Reduced Cost from Outsourcing

Topics: Outsourcing, Offshoring, Wage Pages: 6 (2047 words) Published: November 14, 2008
Reduced Costs from Outsourcing
One of the main reasons companies will consider outsourcing is the overall reduced costs. Outsourcing provides a more efficient approach in controlling operating costs. Costs per additional employee include salary, overhead, equipment/software, training/education, other supplies, and possibly facility costs (Sood, 2005). Another cost savings quality is in overall Human Resources, as outsourcing eliminates costs for future development of employees, current trainings, recruitment, payroll and benefits. There are many markets that are able to reduce operating expense and cost of goods sold through outsourcing. Highlighted in this paper will be IT, electronics, the automobile industry, and customer services. India has had a competitive edge in the global IT market. The salary range for Indian software professionals is about fives times less than their counterparts in other developed countries. India has been able to keep a competitive edge by keeping the supply of IT professionals high. India supplies more than double the number of computer science graduates than any other country (Askari and Chatterjee, 2003). In other words, they are able to provide highly skilled, low paying IT professionals with a grasp of the English language. It is estimated, by 2008, that India will employ $77 billion dollars of the global IT market.

But as salaries in India have gradually increased, other countries have been competing with their low salaried IT professionals. According to the “Watch out, India – Outsourcing to China” article in The Economist (2006) salaries of graduates, engineers and programmers have been climbing fast and staff turnover at IT companies can reach 30-40% a year. Although not at the same rate as India, countries have been producing graduates that have been competing in the IT outsourcing market. China, Malaysia, Philippines, Singapore, Thailand, Czech Republic, Chile, Canada, and Brazil are other outsourcing locations that have been evaluated for lower costs (Regalado, 2007). Cost of engineering time can be significantly reduced by outsourcing work to Asia. In 2005, the US average salary for software design and development positions was at $51,596 while the average annual base pay for software engineers in India was equivalent to $10,300 US dollars. At the same time, new graduates in Ireland were getting an average of about $27,500 (Geer, 2006). In the electronics sector, the wage rate ratio between the United States and China for product engineers is about 10:1, and for software developers, the ratio between the United States and India is about 8:1. Also, it is not like Asia is in short supply of engineers looking to take on new work. China, for example, produces 350,000 graduate engineers every year, compared with 90,000 for U.S. engineering schools (Behind, 2004). Manufacturing is another area that many electronics companies look to the East for lowering costs. Electronic Engineers in the United States typically strive to further technologies and improve products. This is one reason that this country is a leader in new products. However, this does not do much to reduce manufacturing costs. This is where outsourcing the manufacturing may provide cost benefits. Product engineers in China and Taiwan are more focused on designing for production and can utilize methods to reduce production costs (Behind, 2004). The outsourcing of manufacturing also reduces capital costs while increasing company flexibility. Reduced inventories and debt frees up liquid assets for other business activities. Many times, it is not economically feasible for a company to own the latest assembly technologies so there is no choice but to outsource to an Electronics Manufacturing Services (EMS) firm. Small markets are able to be pursued when outsourcing manufacturing. For a company to have a dedicated plant to serve a small customer base with limited production quantities is not a...
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