A strategic debate on the effects of outsourcing on US business

1. OUTSOURCING
[A Strategic Debate]
The article is a debate on the impact of outsourcing from US
point of view.
PRITAM DEY
pritam.dey@gmail.com
2008

2. Strategic Debate: Outsourcing Pritam Dey
pritam.dey@gmail.com
ABOUT THE AUTHOR
Pritam Dey has an extensive background in IT and business consultant. He has
designed and developed IT solutions for customers across domains and
technology platforms. Having joined Tata Consultancy Services in 1999, Pritam
has handled complex project assignments for Global Insurance and Financial
Services firms. With specialization in Internet technologies and object-oriented
design principles, Pritam has led cross-functional teams to execute IT projects for
clients such as Tata Internet (India), Prudential Financial (USA), ING Bank
(Netherlands) and A.P. Moller-Maersk Group (Denmark).
Pritam has also played a significant role as a business consultant. To maximize his
education during the MBA program, Pritam has led and mentored teams to
provide data-driven business consulting and recommendation to deliver bottom-
line results to his clients. He has executed a wide array of projects on business
strategy, market research, business process analysis, competitive landscape study,
new market entry and pricing strategies. He has consulted for Fortune 500
organizations such as 3M, UnitedHealth Group, Thomson-Reuters, and Northwest
Airlines (now Delta). Post his MBA program, he has also consulted for a plethora
of non-profit and startup organizations and has created marketing and business
development opportunities for the respective organizations.
Pritam is passionate about playing a major role in creating executable IT
strategies and roadmap that increase the value of IT projects and that strive to
reduce the gap between IT and business objectives. He spends a great amount of
time following the latest technology trends and understanding how technology is
going to drive business and consumer needs in future. He intends to use this
knowledge to create effective IT solutions for his clients.
Pritam holds a BE degree in Electrical Engineering from Maulana Azad National
Institute of Technology at Bhopal (India) and an MBA from University of
Minnesota at Minneapolis.
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3. Strategic Debate: Outsourcing Pritam Dey
pritam.dey@gmail.com
OUTSOURCING: A STRATEGIC DEBATE
Introduction:
Strategic outsourcing is defined as the practice of using outside firms to handle non-
strategic functions normally performed within a company. The non-strategic functions
typically outsourced include payroll, human resources, IT maintenance, facilities
management, and logistics.
A firm might consider employing strategic outsourcing in order to reduce costs, improve
operational performance, gain access to foreign market, or hire skilled workers who are
unable to come to the U.S. due to limits on immigration.
Strategic outsourcing is considered a contentious issue because of the misplaced perception
that outsourcing means offshoring – a practice of sending work out of the country. Since
the effect of pain (of losing a job) resulting from outsourcing is experienced faster than the
benefits of outsourcing are experienced, outsourcing tends to become synonymous with
loss of jobs and unemployment.
Benefits of Outsourcing:
However, looking from a broader perspective, strategic outsourcing helps companies to
focus more on core business and less on non-core business. It frees the executives from
day-to-day process problems, and helps them to focus on strategic thinking, process
reengineering and managing trading partner relationships.
Outsourcing can result in significant cost-savings because companies can pay only for
services that they need. One of the wonderful things about outsourcing is that companies
can pay the contractors by the project rather than by the hour, so they get a good project
estimate up front. Cost savings can also be realized in terms of unpaid benefits and other
allowances that are usually given to employees. Companies also realize cost-savings by
saving on manpower and training costs, by controlling operating costs, and by avoiding the
cost of chasing technology.
Through strategic outsourcing, companies today have the ability to develop competitive
strategies that will leverage their financial positions in the ever competitive global
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4. Strategic Debate: Outsourcing Pritam Dey
pritam.dey@gmail.com
marketplace. Strategic 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.
Outsourcing can enable a business to provide 24/7 coverage, especially for consumers who
need 24/7 support. Productivity is increased because companies usually get work done
from different countries running under different time zones.
Contrary to popular perception, outsourcing has also benefited the United States.
Companies in other nations also offshore their business services to U.S. The “insourcing”
generated a substantial array of relatively high-skilled jobs in engineering, management
consulting, banking, and legal services. Far more U.S. employees keep their jobs because
outsourcing helps the companies stay competitive. Cost reductions from outsourcing can
open up new market opportunities for U.S. companies and thus generate additional jobs
here at home.
Looking from a different perspective, outsourcing also tends to benefit developing
countries such as India or China in terms of increased wages, job prestige, education, and
quality of life.
Limitations of Outsourcing:
On the flip side, strategic outsourcing is not without its share of criticisms. One of the
biggest criticisms about outsourcing is the loss of jobs. The pinch is mainly felt by the
workers who got laid off because their work has been outsourced. The emotional, financial
and mental stress that a laid-off worker goes through is difficult to control.
Opponents of outsourcing argue that about one-half of the outsourcing arrangements are
terminated because of variety of reasons. Lack of managerial skills is one of the reasons
why outsourcing fails. For example, while software-programming skills are plentiful in
India, good managerial experience is very limited. The irony is compounded by the fact
that after few years of programming, software professionals opt for managerial roles. What
eventually happens is that since these people are not trained to be managers, their
managerial productivity is limited. At the same time, they no longer do the work they are
skilled at (programming).
There are other costly complications that come along with outsourcing. Local highways
and transportation network may be inadequate. Some American companies pay much more
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5. Strategic Debate: Outsourcing Pritam Dey
pritam.dey@gmail.com
for real estate for their offshoring activities than they would in the United States. That
negative differential occurs mainly for two reasons. One is the cost of upgrading poor
infrastructure overseas. The second reason is the fact that inexpensive overseas labor pools
are usually found in large cities where the cost of infrastructure such as rent, wages, etc are
much higher.
Cultural issue is another factor why outsourcing fails. Overseas managers often do not
understand the American business environment – customers, language, traditions, and high-
quality control and expectations for prompt delivery of goods and services. Dell moved its
call center support for corporate customers from India back to the United States in 2003. Its
clients had complained about foreign speaking English in hard-to-follow accents and giving
vague answers to technical questions.
One of the biggest and most vociferous criticisms against outsourcing is the issue of
security and intellectual rights. What is the guarantee that the confidential customer
information that is sent to back-offices in India is not misused? In April 2005, Indian police
arrested 16 employees of an Indian customer support outsourcing company in connection
with the fraudulent transfer of more than $400,000 from Citibank customer accounts to
bogus accounts in India. Those arrested had stolen personal identification numbers from
Citibank customers.
Some U.S. companies limit their outsourcing to routine engineering and maintenance tasks
because they worry that their core technology may be swiped by vendors in Asia that do
not respect intellectual property rights.
Opponents of outsourcing advocate that outsourcing cannot solve all the problems. What
cannot be outsourced are innovation and the invention of new business processes and
technologies. As one executive aptly puts it, “Innovative business processes result from an
understanding of the business that happens when people get into a room and talk to each
other. That is very difficult to outsource.”
Conclusion:
From my point of view, outsourcing has benefited the companies that have resorted to
outsourcing. Far more employees keep their jobs because outsourcing helps the company
stay competitive. Some get new or better jobs because the firm enhances its financial
strength. Cost reductions from outsourcing can open up new market opportunities for U.S.
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6. Strategic Debate: Outsourcing Pritam Dey
pritam.dey@gmail.com
companies and thus generate additional jobs at home. The companies can afford to buy new
equipment and expand training programs. Hence, higher domestic labor costs can be offset
by higher worker productivity.
Over time, there is a positive feedback effect from outsourcing. As poor countries develop
their economies, new markets are created for U.S. made products and services. Opponents
of outsourcing complain that jobs are transferred to offshore. What they fail to observe is
the positive effect it has on American economy. Software programmers who work at
offshore use the computers and laptops made by U.S. companies. The rising higher
standard of living creates demand for more products and services.
Opponents of outsourcing need to consider the following:
1. In 2003, Delta Airlines outsourced 1,000 jobs to India, but the $25 million in
savings allowed the company to add 1,200 reservation and sales positions in the
United States.
2. In 2003, approximately $120 billion was spent on IT in the United States.
Approximately 1.4 percent was moved offshore. However, the 98.6 percent of the
work that stayed here was not deemed newsworthy.
3. In total, about 400,000 U.S. positions in information technology have gone offshore.
Meanwhile, total U.S. employment rose from 129 million in 1993 to 138 million in
2003, mainly in services. It turns out that the international movement of services is
very positive to the American economy.
4. In 2003, the United States imported $87 billion of business services. That included
a lot of relatively low-skilled call center and data entry work done in lower-cost
developing countries. Therefore, not all low-skilled jobs move offshore.
The bottom line is clear: because of outsourcing, the United States creates far more new
jobs (net of layoffs) than Europe and Japan combined. U.S. has the highest proportion (66
percent) of the population employed of all the industrialized countries. Due to the increased
productivity resulting from outsourcing, total U.S. production of manufactured goods has
risen about 40 percent over the past decade.
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7. Strategic Debate: Outsourcing Pritam Dey
pritam.dey@gmail.com
Sources:
1. Murray Weidenbaum, “Outsourcing and American Jobs,” June 24, 2004.
2. Eduardo Porter, New York Times, “Send Jobs to India? U.S. Companies Say It’s Not
Always Best,” April 28, 2004.
3. Lance Koonce, DWT LLP, “Phising in Poisoned Waters: The Escalation of Identity and
Information Theft,” May 2005.
4. Kerem B Limon, “Dell to Stop Using Indian Call Center for Corporate Customers,”
November 24, 2003.
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