The Concept of Offshore Outsourcing - Research Paper Example

The Outsourcing Controversy: Considerations for the U.S. in a Globalized World Globalization is a topic that has been accompanied by heated debates, with proponents and opponents keen to highlight the advantages and disadvantages associated with it. The issue is prominent as evidenced by the strong and conspicuous presence of opposition entities- including environmentalists, labor advocacy bodies, and socialists among others- at forums seeking to promote global economic cooperation. Outsourcing, which is one of the consequences of globalization in the contemporary world, typifies the debates characterizing globalization. The pro-outsourcing side of the debate- mostly made of corporate firms- relies on cost cutting and comparative advantage theories, alongside their fiduciary duty to shareholders. On the other hand, wide sections of the society argue against outsourcing in terms of the impacts it has on aspects such as unemployment, while sections of economists question the long term sustainability of outsourcing. This study investigates the issue of outsourcing through a review of the literature available, focusing on analysis of the research findings on outsourcing by firms in the USA. The study holds a strong position that outsourcing can be managed to reap its advantages and limit its disadvantages, with the USA benefiting from it. Background: The Concept of Offshore Outsourcing According to Ellram, Tate and Billington (148-163), offshore outsourcing is the act of contracting low-cost options outside the country of origin to execute an organization’s internal business processes. Offshore outsourcing is increasingly becoming an attractive way to cut labor costs on services that are dependent on highly skilled labor for efficiency. Traditionally, the outsourcing location offers highly competitive and well educated manpower and holds a cost advantage over the home country. Firms, therefore, would prefer to outsource their internal processes to such destinations primarily for the purpose of cutting costs. Dossani and Kenny (772-791) argue that outsourcing is the next wave of globalization as driven by economic considerations. Couto, Mani, Lewin and Peters (1) trace the evolution of offshoring, noting that it has developed from; simple shifting of manufacturing processes to low labor destinations in the 1970s; moving jobs to low cost destinations as spearheaded by IT; currently, the phenomenon has shifted from just moving jobs to sourcing of talents from the global field. The latest trend has seen the outsourcing of white collar jobs in fields such HR, procurement, product design, engineering and legal services among others. Couto, Mani, Lewin and Peters (2006) argue that offshoring has effectively shifted from a “tactical labor cost-saving exercise is now a strategic imperative of competing for talent globally” (1). Offshore outsourcing is a controversial issue as shown by its prominence in U.S. politics. Outsourcing was the one of the main economic debates that characterized the presidential campaigns in 2004 (Mankiw and Swagel 2005). In essence, offshore outsourcing is a manifestation of the framework of comparative advantage as established by Adams and Ricardo over two centuries ago. In terms of economics, outsourcing represents a new line of international trade in services; in this respect, the new line of trade results to winners and losers. According to Mankiw and Swagel (2005), a cost-benefit analysis in terms of the overall productivity and incomes- rather than engaging in sensationalist winner-loser debates- is key to settling the issue. Interestingly, outsourcing has received similar criticism and elicited debates just as the wider issue of globalization. The pro side of the debate argues that firms naturally tend towards cost cutting and reducing operational expenses, and pose the question as to why they should pay more for the same skill set at home. On the other hand, the contribution of offshore outsourcing to the loss of job opportunities angers many in the country of origin. Sections of economists also argue that outsourcing is not sustainable in the long term and has wide negative consequences to the economy of the home country. Besides, the controversy about globalization promoting western hegemony through corporate entities in poorer countries also arise. The pertinent arguments raised by both sides of the debate necessitate research into the issue of outsourcing from sociological perspectives. Theoretical Framework This study is based on the institutional theory conceptual framework. Here, decision-making within the organization is influenced by pressures arising from internal and external considerations. In this study, the internal pressures entail the need to cut costs, improve quality and access resources outside the country helping to build competitive advantage. The external pressures socio-economic and political pressures arising from the American society apprehensive to outsourcing. Traditionally, the external pressures generate norms and assumptions. When firms conform to such expected behavior, they gain legitimacy and survival capabilities. Failure to conform to these norms brings about the kind of opposition and apprehension observed towards outsourcing by U.S. firms. Thesis This study holds a strong position that outsourcing can be managed to reap its advantages and limit its disadvantages with the USA gaining significantly. Outline After this introductory chapter detailing the concepts under discussion, justification of the study and theoretical framework, the next section details the method adopted for the study. Here, the setting of the study will be described, alongside a discussion of the how data used were collected. The approach towards analysis of the data will then be detailed. In the next section, the data will be analyzed followed a discussion of the findings. The results will then be interpreted in line with other research undertaken in the field. The study will then be concluded through restating the thesis, highlighting the findings, generating recommendations and suggesting areas for future research efforts. Methods of Data Collection and Methods of Data Analysis Setting This study will review data on outsourcing by firms in the USA to destinations around the world such as India. An attempt is made to utilize data of from peer reviewed journals published by reputable scholars so as to ensure the findings are trustworthy and the recommendations reliable. The study also consciously uses work undertaken from the turn of the century onwards so as to ensure the findings are applicable and take into consideration the most current perspectives. The data used is sourced from qualitative studies and thus is interpretive in nature. Data Collection The data to be analyzed in this study is based on document reviews. Here, reliable sources on the issue of outsourcing were search, selected and reviewed. The data selected are qualitative in nature involving case studies, literature reviews and interviews. The approach adopted in analysis of the data is interpretive as they are qualitative nature. The approach is based on Ellsberg and Heise (202-205) qualitative analysis guideline. Here, the first step is data immersion which involves reading and rereading of the data. This leads to the second step, data coding, where appropriate labels are attached to the different sections of the data. The data is then displayed through organization into a form that allows for drawing of conclusions. The next step involves data reduction, where the data is organized around themes and patterns as given in the original objectives of the study. This will then allow for a discussion and interpretation of the data. Findings Analysis The first study under analysis is by Hendee (53-70), who presents a case study of Wal-Mart. The case study is based on a documentary film by Public Broadcasting service (PBS), in which the history of Wal-Mart is traced. The highlight of the documentary is that Wal-Mart developed its business strategy based on a low price guarantee over competitors. To maintain this competitive advantage, Wal-Mart turned to the Chinese labor market which provided lower labor cost solutions. When the U.S. government signed the U.S-China Relations Act in 2000, Wal-Mart was able to increase its business process offshoring to China. The firm outcompeted rivals such as K-Mart and Target through accessing cheap products manufactured in China. The offshoring also resulted into closure of U.S. manufacturing firms whose (more expensive) product could not sell via Wal-Mart. The documentary concludes with an observation that as Wal-Marts profits increase, the job flow towards China increases. The piece of data above captures the themes of interest in the current study perfectly. First, the business sense of outsourcing is realized as Wal-Mart is able to cut costs and outcompete rivals in the market. However, Wal-Mart’s reliance on goods made in China leads to loss of jobs in the U.S. as the processes of production cannot be replicated in the same firm in the home market. Kathawala, Zhang and Shao (185-202) study provides another source of data for the current study. Through undertaking a review of literature, the scholars present a number of findings that can be analyzed around the themes of the current study. First, outsourcing is accompanied by definite advantages. These include the reduction of operational costs; reduction of delivery times as products and services are availed within record times; improvement in quality and reliability; increased exposure to global technological advancements; opportunity to utilize resources that are not present in the home market; sufficient flexibility that enables the firm to respond to market conditions; utilization of the available funds for more profitable purposes. However, increased global outsourcing contributes to domestic job losses. This in turn affects the economy of the home country as the populace has lower incomes, lower propensities to spend (and, thus, reduced markets for products), lower taxes to the home government amongst other economic affects. As of 2005, the U.S. was running a deficit of $125 billion with China, driven by outsourcing which defies the need for trade reciprocity. Besides, outsourcing raises political dilemmas as a nation such as the USA may be caught between pushing for liberalization abroad while seemingly agitating for protectionism against outsourcing. The third study from which data is sourced from is Sourirajan’s (2004) discussion of globalization in the context of outsourcing. Upon analysis, it is noted that cost saving is not the sole driver of U.S. firms seeking to outsource. In IT, Indian firms have achieved the highest rating (CMM 5), which tremendously difficult to achieve even for their American counterparts. Hence, high quality work is a significant factor contributing to outsourcing. The nature of the external sources of labor gives pertinent lessons to the U.S.; the class of Indians being outsourced is highly inventive, innovative and imaginative. Another observation made is the position of the USA in driving globalization; despite a lack of national consensus, the USA is in the front seat of promoting globalization. Outsourcing and similar concepts are aspects of globalization. The USA has traditionally benefited from economic globalization. The realization that the world is headed towards a global village situation means that protecting the USA from the international labor market is not sustainable. Instead, the root causes behind the low competitiveness of the US labor force needs to be addressed rather than focusing on the symptom. Discussion The data analysis undertaken raises a number of pertinent observations; first, firms are driven by lower costs, quality improvement and exploitation of external resources which grants them competitive advantage in the market. However, the impacts of outsourcing on the home market are real; it contributes to job losses and reduced employment opportunities alongside affecting the national economy. Reducing the propensity to spend may be counteractive as the national purchase power reduces. Importantly, the driving force towards outsourcing are harsh operation costs in the home country, which means that the root cause is elsewhere. An observation of the destination countries also indicates that they are highly skilled and creative sources of labor. Since the U.S. has to operate within the global economy, it is imperative that the nation’s labor should be able to compete globally. In essence, the gains made by the USA through globalization point a way out entailing being better options at given sectors. This way, the population will be competing at the global stage. Similar observations can be discerned from other research efforts showing that the USA can gain comparative competitive advantage in certain fields. For instance, Krishnan (2007) shows that India (a primary source of outsourced labor for the USA) is increasingly receiving outsourced legal work from the USA. Here, the USA has comparative advantage in terms of better work and thus, can compete effectively at the global stage. Kenny (2005) argues that it is time the systems in the USA start considering how the future U.S. graduate appears. For instance, many higher institutions are trying to assess the requirements of future engineers in order to ensure that they are globally competitive (3). Conclusion This study set out with the position that the USA can leverage itself to maximize the advantages and limit the adverse effects in order to gain from outsourcing. After undertaking an analysis of data based on three qualitative studies, the advantages of outsourcing to U.S. firms and the negative impacts are validated. However, the study establishes that outsourcing is an issue based on competitiveness. The competitiveness of the U.S. in other sectors driven by globalization has the country gain. Similarly, establishing advantage will help stem the deficit brought about by outsourcing while at the same time providing global opportunities. This study recommends that the USA deals with the root causes behind the low competitiveness of her labor market at the global stage since protectionism is short-sighted. Through policy changes, the work force being produced should be transformed into a globally competitive source of labor both for local and foreign firms. Future research may be aimed at discerning the sectors in which the U.S. has considerable advantage at the global stage. References Couto, Vinay, Mani, Mahadeva, Lewin, Arie & Peters, Carine. The Globalization of White-Collar Work: The Facts and Fallout of Next-Generation Offshoring. Offshoring Research Network. 2006. Web. 5 Apr. 2012. Dossani, Rafiq & Kenney, Martin. The Next Wave of Globalization: Relocating Service Provision to India. World Development. 35.5 (2007): 772-791. Ellram, Lisa, Tate, Wendy & Billington, Corey. Offshore Outsourcing of Professional Services: A Transaction Cost Economics Perspective. Journal of Operations Management. 26.2 (2008): 148-163. Ellsberg, Mary and Heise, Lori. Researching Violence against Women: A Practical Guide for Researchers and Activists. WHO, 2005. Hendee, James. Proftable Globalization and the Ethical Dilemma of U.S. Job Loss. McNair Scholars Research Journal. 1.1 (2008): 53-70. Kathawala, Yunus, Zhang, Ren & Shao, Jing. Global Outsourcing and its Impacts on Organizations: Problems and Issues. International Journal of Services Operations Management. 1.2 (2005): 185-202. Kenny, Martin. Globalization of Work: Outsourcing and Offshoring. Global Executive Forum, 2005. Web. 5 Apr. 2012. Krishnan, Jayanth. Outsourcing and the Globalizing Legal Profession. William and Mary Law Review. 48 (2007). Mankiw, Gregory and Swagel, Philip. The Politics and Economics of Offshore Outsourcing. American Enterprise Institute for Public Policy Research, 2005. Web. 5 Apr. 2012. Sourirajan, Sridhan. Globalization and Offshore Outsourcing: A Tale of Two Realities. Duke University, 2004. Web. 5 Apr. 2012. Read More