Outsourcing Jobs to Foreign Countries - Case Study Example

Outsourcing Jobs to Foreign Countries       Globalization. It is the buzzword of our generation. It is the term that encapsulates the phenomenon sweeping the world today. It is the powerful movement that has broken down the barriers that used to define human society. National borders, geographic distance, time zones – these today are but imaginary divisions, relics of an old world order. Today, everything is globalized. From fashion, food, education, culture, technology to the economy, the world has began to integrate itself into one globalized society. The realities of globalization – high-speed communications, virtual trade, instantaneous travel – have allowed for unprecedented growth in global transactions. The rise of multi-national corporations that transcend national economic boundaries is a product of these realities. The world did not get smaller. Humans only got bigger, with a reach farther than ever before.       The economy, now more than ever, has become globalized. We have become a global neighborhood, which each country offering something new and different to the world. At the same time, the national economies have become increasingly dependent and interconnected with each other. Goods sold by a U.S. Corporation was made by China that got its raw materials from Nigeria and laborers from Pakistan. A transaction down at the Hong Kong stock exchange could affect a business deal in Japan and the United Kingdom. The grimmest reminder of the extent of globalization of our economies is the global financial crisis, with the failing banks in the United States affecting the financial markets of the rest of the world.       Increasingly, the commodities the market has began to accommodate has transformed from consumable to productive. The globalized economy necessarily allowed the emergence of a new form of economic activity that focuses on labor itself as a commodity – outsourcing. This research article explains the phenomenon of outsourcing, why it has become an increasingly profitable economic activity for global corporations, what conditions allow for a country to be a destination for outsourcing, and the current debates on the effects of outsourcing.       Outsourcing is basically a business decision to ask a different company to deliver a service or product that is only a part of the process. Subcontracting is the technical term for this business decision. The reasons for outsourcing are varied at best but the main idea is for the company to be able to produce more in quantity and or quality at lower costs to considerably increase profit. Essentially, it brings the concept of labor beyond mere workers to the level of corporations.       Outsourcing became an important part of the business lexicon in the 1980s, when it became clear that for businesses to continue to bloom, deliberate decisions had to be made to lower costs by redirecting and focusing energies on competencies of corporations for more efficient use of land, labor, capital, technology and other resources.       Part of the outsourcing decision is to transfer management and daily execution of an entire unit of a business function to a provider outside the corporation itself. This transfer is articulated and protected by a contractual agreement between the client and supplier. The usual agreement locks the client into taking the services of a supplier to provide the particular segment of the business operation of the company for the duration of the contract. Traditionally, segments of the operations outsourced include facilities, real estate management, accounting and auditing, information technology, human resources, customer support and call center functions such as CAD drafting, customer service, telemarketing, market research, manufacturing, web development, content writing, designing, ghost writing and engineering. Increasingly, because of pressures from market competition, there is a need to increase the activity of the company in research and development to come out with better quality products. More and more, companies have began to outsource this traditionally internal business function to research organization or universities with strict contracts to maintain the integrity of the outsourcing partnership.       The main process followed by firms that outsource include receiving supplier proposals after invitations are sent-out, competition between suppliers through a bidding process, negotiations to tailor-fit the chosen proposals to the needs of the company, finalization of the contract between the parties which is critical to the partnership and protects both supplier and client from potential infractions, transition to external service provision, transformation of the actual business operation process and benchmarking to evaluate the performance of the service provider. Depending on the evaluations, the contract could be terminated or renewed.       The traditional reasons for outsourcing include addressing the following issues: cost savings, core competency focus, cost restructuring, quality improvement, knowledge, operational expertise, contract, capacity management, access to talent, catalyst for change, enhancement of innovation capacity, reduction of time to market, commodification, risk management, venture capital and tax benefits. The main goal of outsourcing is really to restructure a business operation to follow a more profitable framework. This business decision allows for a stronger corporation focused on its core competencies.       This trend of outsourcing began in the 1980s and has transformed corporations from big conglomerates inefficiently covering all its bases to more sleek and efficient companies working in a new type of economic environment of interdependence, thus increasing jobs, output and profit of the entire company. However, the limit of such outsourcing was that it could only be done at the local or national level. Only at the onset of globalizing technologies and mindsets has a new form of outsourcing emerged – offshore outsourcing or outsourcing of jobs to foreign countries.       In offshore outsourcing, instead of a corporation just enlisting the services of an external provider, a corporation can transfer its operations in another country. It may mean a lot of things. It could mean that a service formerly produced within the corporation is transferred to a foreign source. Sometimes, it could mean that only services important from subsidiaries in foreign companies are considered.       There are generally two types of offshore outsourcing – production and service outsourcing. The main argument for offshore outsourcing follows the same logic for traditional outsourcing – to reduce costs, increase production and increase profit. The economic concept of comparative advantage is applied to this emerging economic phenomenon – when labor itself becomes the commodity traded among nations.       Production offshore outsourcing involves transferring production and manufacturing units of the business process to lower-cost destinations. The reality in most First-World countries is that operational costs are high because of expensive labor for highly skilled workers, high corporate taxes, high energy costs among others. There are certain countries that are able to offer lower costs for the same quality because the technical skills needed by labors are far lower than what is available in the country of origin. Examples of countries that are hubs for production offshore outsourcing are China, Costa Rica, Vietnam and India. The offshore outsourcing usually involves just the final manufacturing stage of the product since product design, research and development require more specialized labor that may not be found in the target countries.       Conditions that allow production offshore outsourcing to thrive include the following: establishment of free trade agreements; very low wage rates; considerably few workers’ rights legislation; relatively stable currency exchange rates; inexpensive loans, land and infrastructure for new corporations; few environmental regulations; set infrastructure for energy, transportation and communications; strong enforcement of intellectual property laws; and huge economies of scale.       Services offshore outsourcing involves the transfer of call center and customer support functions to countries that have solid communication infrastructure. The technological boom in communication in the 1990s has allowed for more Third-World countries to be connected to the rest of the world through the Internet and telecommunications. Services have been digitized so there is little need for the service functions to be operated on the origin country but instead take advantage of lower costs in target countries. Specific services include back-office processes, transaction processing, research and development, equity analysis, tax-return processing, radiological analysis, medical transcription among others. Countries that have been tapped for service offshore outsourcing include India, China, Poland, Romania, Morocco, Mexico, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, the Dominican Republic, South Africa and the Philippines.       Conditions that allow services offshore outsourcing to thrive include the following: stable energy, transportation, security and telecommunication systems to support outsource centers; cheaper but competent labor with specific skills depending on the needs outsourced (i.e. communication and literacy skills for call centers; technical skills for analysis work); non-disclosure agreements and strong intellectual property enforcement; significantly inexpensive costs for facilities and taxes.       All these offshore outsourcing by big companies have benefitted both target and origin countries. The ideal effect is that the corporation from the origin country is able to streamline its operations for efficiency and profitability at the same time that investment that engages highly skilled workers enters the target country. The net effect is an increase in Gross Domestic Product for both countries, ideally expanding the global economy.       To show the extent at which this outsourcing has been occurring in the world today, statistics show that “companies with revenues of at least $5 billion, as many as one quarter of IT jobs will be moved offshore by 2010.” (ComputerWorld, 2009). “The $50 billion-a-year offshore outsourcing business was growing at a 29 percent annual rate until the credit crisis hit last fall. Forecasts show growth in 2009 to be at 10 percent.” (New York Times, 2009). “Global revenues on outsourced medical transcription services in 2005 is already estimated to be at 2.2 billion dollars, with the US market accounting for more than 85% of the global demand.” (XMG Study, 2006). “Offshore outsourcing will create more than 337,000 jobs by 2010.” (InformationWeek, 2005). “Business Process Outsourcing will overshadow and incorporate IT outsourcing and mainstream BPO expenditure is likely to grow worldwide by 10 per cent a year from $140 billion in 2005 to over $220 billion in 2010.” (LogicaCMG, 2005).       Outsourcing has meant big business and big bucks for countries not as developed as the First-World. Offshore outsourcing, as an economic activity, has allowed, at the macro-level, for First-World societies to transform itself from industrial to post-industrial service economies. For countries that are recipient of production offshore outsourcing such as China and India, bigger and bigger outsourcing activities by multinational corporations have propelled these huge economies with cheap but abundant workforce into industrialization. For services offshore outsourcing recipients such as Ireland and South Africa, outsourcing activities have allowed for these developing economies to become highly technical, propelling them at the forefront of the globalizing economy. So far, the picture painted of outsourcing has been very good. It seems that the direction companies have to go is to outsource and to go global both at the production side to respond to the insatiable demands of the global market. However, debates remain on how this outsourcing is impacting local economies and actual households that may not necessarily be reflected in GDP growth and foreign investment increase.       One clear effect of offshore outsourcing is that local jobs in First-World countries are lost with every unit of business outsourced to foreign countries. It is expected that by 2015, 3.3 million U.S. jobs and $136 billion in wages would be moved to outsource destinations such as India, China and Russia. (Forrester Research, 2009). To date, jobs lost in the U.S. which has a labor force of 140 million, has reached 995,000. Projected loss of jobs over a decade will reach 6,000,000 and jobs that remain at risk dependent on the rate at which outsourcing will occur is at 14.1 million jobs. This puts an extraordinary strain on the households that depend on the jobs being outsourced to foreign countries. This is especially true right now in the face of the biggest financial crisis with more American households at risk of mortgage problems, credit problems and unemployment. This issue has dominated the political sphere in the United States since 2000 and is expected to be more important in the face of the worst recession the world’s largest economy has faced since the Great Depression.       Another important debate is on the effect of outsourcing to the target country. Although clearly, investment in the country produces jobs, it inevitably distorts the priorities of the country. This is clearly seen in Third-World countries such as the Philippines. The government adjusts the business environment to become healthier for foreign investment in business process outsourcing. Tertiary education is then refocused to respond to the greater demand for specific technical skills. For the Philippines, outsourcing has become so attractive that since the industry started, a whole class of schools has popped up to produce graduates capable of filling the needs of the industry. The government places at the cornerstone of its economic plan the outsourcing industry which is risky because for one, it does not allow for greater focus on long-term development achieved through industrialization – agriculture and manufacturing growth and modernization. Excessive focus on the service sector denies the necessary focus to place the foundations of a stronger economy. It is clearly seen that the current growth in GDP has been fueled by growth in this area. The problem is, this growth remains volatile because it is dependent on foreign investment that can easily be taken away depending on the health of the global corporations. The global recession has shown that even giants fall and the outsourcing industry is critically affected because of the unwillingness of the corporations to risk investing at this volatile time.       Another debate is on the quality of service offshore outsourcing actually provides. Most First-World societies are used to excellent service. The culture of customer support actually started there. With the transfer of services to outsourced firms, there is a real concern that the service these call centers provide may not be at par with the ones from local call centers given barriers in language and culture. On the part of the call centers, there has been a considerable effort to filter applicants. Of the thousands that apply for jobs in these centers, only a few are chosen. Specific requirements on accent and language proficiency are set to ensure the quality of the employees. However, it is important to understand that call centers are only one service outsourced. The arrangements particularly for production offshore outsourcing has been very promising and beneficial to both country of origin and destination. Technology transfer has been very efficient such that the quality of production in the outsourced firm is at par with that of a manufacturing counterpart in the country of origin. The integration of services despite the great distances has been very successful.       There is growing anxiety that by outsourcing parts of a business process, the main firm has no control over the supply chain that are of direct consequence to the final product. This is particularly problematic in recent years because products produced in countries such as China have been notorious for certain defects and sometimes fatal mistakes such as melamine in milk that is used along a supply chain extending up to final products of chocolates and other consumables.       There are growing fears that through technology transfer to target countries, the firms eventually become competitors to the original corporations. This has happened in the car industry when American manufacturers transferred its operations to China for parts and after a decade of such a practice, Chinese manufacturers began creating cars themselves. Another problem on the domestic market is that the domestic corporations become inevitably dependent on the outsource firms because the qualified workers they used to have are forced to find work in other industries.       All these debates are important in trying to see the future of outsourcing in foreign countries. It has clear benefits and risks that corporations, nations and the globalized economy have to balance out. Because in a globalizing world, it is not just about the profit but the future of the people the new world order must serve.            References Real-Time Technology Solutions. May 5, 2009. “Statistics Related to Offshore Outsourcing.” Retrieved June 10, 2009 from http://www.rttsweb.com/outsourcing/statistics/  Cyberfuturistics. 2004. “Outsourcing statistics.” Retrieved June 10, 2009 from      http://www.cyfuture.com/outsourcing-statistics.htm  Center for American Progress. March 16, 2007. “Outsourcing Statistics in Perspective.” Retrieved June 10, 2009 from http://www.americanprogress.org/issues/2004/03/b38081.html.  Roberts, Paul Craig. March 4, 2003. “Is Outsourcing Trade – Or a Dispossession?” Retrieved June 10, 2009 from http://www.vdare.com/roberts/free_trade_notes.htm.  The Economist. 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