Outsourcing: Theory, Literature, and Effects - Essay Example

?Outsourcing: Theory, literature, and effects Outsourcing “refers to the practice of a firm entrusting to an external entity the performance of an activity that was performed erstwhile in-house” (Varadarajan 2009, p. 1165). Varadarajan elaborated that “although off-shoring and offshore outsourcing to suppliers have dominated much of the recent discussion and debate on outsourcing in scholarly journals and the business press, the nature and scope of outsourcing that does not transcend national boundaries, and outsourcing to entities other than to suppliers is quite substantial.” In other words, outsourcing may or may not refer to offshoring or offshore outsourcing; further, inshore outsourcing is actually substantial. “Outsourcing to third party firms based in other countries is commonly referred to as offshore outsourcing, and sourcing from a firm’s subsidiaries in other countries as off-shoring” (Varadarajan 2009, p. 1165). Beside “actions that are explicit referred to as outsourcing, a broad array of actions that are referred to using terms such as make versus buy, vertical integration versus vertical disintegration (contraction), disintermediation versus intermediation, and using an in-house sales force versus force affiliated with a third party firm” are used to mean the same thing: “performing an activity within versus outside the boundaries of a firm” (Varadarajan 2009, p. 1165-1166). Varadarajan pointed out that other phrases used by firms also imply outsourcing: “externalization of low value added value chain activities in firms, the hallowing of corporations, the transformation of firms into virtual enterprises, and terms such contracting and sub-contracting, also imply outsourcing” (p. 1166). Although one part of the Varadarajan material suggests that outsourcing is a transitional phase, one part recognizes that in some cases, outsourcing is “the only viable” route for the firm (p. 1166). In acquiring an “expansive notion” of outsourcing, Varadarajan suggested a five-source model. Varadarajan’s “five sources outsourcing framework” actually enumerates a distinction between “(1) off-shoring to a firm’s overseas subsidiaries, (2) upstream vertical outsourcing to a firm’s current and new suppliers, (3) downstream vertical outsourcing to a firm’s intermediate and end use customers, (4) horizontal outsourcing to a firm’s direct competitors, peripheral competitors and potential competitors, and (5) horizontal outsourcing to a firm’s strategic alliance partners” (1166). Varadarajan’s main point is that outsourcing is basically tapping goods and/or services external to the firm and that outsourcing can come offshore but not from a subsidiary, from a good or services supplying third parties with which the firm currently do not have a relationship (but not from a head or higher ranking offices of a company), from consumer linking third parties, even from competitors, and from strategic partners (1166-1169). Varadarajan’s model appears sophisticated but the sophistication basically arises from a complicated restatement of essentially simple ideas. Nevertheless, his views on outsourcing is probably unique and a solid contribution to the literature. What is also emphasised in Varadarajan’s ideas on outsourcing is that saving on costs is not the only driver for outsourcing and this point is also one of Varadarajan’s key points on why there is a need to think “expansively” on outsourcing (2009, p. 1169). For instance, quality and not only cost is a major consideration for a firm to outsource a particular product or service (Varadarajan 2009, p. 1169). Perhaps, a key concept that can cover both costs and quality in the decision to outsource is the need to make one’s products or services competitive. In sum, Varadarajan essentially pointed out that decision to outsource can arise from the need to make one’s product or service become costs and quality competitive, access better one’s target customers, acquire access to knowledge and technology, and acquire access to copyrighted product, services, or knowledge. On the theoretical perspectives to outsourcing, Varadarajan articulated that some of the explanations to outsourcing are anchored on transactional cost, comparative advantage, competitive advantage, and ability and motivations explanations (2009, p. 1170). In my opinion, however, another way to look at the Varadarajan’s discussion is that while outsourcing may arise out of a desire to save on costs, acquire specific product features, access technology, access knowledge and product quality, access copyrighted items, and access better one’s customers, the objectives related to outsourcing can pertain to one’s transaction costs, comparative advantage, competitive advantage, enhance’s ability, or another motivation (2009, p. 1170). Varadarajan’s discussion on “leveraging technology for off-shoring and offshore outsourcing” and “beyond leveraging” can be paraphrased into these words: one must think “expansively” and look beyond accessing technology in tapping outsourced services or products (2009, p. 1171). Thinking “expansively” on outsourcing can be done in at least two ways. One way of thinking expansively in accessing technology through outsourcing is to tap outside organizations to provide innovative solutions instead (Varadarajan 2009, p. 1171). Another way is to “perform in-house offshore outsourced services” (Varadarajan 2009, p. 1171). In the latter, Varadarajan recommended, for example, that call centre services provided by offshore firms can be performed by personnel working from their homes (2009, p. 1171). This implies that work previously tapped offshore and outsourced can either be performed in-shore but continued to be outsourced or in-sourced but performed by personnel working from home. In sum, Varadarajan’s recommendation for thinking “expansively” on outsourcing is a call for thinking creatively on how to tap best or maximize outsourced products or services as well as how we can understand better outsourcing and the drivers and objectives involves in outsourcing. Most important and as discussed earlier, Varadarajan even mentioned or implied that offshore outsourced services can also remain outsourced but sourced in-shore or can be transformed into in-sourced services with the personnel working from home. Outsourcing can be tackled from two points of view, the macro and micro points of view. At the macro level, one can discuss outsourcing for its overall impact on the economy. This is very important to discuss, because worldwide the news media reported that U.S. President Barack Obama, for example, has taken the position to discourage outsourcing by American firms. In a working paper prepared for The Work Foundation, Rudiger (2007, p. 27) examined whether outsourcing has been a threat to jobs in the United Kingdom and concluded that “the benefits of service offshoring will, in the long run, outweigh the costs as long as policy makers focus their efforts on adjustment process in the short run.” Further, Rudiger (2007, p. 27) emphasized that “increases in trade in knowledge based services will overall benefit all the economies involved.” Rudiger’s (2007, p. 28) key premise is that “to the rest of the world it seemed perfectly obvious that Europe’s comparative advantage is its ‘high skilled work force’, its ‘ability to provide research, science and design’.” Rudiger pointed (2007, p. 28) out that “the fear of ‘jobs moving abroad’ is often linked to less specific, more general structural change, particularly when this is taking place against a background of high unemployment.” In other words, Rudiger conceded that the debates on outsourcing has been taking place in a background of high unemployment, whether or not outsourcing is somehow one of the causes of unemployment. Rudiger also stressed that “tradeability of knowledge jobs might increase, but this does not automatically mean that all jobs that are tradeable will be offshored” (2007, p. 28). One reason provided by Rudiger to support her claim that not all jobs will be outsourced offshore is that “distance and lack of control may harm the flexibility and speed of delivery due to practical implications of language, time, cultural difference and the lack of face-to-face interaction often needed to resolve complex problems” (2007, p. 28). Another reason given by Rudiger on why not all jobs will be outsourced offshore is that although some services can be done anywhere in the world, “even multinationals rely in practice on local delivery of services with a global brand image supported by global expertise” (2007, p. 28). Rudiger recommended that the debates on outsourcing should therefore stress on “consolidating the UK’s and Europe’s strength in higher value added knowledge services where investments in human capital will prove decisive” (2007, p. 9). Towards consolidating that strength, Rudiger implied strong support for the suggestion of the United Kingdom Prime Minister for industrialised nations to invest 10 percent of their spending in education and skills (2007, p. 29). In 2004, Laura Abramovsky, Rachel Griffith, and Mari Sako studied the impact of offshoring and its impact on the UK economy and found that despite the offshoring of business services, “business services have accounted for over 50% of job growth in the UK over the past two decades” (2). The figures are even better because between 1984 and 2001, as “employment in UK business services grew by 92% or 1.9m jobs” despite business services outsourcing from offshore (Abramovsky et al. 2004, p. 2). From the figure comes half of the total growth in jobs (Abramovsky et al. 2004, p. 2). Further, what is most outstanding is that according to Abramovsky et al. (2004, p. 2), “more business services are purchased form the UK than the UK purchases from overseas; i.e. we have trade surplus in business services, and it has been growing.” Despite outsourcing offshore, “UK production of business services also grew significantly faster than the rest of economy over the last two decades” (Abramovsky et al. 2004, p. 2). Yet, at the same time, “the growth in demand for UK-produced business services has come mainly from UK-based firms” (Abramovsky & others 2). This implies that despite outsourcing, the UK businesses providing outsourced services have been getting a large bulk of their customers from in-shore or from within UK. Further, this also implies that despite the growth of the outsourcing services, UK firms are outsourcing their needs from UK rather than from off-shore firms even if “UK businesses are now outsourcing a substantially greater proportion of service activities more than they did two decades ago” (Abramovsky et al. 2004, p. 2-3). Are the business outsourced services providers faring badly in the overseas market? No, it does not seem that way. According to Abramovsky et al. (2004, p. 3), “between 1995 and 2001, export of business services grew from ?11.7bn to ?31.7bn in nominal terms while imports grew from ?6bn to ?14bn.” Further, according to Abramovsky et al. (2004, p. 3), the said figures gave the UK an increasing trade surplus in business services and the figures contrasted with the “increasing deficit in trade in manufactured goods over the last two decades.” From an economic viewpoint, it is viable or reasonable to interpret the figures that they are indicative that the UK has a comparative advantage in business services outsourcing worldwide and that even UK firms will continue to patronize UK firms as they outsource business services. Nevertheless, “while trade in business services is increasing, it is still very small compared with trade in manufactured goods” (Abramovsky et al. 2004, p. 3). According to Abramovsky and her colleagues, “the fact that UK firms are increasingly sourcing business services offshore and foreign firms are increasingly sourcing business services in the UK may affect the total number of jobs in the UK, the type of jobs, the skills needed to do these jobs and the distribution of jobs across regions and across people” (2004, p. 3). In short, the overall perspective of Abramovsky and colleagues is that business outsourcing and even outsourcing offshore positively affect the number of jobs in the UK but business outsourcing offshore worldwide and in the UK will affect the job profile within the UK. According to Abramovsky et al. (2044, p. 3), the fastest growing job sectors among the business services outsourcing providers of the UK were the computer and related activities that “more than tripled in size between 1984 and 2002.” The growth has included call centres “where the latest figures show that over half of the UK call centres sampled have increased the numbers of staff employed” (Abramovsky et al. 2004, pp. 3-4). The UK employs more than 400,000 people in call centres (Abramovsky et al. 2004, p. 4). A quick look at the official website of the National Outsourcing Association of the United Kingdom at www.noa.co.uk indicates that many of the awardees for best business outsourcing providing services come from the services sector, many from the management consultancies and those also providing management accounting consultancy services. Ana Bobirca’s assessment of the growth of offshore outsourcing in the European Union even argued that “an increasing number of companies are finding that nearshoring to the CEECs is helping them to stay competitive in today’s global market, even with competitive players from the US or Asia (2006, p. 9). In short, Bobirca’s finds that outsourcing will make not only UK but also European firms competitive even vis-a-vis US and Asian firms. In contrast, the work of Anderson and Gascon in 2007 emphasized that the negative effects of offshore outsourcing on the United States economy are real and deserve attention. Anderson and Gascon (2007) emphasized that while the growth of offshore outsourcing has been positive for the economy of the United Kingdom and the European Union as argued by Abramovsky and colleagues and Bobirca, the same may not be true for the United States. The Anderson and Gascon analysis made use of time series cross-section data analysis based on the U.S. General Survey of 2006. In addition, their analysis included “a pseudo-panel model which permits including auxiliary state and regional macroeconomic information” (abstract section). It must be emphasised, however, that the redeeming aspect of Anderson and Gascon’s work on outsourcing in the U.S. is that the authors carefully qualified that their conclusions on outsourcing will hold “without structural change” in the U.S. economy and her labour profile. The work of Ebenstein and colleagues in August 2011 for the World Bank, using the U.S. General Population Survey, appear to confirm the findings of Anderson and Gascon. According to the work of Ebenstein and his colleagues, although offshoring in the United States is associated “with small positive wage effects” within manufacturing and large negative effects “at the occupational level,” offshoring is definitely associated “with a contraction in the manufacturing workforce” (2011, p. 27). According to Ebenstein et al., even services are negatively affected by offshoring and “the negative wage impact is particularly large among displaced workers who also switched occupations” (2011, p. 27). Ebenstein et al. “estimate losses of 2 to 4 percent among workers leaving manufacturing and an additional 4 to 11 percent wage loss among workers who also switch occupations” (2011, p. 27). Ebenstein et al. emphasised that the negative “effects are most pronounced for workers who perform routine tasks” (2011, p. 27). In addition, the “downward pressure on wages due to import competition and offshoring has been overlooked because it operates between and not within sectors” (Ebenstein et al. 2011 p. 27). The work of Ebenstein and colleagues also echoed an earlier work by Elwell. According to Elwell, “the destructive aspects of foreign outsourcing are costly and distressing” to the United States economy (2). Perhaps, one of the relevant documents that can facilitate our study of outsourcing is the 2008 World Trade Report of the World Trade Organization which pointed out that “trade theory comprises a number of distinct but related propositions that are more or less robust and more or less supported by empirical evidence” (xv). We can consider outsourcing through offshoring as a form of trade. On the other hand, Suryanarayan Mohapatra argued that the negative findings on outsourcing for some economies may have resulted because outsourcing was studied in a period of recession and economic gloom (2011, p. 34). Thus, in summary, our review indicates that while the UK and EU economies appear to be gaining as result of offshore outsourcing, the same is not true for the US economy. The way out for the US, however, may lie not in resisting offshore outsourcing but in restructuring both its labour force and its economy. In the first place, outsourcing appears unpreventable in the age of globalisation and the internet. Work Cited Abramovsky, L., Griffith, R. & Sako, M. (2004) Offshoring of business services and its impact on the UK economy. London: Advanced Institute of Management Research. Anderson, R. & Gascon, C. (2007) ‘The perils of globalization: Offshoring and economic insecurity of the American worker’. Working Paper 2007-004A. St. Louis, United States: Federal Reserve Bank of St. Louis. Bobirca, A. (2006) ‘Challenges of nearshoring services within the enlarged EU’. The Romanian Economic Journal (Jurnalul Economic). 9(19) pp. 3-10. Ebenstein, A., Harrison, A., McMillan, M., & Phillips, S. (2011) ‘Estimating the impact of trade and offshoring on American workers using the current population surveys’. Policy Research Working Paper 5750. Washington: The World Bank. Elwell, C. (2005) Foreign Outsourcing: Economic Implications and Policy Responses. CRS Report for Congress. Washington: Congressional Research Service. Mohapatra, S. (2011) ‘The Dichotomy of Outsourcing During Recession’. Asian Journal of Business and Management Sciences. 1 (3) pp. 34-42. Obama, B. (2012, 11 January) ‘Remarks by the President on Insourcing American Jobs’. Washington: The White House. Rudiger, K. (2007) ‘Offshoring, a threat for the UK’s knowledge jobs?’. A working paper prepared for the Knowledge Economy Programme. London: The Work Foundation. Varadarajan, R. (2009) ‘Outsourcing: Think more expansively’. Journal of Business Research. 62 pp. 1165-1172. World Trade Organization (2008) World Trade Report 2008. Geneva: World Trade Organization. Read More