Outsourcing of Production - Research Paper Example

Outsourcing Introduction Outsourcing or off shoring of production and employment refers to the practice of shifting jobs to other areas, more specifically to lower wage countries. For the past few decades, this phenomenon is on a rise especially with US companies that are aiming to cut their operating costs, in order to get a cost advantage over their competitors. Firstly, off shoring of jobs was viewed as an opposite of self-sufficiency and capabilities of firms. However, with the passage of time, statistics have proved that it is response or product of globalization and not of the mindset of individual organizations (Oshri, Kotlarsky & Willcocks, 2009). This hype of outsourcing or off shoring and the love of companies towards it comes as no surprise since it offers companies some clear benefits. These advantages include lower cost, higher profitability, focus on core competencies, more savings, higher ability to meet seasonal demands, help in sharing risks, developing your internal staff and many others. Consider these latest statistics and reports. A study revealed in the first quarter of 2010 indicates that more than 80 percent of the US enterprises either are planning to increase their IT outsourcing or would like to keep it at least the same in future (Organisation for Economic Co-operation and Development, 2010). Year 2008 was a period of flat growth for most of the Indian IT companies but the same is not true for the next year. Only the three biggest IT companies in India have reported to induct more than 16500 new IT experts into their workforce. Moreover, in 2009, a research indicated that by the end of 2010, companies with revenues of at least 5 billion US dollars per year would move more than one quarter of their IT jobs offshore (Oshri, Kotlarsky & Willcocks, 2009). In addition, it is important to note that despite many companies have indicated that they are not fully satisfied with the quality of work that they get by outsourcing but still less than 10 percent of them have expressed the desire to give those jobs back to their internal employees. Even the most conservative estimates indicate that more than 3.3 million would be out sourced from the US by the end of 2015 (Plunkett, 2008). Even serious is the fact that more than 14 million jobs in US are at the risk of being outsourced (Organisation for Economic Co-operation and Development, 2010). Furthermore, this topic has been able to attract many critics and debaters due to its political, economical, social, and other effects on the US as a whole. Nonetheless, it causes layoffs and job cuts, which has made people to criticize it; however, at the same time, many economists have regarded this as temporary and they claim that it will ultimately strengthen the US economy. Discussion Outsourcing and its impact can be simply understood with one of the most basic theories of labor supply and demand. Under normal circumstances, the supply and demand curves of labor decide the wages in an employment industry. However, an increase in the supply of labor shifts the supply curve towards the right thus forcing a new equilibrium point. Quite clearly, this new point would be at a lower wage since the supply of the labor is more than the demand in the industry. Practically speaking, keeping other things constant, now the whole industry would be operating on a lower wage and many jobs would be lost. The same has happened with advent of outsourcing in the US economy (Plunkett, 2008). Globalization and the policies advocated by United States herself of free trade, lesser tariffs, global market, no quotas, and other capitalistic approaches have allowed closed, isolated, or distanced economies like those of China, India and other Asian countries to come close to the US. Since the world is a global market and with the advent of information technology and revolutions in travelling, these economies have come even more closer and to such an extent that now US employers have added workers from these countries to the supply pool of their industries (Haugen, Musser & Lovelace, 2009). It is also effortless to understand this increase in outsourcing with the lens of “utility maximization theory”. This basic approach in microeconomics argues that people tend to spend their money and make choices in such a way, which maximizes their satisfaction. The same is true for the US firms. Employing people is a decision, which is costly; in fact, it constitutes one of the biggest chunks of organizational costs, therefore, employers will seek ways in which every dollar that the spend, creates maximum value for them. Quite clearly, employees from low wage countries like China, India and others provided them with best value for their money. That is another way to explain that why outsourcing is on a rise since the past few of decades (Strassmann, 2004). It is important to understand the fact that outsourcing is a crucial element of globalization; moreover, it is more of a qualitative phenomenon and a new form of competition. Yet it is debatable on both empirical and theoretical grounds. Many authors and critics who regard this issue as “hyped” and “overstated” take a job count approach towards this issue. The number of jobs lost divided by the number of total jobs, is their formula. Quite understandably, they end up concluding that this phenomenon has not hit the US economy that badly (Brown & Siegel, 2005). However, they fail to understand a couple of very important elements. Firstly, it is not about what has happened but it is about what is happening and what would be happening with more speed in the future. In other words, outsourcing and off shoring is on rise and as more firms become increasingly active on a global scale, this process may witness an exponential increase in numbers (Haugen, Musser & Lovelace, 2009). Secondly, “number of jobs lost” is in no way the right measure since volume of employment is always on top compared to volume of unemployment, with exception to disastrous situations, and an economy with the passage of time may recover some of the jobs lost. However, the point worth noting here is that it is not only the practical moving of the jobs that affects the wage levels and employment conditions but it is also the worker’s sense of job security and bargaining power (Oshri, Kotlarsky & Willcocks, 2009). Therefore, with outsourcing on rise, the workers who are still practically safe, have lost the sense of job security and are in an unfavorable position to bargain about wages. This explains why even a small but sudden increase in the supply pool of labor decreases the wages of the industry as a whole. However, important here is to note is that Europe, comparatively, is in a better position to face this challenge. Most of the European states follow a socialist ideology where the public institutions are responsible for providing social services like health care. However, in United States it has been tied to the worker’s job. A conservative estimate reveals that if we remove the cost of worker’s health insurance then every car of General Motors would cost 1500 US dollars less, on an average. Since the same is not true for European firms, therefore, they find lesser incentives in moving jobs off shore (Strassmann, 2004). Additionally, the European Union’s approach of “common markets” and standardizing of systems in terms of regulations and competition will help convert rivalry amongst firms to positive and healthy competition that would provide win-win situations. Despite the fact that China and India are low cost economies, but one can sense that, in the future most of the European firms will outsource to the neighboring Eastern European countries considering their low wages and full access to European markets (Haugen, Musser & Lovelace, 2009). In contrast, the US has been obsessed with the free trade-free market approach that implies elimination of quotas and lowering of tariffs. The problem with this idea arises when one looks disparities between the economic playing fields of these nations. China has been constantly undervaluing its exchange rate against dollar so that it can appeal as an attractive outsourcing market to the US firms. That explains why the congressional representatives have recently advised to impose sanctions on China to stop deliberately undervaluing its exchange rate (Organisation for Economic Co-operation and Development, 2010). The debate about outsourcing has gained widespread media attention since the early 2000s, however, the solutions that the US politicians have suggested to reverse or stop this trend of outsourcing does not appear to be appealing. For example, politicians and political economists are suggesting bringing legislation that would require Call centre attendants to identity their location while answering the call of any US customer. Moreover, giving tax advantages to companies that are not outsourcing, limiting the percentage of outsourcing of firms and forcing the host countries of outsourced jobs to improve the environmental conditions and increasing their work benefits so that these jobs cost more, are also on the list (Haugen, Musser & Lovelace, 2009). However, many economists have said that trying to stop outsourcing through these methods would put a dent on the US economy by slowing it further down. These economists are of the view that outsourcing has allowed the US firms to stay and survive in the competitive global markets or else other firms with cost advantages would have thrown them out of competition long ago (Strassmann, 2004). Outsourcing helps the US firms to not to contribute to inflation and benefits the consumers by offering lower prices. Nevertheless, the strength of any economy is demonstrated by the strength of its corporations. This is strengthening, or to say the least, helping these corporations to survive, which in turn will strengthen the economy, which will ultimately result in creation of newer jobs. A strong economy can produce many jobs but a weak one but definitely lose jobs, whether through outsourcing or through any other phenomenon (Oshri, Kotlarsky & Willcocks, 2009). Many authors offer another lens of looking at the long-term benefits of outsourcing. With outsourcing, as mentioned earlier, the US is creating win-win situations for herself and the host countries. Since most of these host countries are third world countries, this would help these countries to grow their economies and in future become good markets for American products and services (Brown & Siegel, 2005). American manufactures and service providers would then respond by investing more in US thus creating jobs in the long run. In addition, this would also help these countries to pay back the debt that they owe to the United States (Strassmann, 2004). Advocates of free markets, lesser government intervention, and capitalism are obviously of this above-mentioned view. In spite of this, they suggest that something should be done for the time being, to fill this unemployment gap. Government should try to increase the unemployment benefits and other social security benefits for the time being to decrease the general cost of living. Moreover, this outsourcing and globalization is already decreasing the cost of living for an average US citizen by decreasing the prices of products (Plunkett, 2008). On the other hand, the government should invest massive amounts in higher level and specialized education to produce a generation of highly skilled and qualified workers, better prepared for tomorrow. However, many critics also fear that it will reduce the motivation of the young generation to study hard and acquire more skills since the once that are already skilled are not being able to find jobs themselves (Strassmann, 2004). Furthermore, there are authors that have mentioned that outsourcing was inevitable. Globalization, since from the very beginning promised low prices to all of us. Nonetheless, our desire of lower prices has always been in contrast with higher wages (Brown & Siegel, 2005). People fail to understand this basic principle of macroeconomics that lower prices means that some portion of this cost reduction will also be financed by cutting down wages (Strassmann, 2004). Therefore, since globalization was inevitable so was outsourcing. If not outsourcing then some other process or approach would have come to decrease the aggregate labor wages. This explains why labor-management relations get affected badly with outsourcing. It has happened in the past and it still happens that firms have exploited this dilemma to break unions, separating from them non-workers by telling them that labor unions are the ones causing higher prices due to their desire of higher wages (Brown & Siegel, 2005). Quite clearly, this will result in further tensions between labor unions and firms. Additionally, these labor unions will also keep on losing support from “common men” since their primary goal remains lower prices (Plunkett, 2008). Then again, these unions are justified on their side. Many unions have repeatedly tried to make the firms and their CEOs to recall the basic concept of employee satisfaction and its relations to job performance. Many of the employees are uncertain but their future and they are working under serve stress. Quite clearly, this would be putting a dent on their performance, which would in turn decrease the productivity of the organization (Strassmann, 2004). Many researches and studies indicate that for the past decade employees in the manufacturing sector that lost their jobs, it took them around 3 years to get reemployed and majority of them had no choice but to accept wages that were on an average 15 percent less (Oshri, Kotlarsky & Willcocks, 2009). References Brown, Sharon P., & Siegel, Lewis B. (2005). Mass layoff data indicate outsourcing and offshoring work. Monthly Labor Review. August 2005, 2-10. Ching, Jacqueline. (2009). Outsourcing U.S. Jobs. The Rosen Publishing Group. (Ching, 2009) Haugen, David M., Musser, Susan, & Lovelace, Kacy. (2009). Outsourcing. Greenhaven Press. Organisation for Economic Co-operation and Development. (2010). Measuring Globalisation: OECD Economic Globalisation Indicators 2010. OECD Publishing. Oshri, Ilan, Kotlarsky, Julia, & Willcocks, Leslie P. (2009). The Handbook of Global Outsourcing and Offshoring. Palgrave Macmillan. Palley, Thomas I. (2007). The economics of outsourcing. How Should Policy Respond? The Levy Economics Institute of Bard College, 98 (A), 1-9. Plunkett, Jack W. (2008). Plunkett's Outsourcing and Offshoring Industry Almanac 2009 (E-Book): Outsourcing and Offshoring Industry Market Research, Statistics, Trends and Leading Companies. Plunkett Research, Ltd. Strassmann, Paul A. (2004). The economics of outsourcing. Information Economics Journal. June 2004, 13-17. Read More