The Positive and Negative Effects of Outsourcing - Research Paper Example

The Positive and Negative Effects of Outsourcing Table of Contents Abstract 2 1.Introduction 1 2.Positive Effects 3 (a)Stronger Corporations 3 (b) Focused Exports 3 (c)Competitive Advantage 4 (d)Consumer Benefit 4 (e)Innovation 5 (f)Increased Productivity 5 (g)Intangible Benefits 6 (h)Statistical Illusion 6 3.Negative Effects 7 (a)Jobs Drain 7 (b) Lose of Taxes 9 (c)A Lost Economy 9 References 11 Abstract Technology has changed our world and will continue to reshape it in future. These technological developments play a pivotal role in designing and reshaping businesses and economies. Outsourcing phenomenon is inherently driven by the technology and today it has grown into an inevitable business reality, especially multinational business entities cannot escape this reality. However, outsourcing impact on economy are widely debated in order to ascertain its inevitability or otherwise. In American society the debate has not lasted as yet and both sides have some solid evidence to favor their arguments. Although, the argument that denies the inevitability of phenomenon claims it to be a major cause of unemployment in America, but the positive impact of outsourcing on the economy cannot be rejected altogether. As a matter of fact, there is a fair amount of subjectivity in the questions like where, when and how outsourcing should be employed and the detrimental effects of outsourcing on US job market are a reality but another reality is the importance of these outsourcing companies to the US economy. Although cost is the key factor while making a decision of outsourcing, it must also be a strategic decision at the same time. A strategic decision takes into account the capabilities of company's resources, challenges at hand, benefits and key factors that favor outsourcing. The strategic outsourcing prevents the outsourcing of goods, services and labor that are critically important to the function of the company. At the same time, strategic outsourcing can take into account the expected impact of an outsourcing decision on national economy. The establishment of a separate formal Officials authority might be a good idea to evolve a regulating mechanism and to strike a balance in outsourcing decisions. Nevertheless, purging it altogether is not an option. 1. Introduction Pacing with rapid changes in business dimensions has become a demanding challenge for business leaders in diminishing geographical limitations. Technology in general and cutting edge communications in particular drastically redefines business operations in terms of resources. The globalization has vast and vivid repercussions on business domains and business leaders have to be very knowledgeable and current on prevailing trends in human resources, purchases and supplies to manage these effects in their specific domain. The globalization of businesses and advancement in technologies to support these global business operations have reduced the geographical limitation of engaging low cost human and material resources while managing supplies of products produced overseas in the spur of the moment they are required by the businesses. Today, the stage is all set for businesses to engage low cost resources through outsourcing; a concept that can considerably slash the production and service costs while targeting the profit maximization. Companies all over the world are now striving hard to reduce the cost of their products or services by efficient management of resources, purchases and supplies. Jacques1 defines, “Outsourcing means more than just the purchase of raw materials and standardized intermediate goods. It can be defined as a long term, result oriented partnership of company with an external provider for activities that would otherwise have been performed in-house.” However, realization of these outsourcing benefit require intelligent handling of in-house resources to control external resources and ensure substantial slash of cost through insightful purchasing of goods that best suit the business requirements in terms of standard of material and cost-effective, secure and smooth supply of purchased goods. Like any other business phenomenon, the outsourcing and purchases from external markets comes at a cost. It is not like a paradise walk and business have to look for disadvantages that this low cost solution can bring to the business if not tackled skillfully. Take the example of a multinational service provider who can risk the direct communication mechanisms with clients in case of an overwhelming stress on outsourced service centers. Similarly, reduced control over its workforce and security of information can be a very challenging task. Moreover, there are social issues2 involved in the decision as workers may have to sacrifice their sleep and social engagement to ensure coincide office hours with the outsourcing company. And above all the impact of these out-sourced businesses on local employment ratios and taxes must be a decisive factor before issuing a final verdict in favor of outsourced resources and purchases. Despite being an important business strategy, outsourcing in America has witnessed a bitter controversy in last three decades. The positive and negative impact of outsourcing are widely discussed and deliberated by major civil society representative and governmental agencies but these segments of the society have failed to reach a consensus on the issue. There are only fewer chances that the debate on the issue will be ever decisive because there are so many allied factors that make the equation very complex. If on the one hand the supporters have semantic evidence of goodies that the American economy can extract from the outsourcing, the contenders have clear statistic that shows the other side of the picture. The supporters present the logic that hiring low cost resources and import of low cost intermediate goods can boost the economy by leaving higher level jobs for Americans and ensures the production of low cost the finished goods and more Americans can afford access to these goods. This research paper will strive to present a comparative analysis of both the viewpoints to show the positive and negative impact of the strategy on US economy. 2. Positive Effects There are numerous positive effects that outsourcing can bring to American economy some of these effects are enlisted below; (a) Stronger Corporations Outsourcing can save a lot of money for the corporations which make them stronger and this saving can help corporations to invest in the more important area that are concerned with the betterment of local employees and new projects to help raise the standard of living for Americans. Obviously, economically stronger corporations can bring a lot of good for the economy and the nation. (b) Focused Exports Outsourcing of intermediate goods not only saves money in terms of inexpensive imports but also enables the American industrialist to focus on better finished goods and products. Outsourcing can save a lot of time and effort of local manufacturers which otherwise would have been an overhead in production process. The outsourcing may also help to keep a steady pace of production with increased focused on fine tuning of final products. These finished goods can earn a handsome foreign exchange which can boost the American economy. (c) Competitive Advantage In order to compete in international markets America need to decrease the manufacturing expense of finished goods. This is especially important when India and China have access to low cost labor and intermediate goods in their local markets which provide them an inherent advantage while competing in international markets. Outsourcing can help America to bridge this gap and to produce more finished goods at a competitive price. Obviously, if American manufacturers and producers can reduce the cost of production the access to the cutting edge technologies can provide them a clear competitive advantage. (d) Consumer Benefit The outsourcing is not only beneficial for the companies who gain high returns and increased profitability through outsourcing but it also brings comfort to American consumers who can buy products that are partially or wholly outsourced. Most of the American companies have clear perceptions that saving the cost of production in higher-labor-cost economy3 like USA not only support companies to sustain competitive goods in the local market but it also bring allied benefits to the customers and they can afford quality products in accessible prices. (e) Innovation Outsourcing brings innovation in the company and society because it brings experience, new processes and ideas of the other side. This might be very useful and can initiate procedural and design level changes in the final product. Moreover, outsourcing can add cultural diversity and depth in the product line. (f) Increased Productivity Outsourcing can be very effective if the company requires an accelerated production. It might be very handy to outsource same intermediate material to more than one external company in order to complete a speedy production cycle or to meet some additional demands of the final product. In the absence of outsourcing option, such a demanding situation can turn into a management nightmare where the company may have to operate an additional shift or would have been forced to establish a full scale upgrade of existing business facilities. Efficient utilization of outsourcing can provide effective solutions for the urgent and increased production demand management. Gupta4 has presented a real world example of this situation, “Motorola is another company that has utilized the similar approach to achieve higher level of productivity from their software division. A project at Motorola used developers in six countries to develop the same piece of software, with each site maintaining local work shifts.” So, outsourcing can be employed in scenarios where an immediate and increased productivity is required to manage demand. (g) Intangible Benefits Beside tangible benefits like low labor costs, equipment costs, maintenance costs etc. there are several intangible benefits that outsourcing can bring to American society. One of the major benefits is environment, because most of the intermediate goods are produced from the raw material and this conversion is often very costly in terms of environmental effects. The heat produced in burning is a good example of intangible benefit that American society harvest from outsourcing. A lot of burning in the production of intermediate products of iron and crystal is involved; similarly many toxic gases are produced in converting raw materials to semi-prepared products. Moreover, the cost of maintenance, labor healthcare facilities and other structural liabilities are not the concern of the country outsourcing a product or service. These and many other effects on the intangible benefits are often overlooked by the researchers in this domain. (h) Statistical Illusion Some of the researchers have presented the facts along with statistical proof that job drain projected in media is not real, rather it is angular. Simply put, it is just another side of the big picture but not the actual picture itself. Geene 5 belongs to this cadre of the researchers and has presented an important point that denies the negative impact of outsourcing is the dispersion spectrum over which the lose of employment is depicted. More often than not the figure that shows a sharp decline of jobs in US markets shows statistics from a limited job sector spectrum and the hype is can be attributed to the media primarily. "There was no correlation between the job growth and the growth of outsourcing at sector level. The authors concluded that importing services input may lead to a substitution effect away from labor but increasing demand in other industries offset this effect. This is in contrast to the popular media generated belief that the outsourcing of services was exploding, when in fact the overall employment effect has been small." 3. Negative Effects In most of the advanced countries of the world technological advancements have forced many companies to adopt outsourcing in order to keep the prices of their products competitive. However, the negative effects of the phenomenon are serious and public annoyance on these effects is arousing day by day. Following are the few major economic concerns and dilemmas that the outsourcing companies and societies are facing; (a) Jobs Drain In American economy where workforce is quite expensive, companies find is soothing to outsource low level jobs in order to leverage market competition and maintain products cost at an affordable level. As a result jobs are outsourced to the countries where cheap labor is available and Americans who are willing to perform these jobs are denied of job opportunities. This job drain has caused lower level workers to rely heavily on welfare and public sector health insurances schemes which have further deteriorated the economy. There are serious concerns of middle class hard working Americans that have been losing their jobs at the hands of cheap and inexperienced workers due to marketing strategies adopted by the major market competing forces, Romano D., & Yotopoulos 6 have phrased it as the “globalization under severe cost competitions”. The issues is raised at every forum and has resulted in severe criticism of presidential administration of previous regimes. A considerable majority of Americans still considers that “our major competitors, such as India and China, have long term designs to out compete us in every major industry and service.”7 However, the chief concern of masses remains the lesser opportunities for the local skilled middle class who have been loosing jobs. Barring last two years statistics the unemployment ratios have been shooting up abruptly in last ten years. Following graph8 clearly depicts this trend; (b) Lose of Taxes The phenomenon of job drain discussed above has not only cost employees their jobs but it has also resulted in loss of state income. Hasan 9 claims, “Another harmful effect of outsourcing is the loss of income by local, state and federal governments. There are lesser payroll tax receipts and lesser contributions to Social Security and Medicare. Then there are the outgoing payments for unemployment benefits. Sales and other tax revenue suffer too.” Obviously, for a country that is committed to the welfare of its citizens, any reason for the compression of tax network cannot be ignored. (c) A Lost Economy 10 More and more firms are now outsourcing manufacturing to India and China where the labor rates, tax rates, and environment responsibilities are not as costly as they are in America. Carbaugh 11 observes, "The concern is that a free-trade environment allows good jobs to drain from US economy to China, India and other countries." The graph of outsourced manufacturing is rising higher and higher, Made in USA label is vanishing rapidly from household goods in America and the country has lost it way to high value and high tech goods. 12 The perils of this trend for American economy is not a far cry, and cost reduction pursuits will ruin the American economy soon. Some recent surveys have shown alarming rise in the dominance of Chinese and Indian product lines because these products offer consumers with low buying a good opportunity at subsidized prize and attracts the corporate leader due to profit maximization. However, this offer no good to consumer, corporation and nation in real sense and all have to face consequences of a lost economy. The effects of these trends are recognized at the highest level and forces Obama 13 to show the resolve of his administration to fight the menace of outsourcing, "No, we will not go back to an economy weakened by outsourcing, bad debt and phony financial profits." References Carbaugh, R. J. (2010). Contemporary Economics: An Applications Approach. USA: M. E. Sharpe. Greene, W. (2006). Growth in services outsourcing to India propellant or drain on the U.S. economy? New York, NY: DIANE Publishing Gupta, A. (2008). Outsourcing and Offshoring of Professional Services: Business Optimization in a Global Economy. USA: Idea Group Inc (IGI) Hira, R., & Hira, A. (2008). Outsourcing America: The True Cost of Shipping Jobs Overseas and What Can Be Done about It. New York, NY: AMACOM Div American Mgmt Assn Huffaker,S. Jr., (2005, Jan 1). Offshoring ... benefits the consumer. USA Today, Retrieved from http://www.usatoday.com/tech/techinvestor/industry/2005-01-16-dhl-advice_x.htm Hasan. (2008. Sep 16). How Outsourcing Affects The U.S. Econom!. Business Journal, Retrieved from http://www.dirjournal.com/business-journal/how-outsourcing-affects-the-us-economy/ Jacques, V. (2006). International outsourcing strategy and competitiveness: Study on current outsourcing trends : IT, business processes, Contact Centers. Paris, France: Editions Publibook Publishing Inc. Obama, B. (2012, Jan 25). Obama to take US economy away from outsourcing, bad debt. New Delhi: The Times of India, Retrieved from http://articles.timesofindia.indiatimes.com/2012-01-25/us/30662258_1_skills-for-american-workers-barack-obama-bad-debt Peng, M. W. (2010). Global Business. New York, NY: Cengage Learning. Roberts, P. C. (2010). How the Economy Was Lost. New York, NY: AK Press Romano, D., & Yotopoulos, P. A (Eds.). (2007). The Asymmetries of Globalization. New York, NY: Routledge Publishers Inc. Trade Economics. (2012). United States Unemployment Rate. Retrieved from http://www.tradingeconomics.com/united-states/unemployment-rate Read More