services, including the export of moderately high-skilled, white-collar jobs (Sneddon Little 3). China and India enjoy large human capital; at least some of their outsourced jobs are the better jobs-professional ones in programming or software design, accounting and medicine, in the new service industry where the US assumingly had a strong advantage. Despite all critics, in recent years, a large number of companies in the US (and elsewhere in the world, in fact) have seen outsourcing as a form to reduce their costs, mitigate the lack of know-how of the domestic market, operate 24 hours of 24 and 7 days a week, and to increase their productivity. Outsourcing does not mean the absence of risks; however, considering its value and its different shapes, we note significant cost reduction and a much lower risk level. Strategies based on skills and outsourcing enhance revenue growth, risk reduction, greater flexibility and a broader ability to respond to ever increasing customer’s demands. In spite of outsourcing both positive and negative implications, the net impact on the US economy is yet to be fully measured (Lieberman 22). The most important advantage is the lowering of corporate costs, in the benefit of consumers and shareholders. In turn, this enhances company’s profit and investor confidence. Outsourcing has transformed into a vital matter of survival for some US entities faced with a strong global competition for a market share. However, in early 2010, U.S. President Barack Obama strongly criticized companies that outsource their services because, he says, they contribute to rising unemployment. On the other hand, the usefulness and importance of companies activating in the outsourcing market can no longer be denied. The current development of external service providers shows that, after all, outsourcing may be the future for many segments of the business industry. It remains to be seen the attitude of companies towards the increasing use of outsourcing and to what extent they will choose to develop in-house projects or seek external support. In a short interview with Dr. Andreea Avadanei, economic adviser for Gaube Medical Center, she expressed her beliefs about the opportunity to outsource some of non-critical company functions and the effects of such strategy on the US national economy. Dr. Avadanei has argued that after an analysis of the multidimensional implications of outsourcing on the US economic environment, its significant advantages in terms of access to skills, large cost cuts, flexibility level or best practices recommend its application, as a dynamic trend that can no longer be ignored. Like any other process, outsourcing has its drawbacks, and has indicated here the loss of control, potential misunderstanding of requirements, low degree of customization and most important the export of jobs. But despite all that, in order to cope with the new global economic challenges, an outsourcing strategy tailored to the company’s culture and primary objectives is the best alternative. References 1. Arrison, Sonia. “Outsourcing is good for the America.” Tech Buzz 24 Sep. 2004, Web 4 April 2012 2. Avadanei, Andreea. “Comments on outsourcing”, 6 April 2012 3. Bank of International Settlements. “Outsourcing in financial services.” The Joint Forum. February 2005. Web. 6 April 2012 4. Dumitrescu, Razvan. “Outsourcing market in the US.” BPCE Los Angeles. 2009. 5. Global Futures and Foresight. “The Futures Report 2011”. Web. 7 April 2012 6. Global Insight. Executive summary: The comprehensive impact of offshore software and IT services outsourcing on the US economy and the IT industry. Massachusets. 2005 7. International Association of Outsourcing Professionals. “The 2011 Global Outsourcing.” Special Advertising Section. Web. 6 April 2012 8. Levine, Linda. “Offshoring (or Offshore Outsourcing) and Job Loss among US Workers.” Congressional Research Service. 21 Jan. 2011. Web. 6 April 2012 9. Levy, Philip. “Is Outsourcing Good for the US Economy?.” The New York Times Upfront, 14 March 2011, Web. 4 April 2012 10. Lieberman, Joseph. “Offshore Outsourcing and America’s competitive Edge: Losing out in the High Technology R&D and Services Sectors.”, United States Senate, Washington, 2004 11. Petecila, Tudor. “Outsourcing: risk or advantage?” 13 Jun. 2010. Web. 7 April 2012 12. Saleem, Hasan.” How Outsourcing Affects the US Economy.” Business Journal 16 Sep. 2008, Web 5 April 2011 13. Sarbu, Janeta. “Outsourcing- flexibility option used by service companies from Cluj-Napoca” Firm Economics (2009): 67-73. Web 5 April 2012 14. Scott Paul. “Is Outsourcing Good for the US Economy?.” The New York Times Upfront, 14 March 2011, Web. 4 April 2012 15. Sneddon Little, Jane. “Outsourcing jobs overseas: perspective” Regional Review Q2/Q3 2004 16. Yankelovich Partners. “Global Top Decision Makers Study of Business Process Outsourcing.” Sponsored by PricewaterhouseCoopers 1998. Web. 6 April 2012 Read More