Outsourcing: Good or Bad?

Introduction:
Recent technological developments have transformed the way business is conducted in today’s world. The reduction in transportation costs and huge development in the communications and digital industry opened opportunities to do business across great distances and/or in entirely new ways. It has opened the possibility to trade and exchange a variety of services on both national and global levels. Outsourcing became one of the most popular tools of business transformation in order to adapt to a new world and a highly competitive market. Let’s try to explore what outsourcing is; when it began and how it evolved; the main reasons behind outsourcing and its types; the consequences and main concerns about certain types of outsourcing. Finally, I will analyse the major positive and negative effects of outsourcing. What is outsourcing?
According to Brown and Wilson (2005) outsourcing is when goods or services are obtained or being given to perform by an outsider (supplier, end consumer, other company etc.), or works contracted out either within (domestic) or outside the country (offshoring).
History
Asefeso (2011) says in his book that many believe that outsourcing is something very new, but history suggests otherwise, stating that it started thousands of years ago. Even in the early ages, it was understood that a person specialising in a certain skill would do the task faster, better and cheaper. For example, it was vital for the Egyptians, with their developed farming, to build irrigation canals to get water to their farms and grow a good harvest. They outsourced the building of irrigation canals to their neighbours. The Chinese Han were using other tribes to manufacture jewellery, as they specialised as blacksmiths, having had developed special sophisticated skills and knowing where to get precious metals for them. The Chinese Han had good resources and could pay them in food and other valuables, which were desired by tribes. The navigation techniques in ancient times were best known to Dutch mariners and were used by the Portuguese and Spanish. Braudel (1995) in his history book gives a better understanding on how early economies were formed, and international relationships and trades were developed. His work suggests that outsourcing was commonly used in day to day life throughout the 15th -18th centuries in many ways, domestically and internationally.
In the mid 1800’s, a bright example of outsourcing was colonisation, where the uses of resources, production and human labour were outsourced from other countries, which became colonies of powerful nations. Outsourcing at those times could turn into a repugnant or expensive affair. Outsourced labour very often could become conquered slaves, engineers and mariners were asking either for a big share of a company or for a hefty cut of the gains. The party which initiated an outsourcing task would get a much lesser gain, but would still go ahead as it was not only about profit but about progress - getting access to resources, exploration, finding new talent. Outsourcing today is in a different shape. It is a mutually agreed exchange of goods and services and is still about skills, talent, resources but also a cost saving tool in order to be able to withstand the competition. Mullin (1996) in his article pointed out that this was not considered a business strategy before 1989.

Rushton and Walker (2007) in their book, described the major enablers for the outsourcing wave: the political decision to open up trading borders worldwide, technological development and migration that started in the 1950’s. Migrating, people became more connected, exchanged their cultures, and became politically and economically integrated. The factors like time, distance and cultural differences are faded and were no longer obstacles in the way of businesses. In the early 90’s, outsourcing became very popular and widely used. It became something that everybody either could hear about or become directly or indirectly affected by. People started to raise concerns about its influence, its ability to shape the economies, its ability to change people’s lives. It attracted a lot of media attention, research, and thinking.
The variety of outsourcing
Outsourcing today moved to broader spectre of industries and has evolved to a range of various types. As Varadarajan (2009) points out in his article, that in today’s competitive environment, businesses should look at outsourcing from a variety of perspectives, not just business-to-business, as it provides potential for new opportunities. He identifies 5 major types of outsourcing that are being used today:
1. off-shoring to a firm 's overseas subsidiaries - where certain activities previously performed by the entity are now being performed abroad, either as being part of the existing business or by creating a new company.
2. Upstream vertical outsourcing to a firm 's current and new suppliers - outsourcing to a third party, either to a new supplier or broadening relationships with an existing one. This could be done either within the country or offshore.
3. Downstream vertical outsourcing to a firm 's intermediate and end use customers – This type of outsourcing could be recognised easily by anybody as it’s become part of everyone’s day-to day life. Self-check-out in the supermarkets is one of the examples where servicing is outsourced to the end-user customer. Airlines outsourced the check-in process to their clients, so now it’s done online and clients have to themselves print out their boarding pass and bring it with them to the airport. Car dealers passed on scheduling of car maintenance or repair services to customers to schedule online themselves. Many retailers and logistic companies outsourced to their clients tasks such as scheduling the pick-up of their parcels over the internet, or printing and affixing return postage labels, tracking and verifying the status of shipped packages.
Varadarajan makes an interesting point by analysing how technological advances and creativity can significantly reduce variable costs by doing outsourcing to end users. He also points out that this way may require a big investment in equipment, software etc., so the fixed cost will be high. Quite the opposite can be seen by companies substituting low cost labour with even lower by doing offshore outsourcing, in which case the fixed costs are dramatically reduced but changes in variable costs will be very little. 4. Horizontal outsourcing: outsourcing to competitors – partial outsourcing, used mostly by companies to meet their seasonal demand increases, and also in order to widen their existing range of products ,where the first prototypes will be manufactured elsewhere. Or if there are no facilities to manufacture a particular part or detail of the existing product, it could be outsourced to a competitor – which is particularly popular in car manufacturing. It is also popular in the service industry, for example airline companies would service their frequent flyers but outsource CRM of less frequent to third parties.
5. Horizontal outsourcing: outsourcing to strategic alliance partners – when penetrating certain countries’ markets, some of the services or some manufacturing has to be outsourced to this country in order to gain access to this country’s market. Another example is when pools of resources and skills are created in cooperation with alliance partners in order to achieve common goals. By creating these pools, a firm outsources certain activities to be performed by its alliances and as a result each is able to focus on a specific stage of the value chain. This helps all concerned to achieve their targets faster and at lower costs.
However, underlining all of the above, Varadarajan in his article tries to show different sides of outsourcing, not only as a cost saving tool. He tries to convey a message that the way outsourcing is to be conveyed is only up to a firm’s on-going concern, but all has to be taken into consideration, and a much wider view on everything has to be in mind. And in terms of leveraging technological advances, firms have not only to think how to use it in order to offshore, but how to leverage technologies, so the need for this particular activity or services could be made completely redundant. That way of thinking may well lead to businesses being reshaped in a model which will be more cost efficient for firms and convenient and affordable for its clients.
Major concern
Many of the types of outsourcing analysed above have shown positive effects on both business and its clients. One particular type of outsourcing that has split the opinions and is most talked about- is offshoring, or also called globalisation. It has raised a lot of concern and media attention. Because of the depth and scale it has been performed at lately, offshoring has raised concerns about its impact on economies as it particular affects labour markets and seems to be tied in with unemployment rates. There are a lot of articles in the press and a lot of books have been written about this phenomenon, but the opinions seem to be very different and completely divided as to whether it is good or bad thing to happen. For example many authors agree with Alan Blinder (2006) former advisor of Bill Clinton that outsourcing will not only sweep abroad manufacturing and services that do not require face-to-face involvement, but it will take away from western industrialised countries high knowledge jobs. His predictions seem to be rather gloomy for all developed countries and he takes it deeper, saying that it will lead to “Third Industrial Revolution” in the future. But many argue against his vision, like Atkinson (2006) in his article saying that only industries under threat of offshoring today will be at risk being offshored in the next 20 years, and these will be only low skilled jobs or services that do not require direct face-to-face contact. The European Labour Force Survey published figures for the year 2005, stating that only 5.5% of total jobs lost in Europe was due to offshoring. This figures varies a lot if we look at different sources, for example the European Restructuring Monitor published a 3.4% job loss number for the same year. According to Ghose, Majid and Ernst (2008) offshoring just coincides with high unemployment time, and is not the cause of it, as job loss related to this type of outsourcing is still very low in comparison to total job losses overall, and it’s also a two way traffic road as more jobs were created due to outsourcing than lost. Amiti and Wei (2006) have the same opinion, analysing US industries that were hit by offshoring, and came to the conclusion that outsourcing certain activities gives opportunities to increase the efficiency of other sectors, which results in job creation. Amiti and Wei (2005) conveyed similar research on the UK economy, and the results were similar, showing positive correlation between jobs created to the amount of jobs offshored. Once again, opinions are divided and many others disagree. For example Harrison and McMillan (2006) did their own research and came to totally the opposite conclusion, saying that offshoring does indeed hurt the home country due to jobs being taken away because of offshoring, and that a statement that this leads to job creation in other sectors of the economy is a total myth. There are no concrete numbers out there to establish how many jobs were lost and what the real consequences are, due to the complexity of the process of offshoring and also the methods of measures used by researchers not being the same. The Organisation for Economic Co-operation and Development (2007) in their book pointed out the difficulties in measuring outsourcing activities, and stated that there is no doubt that offshoring has a greater consequence than just job losses. They cannot be known unless the true scale of offshoring is counted; otherwise it could be only estimations and guesses. Another argument to point out is regarding the question - is offshoring spreading wealth from the West to third world countries, or spreading misery and poverty, converting the West into third world? Auer, Besse and Méda - these author’s research describes the positive impact of offshoring on third world countries, saying that in 1981 more than 40% of the world’s population had to live on less than 1$ a day, however by 2001 it dropped down to 20%. Whereas Steingart (2008) predicts that It’s not only wealth that rapidly disappears from western countries but something even bigger is at stake – the world leadership, political power and democracy will be lost. He doesn’t forecast a doomsday but says that the way offshoring is conducted today has to be changed. He created an interesting argument by showing the perspectives of two contradictory visions on this matter, both from well-known people: Henry M. Paulson (former CEO of Goldman Sachs) who says that globalisation is a great thing, and Naomi Klein (the author of “Shock Doctrine”) who is known as a desperate anti-globalization campaigner and says that globalisation is a road to perdition.

Exploring the subject shows that there is a big argument that seemingly has no resolution yet, but we can try to summarise the main positive and negative sides of outsourcing:

Positive side
Source
Negative side
Source
Cost savings, more profitability
Institute of Management & Administration (2006)
Hidden and unpredictable costs may be incurred

Delen, G.(2009),

Cheaper goods
Heetkamp, A., Tusveld, R. (2011)
Risk of failure of the outsourced tasks (followed by insourcing) Schniederjans,M., Schniederjans,A., Schniederjans, D.G (2005)
Access to new talent and skills
Lewin, A.Y., Peeters, C., Massini, S.(2009)
Job loss, increase in unemployment rate

Harrison, A. E., McMillan, M. (2006)
Increase in productivity
Görg H., Hanley, A. (2005)
Less control on quality of products

Koerner, B. (2011)
Potential growth
As above
Not properly controlled by Heath department, i.e. products may content toxic materials of dangerous chemicals

Charter, D.(2007) Access to new markets
Graham, G. (2005)
Domestic consumers can change their opinion on products manufactured abroad, no trust, example - bed reputation of Chinese products Midler, P. (2011)
Allows to focus on more important tasks
Varadarajan, R. (2009)
Creates job insecurity in country jobs were outsourced from
Gardner, J. Lluberas, R., Watson, T. (2007)
Created new industry “Outsourcing”- now rivals finance
Spence, A., (2011)

Creates wage inequality
Bottini, N., Ernst, C., Luebker, M. (2008)

Reduces Global poverty
Peter Auer, P., Besse, G., Méda, D. (2006)
Less control, firms become rigid by not able to react quickly in unpredictable situations Rowland,T. (2006)

In conclusion
We can clearly see that outsourcing has many positive sides but not without flaws. Which side outweighs the other is not clear yet as it is a new phenomenon which does not yet have a proper system to be measured with.
The outsourcing wave has decreased its pace but is still continuing to grow. In the beginning of its history, it started with unpleasant stories, but today’s modern world is a much better and fairer place, and outsourcing has also evolved. The public is in debate about its impact on our economies, with major concerns about labour markets. However, the opinion is shifting toward its positive side – the reduction of the world’s poverty and long term benefits, leading to better living standards, which I hope we have yet to see.
With the right attitude, proper regulations and a wider picture in mind, which is concerned not only with profits but also with those who labour to make them, any type of outsourcing will lead to equilibrium in wealth and a prosperous future.

Bibliography:
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Heetkamp, A., Tusveld, R. (2011) Origin Management: Rules of Origin in Free Trade Agreements, Berlin. Springler-Verlag
Why Are Companies Offshoring Innovation?
Lewin, A.Y., Peeters, C., Massini, S.(2009) The Emerging Global Race for Talent. Journal of International Business Studies, 40. pp. 901-925
Productivity effects of international outsourcing:
Görg H., Hanley, A. (2005) Labour Demand Effects of International Outsourcing: Evidence From Plant Level Data. University of Nottingham Research paper. Available at: http://dspace.cigilibrary.org/jspui/bitstream/123456789/5441/1/Labour%20Demand%20Effects%20of%20International%20Outsourcing%20Evidence%20From%20Plant%20Level%20Data.pdf?1 (Accessed 24 December 2011)
Graham, G. (2005) Exploring Supply Chain Management in the Creative Industries. UK. Emerald Group Publishing Ltd.
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Bibliography: Brown D. and Wilson S., (2005) The Black Book of Outsourcing: How to Manage the Changes, Challenges and Opportunities, USA, Hobocen Inc. Asefeso, A. (2011) Outsourcing: The Competitive Advantages. UK. Lulu Braude,l F Mullin, R. (1996) The Journal of business strategy. 17(5), 56 - 59.  Rushton A., and Walker S Varadarajan R. (2009) Outsourcing: Think more expansively. Journal of Business Research. 62, 1165–1172 Blinder A the European Labour Force Survey (ELFS) (2006) Available at: http://europa.eu/rapid/pressReleasesAction.do?reference=STAT/06/118&format=HTML&aged=0&language=EN&guiLanguage=en (Accessed: 22 December 2011) Ghose A., Majid N., Ernst C. (2008) The Global Employment Challenge. Geneva. International Labour Office. ISBN: 978-92-2-120305-6 Amiti, M Amiti, M. and Wei S. (2005) Fear of service outsourcing: is it justified? CEPR, CES, MSH. Available at: http://www.oecd.org/dataoecd/44/24/35333668.pdf (Accessed: 22 December 2011) Harrison, A Organisation for Economic Co-operation and Development- OECD (2007) Offshoring and Employment: Trends and Impacts– ISBN-978-92-64-03092-3 Delen, G.(2009) IT Outsourcing: An Introduction. NL. Van Haren Publishing  Schniederjans, M., Schniederjans, A., Schniederjans D.G, (2005) Outsourcing and insourcing in an international context Midler, P. (2011) Poorly Made in China: An Insider 's Account of the China Production Game. US. John Wiley & Sons Gardner, J., Watson,T Bottini, N., Ernst, C., Luebker, M. (2008) Offshoring and the labour market: what are the issues? International Labour Office,(ILO) Geneva Rowland, T Institute of Management & Administration (2006) Cost reduction and control best practices: the best ways for a financial practices. US. John Wiley and Sons  Heetkamp, A., Tusveld, R Why Are Companies Offshoring Innovation? Lewin, A.Y., Peeters, C., Massini, S.(2009) The Emerging Global Race for Talent Graham, G. (2005) Exploring Supply Chain Management in the Creative Industries. UK. Emerald Group Publishing Ltd. Spence, A., (2011) Outsourcing industry is almost as big as finance. The Times Online [online] Available at: http://www.thetimes.co.uk/tto/business/industries/supportservices/article3005674.ece (Accessed: 23 December 2011)