Outsourcing



Outsourcing (or contracting out) is often defined as the delegation of non-core operations or jobs from internal production within a business to an external entity (such as a subcontractor) that specializes in that operation. Outsourcing is a business decision that is often made to lower costs or focus on competencies. A related term, offshoring, means transferring work to another country, typically overseas. Offshoring is similar to outsourcing when companies hire overseas subcontractors, but differs when companies transfer work to the same company in another country. "Outsourcing" became a popular buzzword in business and management in the mid-1990s.

Outsourcing takes place when an organization transfers the ownership of a business process to a supplier. The key to this definition is the aspect of transfer of control. This definition differentiates outsourcing from business relationships in which the buyer retains control of the process or, in other words, tells the supplier how to do the work. It is the transfer of ownership that defines outsourcing and often makes it such a challenging, painful process. In outsourcing, the buyer does not instruct the supplier how to perform its task but, instead, focuses on communicating what results it wants to buy; it leaves the process of accomplishing those results to the supplier.

Outsourcing is defined as the "the process of transferring an existing business function, including the relevant physical and/or human assets, to an external provider in order to strategically use outside resources to perform activities previously handled in-house."

Outsourcing involves transferring a significant amount of management control and decision-making to the outside supplier. Buying products from another entity is not outsourcing or out-tasking, but merely a vendor relationship. Likewise, buying services from a provider is not necessarily outsourcing or out-tasking. Outsourcing always involves a considerable degree of two-way information exchange, coordination, and trust.

Organizations that deliver such services feel that outsourcing requires the turning over of management responsibility for running a segment of business. In theory, this business segment should not be mission-critical, but practice often dictates otherwise. Many companies look to employ expert organizations in the areas targeted for outsourcing. Business segments typically outsourced include information technology, human resources, facilities and real estate management, and accounting. Many companies also outsource customer support and call center functions, manufacturing and engineering. Outsourcing business is often characterized by expertise not inherent to the core of the client organization.

The overhead costs of customer service are typically less where outsourcing has been used, leading to many companies, from utilities to manufacturers, closing their in-house customer relations departments and outsourcing their customer service to third party call centers. The logical extension of these decisions was of outsourcing labor overseas to countries with lower labor costs, this trend is often referred to as offshoring of customer service.

Due to this demand, call centers have sprung up in Canada, China, Eastern Europe, India, Sri Lanka, Israel, Ireland, Pakistan, Philippines, Uruguay and even the Caribbean.

Many companies, most notably Dell, have gained significant negative publicity for their decisions to use outsourced labor for customer service and technical support. One of the most prominent customer complaints is that the outsourced staff deliver a lower quality of service to customers. A prominent business complaint is that outsourcing only offers an industry average cost structure, potentially reducing competitive advantage.

A related term is out-tasking: turning over a narrowly-defined segment of business to another business, typically on an annual contract, or sometimes a shorter one. This usually involves continued direct or indirect management and decision-making by the client of the out-tasking business. Out-tasking other than business process outsourcings (BPO) doesn't mean outsourcing of a whole process but of elements of processes. This enables businesses to maintain stronger process control. Mostly digitalizable jobs such as data entry, internet based research, technical writing, proofreading and graphic design are out-tasked.

The term "outsourcing" became more well known largely because of a growth in the number of high-tech companies in the early 1990s that were often not large enough to be able to easily maintain large customer service departments of their own. In some cases these companies hired technical writers to simplify the usage instructions of their products, index the key points of information and contracted with temporary employment agencies to find, train and hire generally low-skilled workers to answer their telephone technical support and customer service calls. These agents generally worked in call centers where the information needed to assist the calling customer was indexed in a computer system. The agents were often not able to tell the customer they did not actually directly work for the original manufacturer. In some cases, the agents are not allowed to even give out their real name.

Organizations now often establish shared services within their firm as an alternative to outsourcing. Shared Services are the convergence and streamlining of an organization’s functions to ensure that they deliver the organization the services required of them as effectively and efficiently as possible. Rather than having a department (e.g. human resources) devolved over a number of offices, a shared service is the centralizing and convergence of these. This often involves the centralizing of back office functions such as HR and Finance but can also be applied to the middle or front offices. A key advantage of this convergence is that it enables the appreciation of economies of scale within the function and can enable multi function working (e.g. linking HR and Finance together, where there is the potential to create synergies). A large scale cultural and process transformation is often a key component of a move to shared services. This transformation often results in a better quality of work life for employees.

Note that “outsourcing,” “offshore outsourcing,” and “offshoring” are used interchangeably in public discourse despite important technical differences. To be consistent, “outsourcing,” in corporate context, represents an organizational practice that involves the transfer of an organizational function to a third party. When this third party is located in another country the term “offshore outsourcing” makes more sense. “Offshoring,” in contrast, represents the transfer of an organizational function to another country, regardless of whether the work stays in the corporation or not. In short, “outsourcing” means sharing organizational control with another organization, or a process of establishing network relations within an organizational field. "Offshoring,” on the other hand, represents a relocation of an organizational function to a foreign country, not necessarily a transformation of internal organizational control.

Some outsourcing companies use a competition/contest-style approach to get their advanced work done as well as to hunt for international talents for potential employment.

Every organization generates huge chunks of data. Hidden in them is information. Data analysis is the crucial process to extract information out of the otherwise random pile of data. The analysis results in gaining intelligence, such as trends, out of the data. This is vital in any processes let it be banking operations, retail or pharmaceutical research. Depending on the process, varying amounts of data are generated. These amounts reflect in quality as well as quantity. Similarly, the analysis requirements differ, contingent on the method. For example, the huge chunk of data generated by drug trials needs to be analyzed to conclude the result. Likewise, data from a diversified field needs to be pulled together and analyzed to forecast the trend in the stock market.

There are numerous ways the outsourcing is exploited for business advantages. For example, the data generated out of the New York Stock Exchange (NYSE), during the day's transaction, is sent to the analysis centers at Bangalore, India which is at the opposite end of the time zone. The Data Analysts perform the analysis required for the trading company executives and sends it back to New York. The day for the New York executive starts with the needed picture processed out of the data.

This is treated as a niche sector in outsourcing. The research processes are outsourced in full or in parts. Whether it is research in nanotechnology or research in genetics, the process is viable for outsourcing. Generally larger research projects are cut into various sub projects or tasks. The outsourcing is then carried out based on the viability and competitiveness of the outsourcing destinations. Thus exploiting the competitiveness available at various parts of the world into a single large project. The research process outsourcing (RPO) is also known as Knowledge Process Outsourcing (KPO), as it calls for the application of specialized knowledge of a high level. The KPO typically involves a component of Analysis Proves Outsourcing (APO) and Research Process Outsourcing (RPO). General Electric is one of the pioneers in RPO.

Outsourced customer support has been a huge trend as of late. Small to large corporations have outsourced to support to companies that specialize in these services.

This is one of the newcomers in the outsourcing arena. The task basically involves the management of information technology assets of corporations from a remote location. For example the management of a computer network of a large corporation includes outage monitoring, alarms monitoring, remote monitoring of data centers, etc. The nature of these operations calls for a real-time support when the need arises. That means such tasks are not easily outsourced to the places in far time zones. Instead it’s outsourced to comparable time zone locations, which are competitive. This need for the geographical proximity earned it a specific name Near sourcing.

Anything from design of huge refineries to wristwatch design can be outsourced. This is probably the next matured outsourcing process after the software development outsourcing. There are two types of business houses in this arena. The first is the captive design houses, which are design houses setup for the exclusive work of one client. There are different cases such as the parent company themselves setup the design center at a different (economically competitive) country or partner with another company at the outsourcing location or completely depend on the partners resources (with appropriate contractual obligations). Popularly such facilities are called Offshore Development Center (ODC). The second types of design firms are open in nature. That’s they win contracts for design from customers in an open market, just like any other services for sale.

A typical specialty of engineering design outsourcing includes Structural design (buildings, factories, bridges, etc.), Hardware design (consumer electronics, home appliances, toys, industrial instruments, etc.), Product design ( medical devices, white goods, automobiles, etc.), Architectural design, Mechanical engineering (Gas turbines, aircraft engines, automobile parts, etc.)

This is often touted as the most promising yet contentious area of outsourcing. The services that can be outsourced in Medicare could be anything from the trivial keying in of the physicians transcript (in audio) of the treatment records into a structured documents to physically sending the patients to another country for treatment. Other services include using the service of radiologists at a remote but competitive country to interpret scan images such as CT or MRI.

A recent example of Medicare outsourcing is that of United Kingdom’s decision to send blood and urine samples from National Health Service (NHS) patients to India for pathology tests to cut cost. The non-emergency requirements (where the results are required not within 48 hours) of pathology tests are conducted at the clinical lab setup at Mumbai, India. The blood and urine samples are flown to Mumbai. The 24-hour lab conducts the test and the results are uploaded into the special network linked to the NHS. The NHS hospitals in the UK get the reports in 24 hours.

Another larger area of outsourcing in biological area is bioinformatics and biotechnology. Here again the outsourcing ranges from data analysis to basic research.

Works outsourced in this field range from those in the techno-legal (such as drafting patent claims) to the keying in of legal transcripts (from audio) to structured legal documents. Patent application preparation is a painstakingly labor intensive process (searching patents all over the world) that demands special knowledge in the subject under patenting and the legal requirements. Nevertheless this is a multibillion dollar business and hence its place in the outsourcing arena.

This is where the creative business finds its overseas partners at a competitive country. Anything from apparel design to cartoon animation in the creative business is outsourced. For example, creative houses are setup at competitive locations to get the animation of movies done. Another example is DTP work. The text transcript of a book can be sent to another country, where designing takes place (typeset, artwork, illustrations, cover design etc). This can then be directly sent to press.

This is likely the most talked about subject in the outsourcing field. Due to the nature of programming, the outsourcing of software development has evolved more rapidly than other areas of job outsourcing.

Many large institutions have outsourced the management of their environmental service facilities, such as laundries and waste management plants, to service providers. Thus, while appearing to save on operating costs, the institution gives up control of these vital functions to the outsourcing company.

The fact that many large businesses outsource and continue to outsource suggests that, in many cases, outsourcing is successful in that it increases product quality, lowers costs substantially, or both. Some economists have argued that outsourcing is a form of technological innovation analogous to machines on a car assembly line. Ford Motor Company relied heavily on workers in the past to assemble car parts. Today these workers are replaced by machines because they are cheaper in the long run, produce better quality products, or a combination of the two (the firm is trying to increase its quality to cost ratio, quality being defined by the consumer and inferred from revenue). Economists state that machines on the car assembly line must have a higher quality to cost ratio than workers because, if they didn't, there would be no incentive for the firm to replace workers with machines. Although workers’ jobs were lost from this replacement of workers with machines, the Ford Motor Company made more money by lowering costs (and increasing quality, thereby increasing revenue). Some argue that greater profits to the labor owners lead to higher consumption, which leads to further job creation, allowing those who lost jobs to gain jobs in other sectors of the economy. A firm's motivation for replacing workers with machines is identical to the motivation for outsourcing, i.e. the firm is trying to maximize the quality of its product given cost (its productivity). Because outsourcing allows for lower costs, even if quality reduces slightly or not at all, productivity increases, which benefits the economy in aggregate.

Professor Drezner reports that for every dollar spent on outsourcing to India, the United States reaps between $1.12 and $1.14 in benefits. Drezner also points out that large software companies such as Microsoft and Oracle have increased outsourcing and used the savings for investment and larger domestic payrolls.

Likewise, outsourcing can present advantages to non-Western states. "Developing" countries, such as China or India, benefit from the patronage of companies that outsource to them - in terms of increased wages, job prestige, education and quality of life.

On a political level, there are also benefits. As Thomas L. Friedman details, countries with a vested interest in their economies are much less likely to go to war, and there is virtually no possibility that they will go to war with countries that participate in their economies. Although, it is worth noting that Germany and Britain were each other's largest trading partners prior to the start of World War I.

It is apparent that many organizations today are making the decision to outsource. In today’s global marketplace outsourcing has made itself accessible to many organizations on a National and International level. Offshore outsourcing has provided many businesses with the opportunity to harvest the benefits of lower labor costs and to exploit the value of less than par foreign currencies. Through outsourcing companies today have the ability to develop competitive strategies that will leverage their financial positions in the ever competitive global marketplace.

Some of the major advantages that today’s organizations can expect to obtain through outsourcing are:

-Ability to purchase intellectual capital

Through outsourcing, today’s businesses have the ability to utilize the technological know- how of other organizations. This allows businesses to find the specific requirements they need to implement their target objectives.

-Ability to focus on core competencies

Outsourcing allows businesses to delegate non-vital projects they need completed to vendors. This ultimately provides an organization with the ability to focus on distinctive core competencies which will help yield long term benefits. If an organization experiences long term advantages from well developed core competencies they are said to have achieved a sustainable competitive advantage.

-Ability to better anticipate future costs

Organizations that choose to outsource have the ability to determine exact future costs. Prior to the contract development of any outsourcing agreement, the outsourcing company develops a request for proposal (RFP) document which highlights the major requirements and scope of the project which is to be outsourced. Through bids vendors have the ability to make offers to perform the outsourcing for the given project. When a bid has been accepted the organization has an exact figure illustrating what the expense will be to outsource the project.

-Ability to lower costs

Overall outsourcing is viewed by many organizations as a strong business tactic that ultimately is a superior economical approach to developing products and services.

Because "outsourced" workers are not actually paid agents of the company, it has been argued that there is less incentive for the agent to show loyalty or work ethic in its representation of said company. It has been therefore argued that quality levels of customer service and technical support of outsourced tasks are lower than where they have remained 'in-house'.

In hospitals whose environmental services have been outsourced, the regular staff members commonly complain that the outsourced services were performed better and less expensively when they were performed in-house. Outsource companies may not be able to meet the demanding quality standards which a health care facility is likely to require. Also, managers at outsource companies tend to assume that all hospitals are alike, thus underestimating the service needs of major institutions.

Criticism of outsourcing from the public and media sometimes tend to concentrate on lackluster customer service and technical support being provided by either local workers who are not actually employees of the company, or by overseas workers attempting to communicate with Americans in broken or incomprehensible English. Defenders of outsourcing say if this were true, then companies would experience market forces compelling them to return service and support handling back from the outsourced company. However, service and support are often not considered by customers as part of their original purchases. Customers only experience outsourced service and support after they have spent their money since sales is generally done in-house by the original company. Dealing with lackluster outsourced service is a negative surprise after the money is already spent.

The 2004 U.S. presidential election campaign focused on outsourcing to some degree. This debate did not center on problems of declining quality of customer services but on the threat to U.S. jobs and work. Democratic U.S. presidential candidate John Kerry blasted firms that outsource jobs abroad or that incorporate overseas in tax havens to avoid paying their fair share of U.S. taxes during his 2004 campaign, calling such firms "Benedict Arnold corporations," in reference to the infamous traitor Benedict Arnold. Criticism of outsourcing, from the perspective of U.S. citizens, by-and-large, revolves around the costs associated with transferring control of the labor process to an external entity in another country. A Zogby International poll reports that 71% of American voters believe that “outsourcing jobs overseas” hurts the economy and another 62% believe that the U.S. government should impose some legislative action against companies that transfer domestic jobs overseas, possibly in the form of increased taxes on companies that outsource. The poll of over 1,000 Americans was conducted in August 2004.

Outsourcing appears to threaten the livelihood of domestic workers and, in the United States, the American Dream. This is especially true for high-tech workers who were promised the “jobs of tomorrow”- a phrase Bill Clinton iterated in 1994 to justify his conservative position on the North American Free Trade Agreement (NAFTA). Outsourcing appears to work contrary to the claim that “free trade” will create the “jobs of tomorrow” in America when high-tech or high paying white collar jobs are transferred to or created in foreign countries. Thus, outsourcing is representative of a specific historical moment where the United States government fails to mediate business-labor relations in a way conducive to prevailing values that places the American middle class worker as a central priority. At a more general level it represents a new threat to labor, contributing to rampant worker insecurity, and reflective of the general process of globalization culminating in Western societies as a whole.

In the UK, it is argued a malicious implementation of the Higher Education Role Analysis (HERA) may force Higher Education administrative and support staff to prematurely retire or seek for new employment in other organizations, thus freeing of staff many departments which could then be effectively outsourced. Outsourcing departments like Accounts, Payroll and Procurement is now common practice, as seen in August 2005 at the University of Portsmouth.

Policy solutions to outsourcing are also criticized. One solution often offered is retraining of domestic workers to new jobs. However, some of these workers are already highly educated and already possess a bachelor's and master's degree. Retraining to their current level in another field may not be an option due to years of study and cost of education involved. There is also little incentive given that the jobs in their new field could also be outsourced as well. Proportions of workers trained for Science, Technology, Engineering, and Mathematics (STEM) fields fields in developing nations are viewed to outstrip traditional technology leaders such as the U.S. Thus jobs considered previously to be protected from international competition may not continue to be so.

There are also security issues concerning companies giving outside access to sensitive customer information. In April of 2005, a high-profile case involving the theft of $350,000 from four Citibank customers occurred when Indian call center workers in Pune, India, acquired the passwords to customer accounts and transferred the money to their own accounts opened under fictitious names. Citibank did not find out about the problem until the American customers noticed discrepancies with their accounts and notified the bank.

Outright fraud is also a concern. In 2005, Intel discovered and fired 250 Indian employees after they faked their expense reports. The firings followed from Intel's internal Business Practice Excellence program of expenses claims. The report concluded that fraudulent practices such as "faking bills to claim your allowances like conveyance and drivers’ salaries" were some common malpractices in India. Intel would not put up with such fraud. NASSCOM, which is a forum of IT and ITeS companies, has attempted to address these fraud concerns in India by creating the National Skills Registry. That database contains personal and work-related information, enabling employers to verify a staff member's credentials and allowing police to track the background of workers.

Opponents often dismiss these reports, saying that fraud and corruption exist everywhere. However, it is disingenuous to therefore insinuate that fraud and corruption is uniform from nation to nation. Corruption is in fact measured for comparison by Transparency International, through their Corruption Perceptions Index. Popular outsourcing destinations such as China (3.2/10) and India (2.9/10) rank low on the index, meaning high levels of corruption.

That being said, security related issues, such as falsifying expense documents, or compromising client financial information, are rare when taken in to account the number of offshore personnel and projects they are associated with.

A recent poll of economists by the Wall Street Journal found that only 16% of them saw outsourcing as having a significant impact on the overall job picture. This was the conclusion of the distinguished economist John Kenneth Galbraith in his book, The Economics of Innocent Fraud, published by Houghton Mifflin in 2004.

Economist Thomas Sowell from the University of Chicago said “anything that increases economic efficiency--whether by outsourcing or a hundred other things--is likely to cost somebody's job. The automobile cost the jobs of people who took care of horses or made saddles, carriages, and horseshoes.” Walter Williams, another economist, said “we could probably think of hundreds of jobs that either don't exist or exist in far fewer numbers than in the past--jobs such as elevator operator, TV repairman and coal deliveryman. ‘Creative destruction’ is a discovery process where we find ways to produce goods and services more cheaply. That in turn makes us all richer.” Nationally, 70,000 computer programmers lost their jobs between 1999 and 2003, but more than 115,000 computer software engineers found higher-paying jobs during that same period. However, economists do concede that labor is not always perfectly mobile and that some workers may have difficulty getting new jobs. Some economists suggest that government training programs be provided.

One criticism of outsourcing is that product quality suffers. But the outsourcing firm has freedom to move a firm department or division back home if its profits are suffering as a result of poor quality. In fact, many American companies like Dell have moved customer service divisions back to America as a result of poor quality. The decision to outsource is like any other business investment decision in that there is risk. Critics of outsourcing often talk about outsourcing failures without mentioning instances of outsourcing success. The decision to outsource is like the decision to expand a business overseas, to incorporate computer technology, or to hire new workers. If the company does it correctly, it benefits from higher profits. Proponents of outsourcing believe that arguing that outsourcing leads to lower product quality is pointless because if it were true, consumer demand will force firms to shift back to producing the good or service in-firm rather than out-firm.

The ability to influence the quality of outsourced production depends on the relationship of power between consumers and producers. The idea that consumers have power over producers is something of a myth, however. Often shoddy goods and services must be accepted in even advanced countries like the United States because accountability systems regarding consumer or user feedback are limited.

In order to increase quality or maintain a high level of quality, many offshore outsource firms also employ American management models. These models range from Taylor to Lean to Six Sigma. Each model has to be tailored to local culture and sensitivities. Differing firms have varying levels of implementation success. As the offshore outsourcing industry matures, quality may stabilize at higher levels due to competitive pressures and ready implementation of foreign quality control management techniques.

Advocates of outsourcing also claim that outsourcing-related fraud is insignificant, averring that such malpractices can occur in any country. For example, 40 million credit card numbers were stolen in June 2005 at Card Systems Solutions in Tucson, Arizona. In December 2005, nearly 50 people were indicted in connection with a scheme that bilked at least $200,000 from Katrina relief fund at Red Cross claim center in Bakersfield, Calif., which handled calls from storm victims.Permission is granted to copy, distribute and/or modify this document under the terms of the GNU Free Documentation License, Version 1.2 or any later version published by the Free Software Foundation; with no Invariant Sections, with no Front-Cover Texts, and with no Back-Cover Texts.
Virtual Magic is a human knowledge database blog. Text Based On Information From Wikipedia, Under The GNU Free Documentation License. Copyright (c) 2007 Virtual Magic. Permission is granted to copy, distribute and/or modify this document under the terms of the GNU Free Documentation License, Version 1.1 or any later version published by the Free Software Foundation; with no Invariant Sections, no Front-Cover Texts and no Back-Cover Texts. A copy of the license is included in the section entitled "GNU Free Documentation License".

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