Arguments Pro and Contra Outsourcing - Case Study Example

Argumentative Essay on Outsourcing

Introduction

Outsourcing describes the process involved in the transfer of some of an organisation’s rights of decision making and recurrent internal activities to outside providers, as outlined in a corresponding contract between the two parties. As a result of the complexities of such a process, the whole process involves more than just a contract. Factors of production are transferred as well as decision rights. Outsourcing can occur at different activity levels that include the individual, activity or process levels. The process enhances the effectiveness of the organisation by allowing it to focus on what it can do or produce best. It also increases the flexibility of the business in matters concerning the changing demands for services and products, business conditions and technologies involved. Outsourcing also aids in the improvement of the operating performance of the firm by facilitating the acquisition of skills, expertise and technologies. Cash is also generated when assets are transferred to the provider. Consequently, the concept results in the company's continued ability to sustain its bottom line in the long run despite any changes or instabilities in the market. Even though outsourcing helps in the sustaining of the organisation's bottom line its principles result in intangible effects and hidden costs of trade that have a significant bearing on the American economy.

Arguments against Outsourcing

Loss of Comparative Advantage

The concept of comparative advantage refers to a situation where consumers are offered greater value for goods either through increased quality or benefits or by providing lower prices. The United States has had comparative advantages in industries requiring large capital investment and highly skilled labour (Rivard & Aubert, 2015). Its population boasts of an abundant supply of these two factors (strong knowledge base and skilled labour) that has given it an edge over other economies (Rivard & Aubert, 2015). Outsourcing has enabled the United States companies to witness a high turnover rate of entrepreneurial ventures when some of these jobs are shifted to other countries. As a result, these other countries tend to benefit from the reduced costs of the knowledge (Rivard & Aubert, 2015). Economies such as Mexico and Asian countries have built their economies from the spill over benefits of the knowledge and skilled labour influx. These countries have ended up advancing their economies to such high levels that they have become direct competitors to the United States for markets where the United States initially enjoyed singular monopoly (Rivard & Aubert, 2015). In this regard, there is a potential risk of loss of the competitive advantage that the United States had due to the monopolistic control it had over its technology. Industries such as the Aerospace manufacturing companies have developed in various countries as a result of the training, technology and contracts provided by the firms in the United States (Rivard & Aubert, 2015). In this respect, there is no guarantee that the intellectual properties of the initial owners of these technologies would be safeguarded.

Loss of Local Talent

It is very likely that the most affected field as a result of the spread of outsourcing concepts is the Information Technology sector in the United States. For a long time, the United States boasted of having one of the largest pool of Information technology gurus as well as talents in other high-end fields of knowledge. As a result of Outsourcing, most of the professionals in Information Technology (and other crucial fields) have migrated or have become displaced resulting in the shrinking of the national pool of such talents. The phenomenon has led to several effects. For starters, the country has started to experience a shortage in important fields in the economy that was not present before. A continuation of this trend might result in the country having to rely on outsourcing (the culprit) to access some crucial services. The situation has also struck a chord with America’s future employees with recent shifts being experienced in college enrolment (Rodgers, 2016). Most college students have begun ignoring high-technology fields like IT and computer science. Reports by the Center for Management Communication at the University of Southern California indicate a drop (by 20 percent) in the enrolment of students for courses of undergraduate computer science (Rivard & Aubert, 2015). The situation prompted Bill Gates to go on a university tour in 2004 to motivate students to continue majoring in computer-related courses. The Ford Company establishment in Mexico has resulted in the loss of job opportunities for Americans to Mexicans who provide much cheaper labour (Rodgers, 2016). Consequently, fewer American students are inspired to study IT or register for manufacturing courses due to these instabilities in the job markets (Rodgers, 2016). The trend could be a major blow to the companies seeking domestic skills and talents since they would then face a dry-up of the local talent.

Increasing Trade Deficits

The growth of the United States economy has witnessed a disturbing variation since Outsourcing picked up in the late 20th century. Outsourcing negates trade balances in cases where one economy consumes more than it produces (Sheng, 2014). Outsourcing between the United States and most economies (with neighbouring countries such as Mexico) picked up in the 20th century that was then followed by a growing trade deficit later in the century (Sheng, 2014). After decades of trade surpluses, the United States economy started recording an annual trade deficit since 1975. Today, the country imports a quantity of goods and services that are twice the exports. Currently, the United States owe the rest of the world (especially China) around three trillion dollars. It would prove significantly hard for the United States to scale down this trade deficit if there is continued overseas exportation of economic activities (Sheng, 2014). The deficit situation is worsened by the fact that the services and goods that the United States firms provide are the same ones being imported back to the country. Further, the outsourcing-caused trade deficits decrease the purchasing power of the workforce and deplete their strength in the consumer market (Sheng, 2014). Prominent economists have voiced their opinions regarding the consumption-happy ways of the United States. They have expressed fear that the country has and is continuing to create unsustainable global imbalances that have been assumed as the main cause of the global economic crisis.

Decreased Protection of Privacy/Compromised Security.

Presently, in the United States, the business environment is characterised by a microscopic examination of the governance structures, and thus, managers need to reduce any risk of information falling into the wrong hands. As already mentioned, outsourcing can happen at the level of processes. Correspondingly, attention is increasingly being focussed on the presence or absence of quality of third party processors (Ciriani et al., 2011). At times, the offshore outsourcing activities might occur without the knowledge of the firm for which the data is being processed. An example is the 2009 case of the Pakistani case where a clerk of Pakistani origin tried extorting money from UCSF Medical Center, which had outsourced the processing of hospital transcripts to a United States company (Ciriani et al., 2011). The company had further outsourced the information to another US company that sent the records to Pakistan for processing. The impact of such an action is huge not only financially but to the privacy and the security integrity of the information. In this respect, the organisation that outsourced the data will be the one that would be accountable for the actions of the initial outsourcing company (Ciriani et al., 2011). A Stanford University study reported that suits related to violations of confidentiality have faced ten percent of companies that outsource. The breaches of privacy usually arise when the processes or information is further outsourced to a third company (Ciriani et al., 2011). It is important to note that there is the outsourcing of decision rights as well that might render a confidentiality suit null and void.

Hidden Costs that result from Outsourcing

There are definitely visible decreases in costs that occur with outsourcing that are more known than the hidden costs. Such apparent cost-cuts include the cuts on salary costs and labour. However, the total costs of operations do not necessarily decrease with outsourcing. The companies that engage in outsourcing do not always account for the qualitative aspects and measures such as the quality of services and productivity (McIvor, 2016). Rather, they focus on quantitative factors such as salaries and quantities of the trade (goods and services). Economists assert that most companies do not possess adequate tools to measure their costs and productivity before and after outsourcing. Productivity may be reduced due to the time zone differences that would lead to extra costs and inconveniences that come with the management of offshore crews (McIvor, 2016). Additionally, customer support programs problems may arise forcing a company to shift their operations to the United States. An example is when Dell was forced to shift its support centres from India to the US due to the poor quality of technical support. Customers had voiced their dissatisfaction arising from lack of understanding of the foreign accents (McIvor, 2016). Such an event most likely negated the positive cost-saving effects that had manifested much earlier on. These effects take long to materialise, unlike the cost-saving impacts that are witnessed with immediate effect.

Arguments for Outsourcing

Cost-saving

The reduction in costs is the principal factor that motivates companies to consider outsourcing. In this respect, the company conducts an analysis to establish jobs that are costly when done in-house and seek ways to outsource these to partners who tend to offer the same at a lower price Sheng, L. (2014). The cost-reduction effect is mostly manifested with services that are highly specialised and require high costs to establish. An example is a situation where a company requires highly specialised engineering or information technology skills (Asefeso, 2012). In most of these situations the out-sourcing company usually only needs these services for a short period (Asefeso, 2012). It thus becomes cheaper for such a company to outsource these services since the outsourced firm will accomplish the task more efficiently, faster and at a lower cost.

Operational Effectiveness.

Outsourcing ultimately leads to increased flexibility in the way the company operates. For starters, the company gains access to a larger labour supply that it does not have to maintain on a permanent basis (Asefeso, 2012). The implication is that the firm will have ridden itself of the stress of worry of idle workforce and layoffs (Asefeso, 2012). The flexibility provided permits the company to adjust the production and workforce capacity according to the trends in the market and requirements.

Revenue Benefits.

Outsourcing generally results in an increase in the net income that comes. The company that has outsourced its services has access to more business opportunities and more market access (Sheng, 2014). Further the company can expand the sales and production capacities during the periods when such expansion could not have been financed (Asefeso, 2012). The revenue benefits are also manifested through the reduction in costs due to the provider's lower cost structure. Thus, it facilitates the conversion of fixed costs to variable expenses.

Proponents of outsourcing thus suggest that by outsourcing, firms tend to free up the valuable time and capital so that they can focus on the main operations of the business. For businesses that have specialised in manufacturing, there is unlimited access to the latest technologies of production and resources that they do not have to purchase or maintain (Sheng, 2014). The outsourcing also provides the firms with unlimited opportunities for accessing a variety of business partners that may be profitable in the future (Asefeso, 2012). An example is the assembling firms in Asia (China) that partner with multiple electronic manufacturers and share one assembler can profit from the chain of supply from a maker of glass displays or chip manufacturer (Sherlock, 2012).

Conclusion: Potential Solutions and Implications

From the preceding discussion, the negative effects of outsourcing are multiple and outweigh the positive outcomes and thus cannot be disregarded. However, outsourcing should be considered a necessary evil and as such if policies are formulated that arrest the activity, the result might be a net negative cost (Sheng, 2014). There are, however, a variety of policies that can end up being beneficial that does not involve removal or cessation of outsourcing activities. For one, the United States government can resort to the expansion of overseas markets by advocating for the removal of foreign trade barriers against its exports (Sherlock, 2012). Another solution would be to formulate policies or international agreements geared towards the correction of trade deficits by focusing on an appropriate balance between production and consumption (Sheng, 2014).

Outsourcing has led to transformations in the interaction of nations. The implications of the solutions suggested above are that they would give rise to a further strengthening of these relationships but in a way that would lead to more positive outcomes arising from outsourcing. A lot is yet to be known regarding the effects of outsourcing mostly because the data that is available does not provide adequate information. However, the existing information is substantial enough to warrant examination of the consequences of outsourcing in the United States. The sudden increase in the outsourcing of highly technical jobs may result in the United States no longer becoming the leading economic power. The solution suggested above imply that companies in the United States must increase their knowledge base regarding outsourcing to increase their advantages.