Outsourcing

A practice used by different companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally.

Contracting with outside consultants, software houses or service bureaus to perform systems analysis, programming and datacenter operations. In the U.S. in 2003, the term took on extra meaning, often referring to jobs being given to people in companies located in India and other countries. See netsourcing, ASP, SSP and facilities management.

Outsourcing is an effective cost-saving strategy when used properly. It is sometimes more affordable to purchase a good from companies with comparative advantages than it is to produce the good internally. An example of a manufacturing company outsourcing would be Dell buying some of its computer components from another manufacturer in order to save on production costs. Alternatively, businesses may decided to outsource book-keeping duties to independent accounting firms, as it may be cheaper than retaining an in-house accountant.

The international context
With the rise of globalization, many companies are turning to either offshoring, offshore outsourcing or Global Sourcing. Offshore outsourcing more and more takes the shape of Business Process Outsourcing, where whole business processes (such as support and development) are outsourced. The client is usually free to choose who provides the outsourced business processes, while stock markets press the company to do more for less. This requires that managers search out the cheapest sources they can find. In countries like India and China (primarily cities like Bangalore and Chennai in India), companies like IBM, Microsoft, Hewlett Packard, and Novell choose to get services from sub-contractors in these countries or move many development and support jobs there. Smaller businesses can also take advantage of freelancing on the Internet to get smaller projects done by offshore developers at minimum cost.

This practice became even more popular after the dot-com crash of the early 21st century. As many businesses struggled with cash-flow problems, many investors were leery of investing money in high-tech companies, which many felt were still vulnerable to the dot-com effect. Struggling to do more with less, companies looked for less expensive avenues of development and support. For the United States, India seemed like a perfect resource for these needs since many nationals spoke English—a side-effect of several decades of British colonial rule. A company can hire an engineer in India, for example, for USD$10,000 a year whereas an equally qualified engineer in the U.S. could cost $60,000-$90,000 a year.

A side effect of this practice led to the domestic unemployability of thousands of high-tech professionals, many of whom were new college graduates. Many of these new graduates studied high-tech fields specifically because a few years earlier, they were told there was an earnest need for people with the skills they actively acquired. Many companies required their employees to train their off-shore replacements, after which they were downsized (laid off).

In practice, this trend has experienced mixed results. Some companies, which were required to hire off-shore talent by investors, reported communication barriers and high foreign personnel turnover rates. They would often ask for one thing, but be delivered a different item. Communication between onsite and offshore teams is a must. Attrition in the offshore company is another issue. One company in Pleasanton, California in the U.S. specializes in fixing jobs that were botched due to offshoring.

Some companies report favorable results . One company said that the low cost of his Indian development team allows him to hire higher-paid American lead developers. Major companies doing outsourcing include Microsoft, Cisco Systems and IBM to name a few.

Outsourcing, especially BPO (Business Process Outsourcing), has long been a factor in American business, but the trend is beginning to reach Europe. More outsourcing deals were signed there last quarter than in any single quarter since 2000. Most economists feel that it will inevitably remain a part of global trade.

Outsourcing is not just related to the services sector. A lot of manufacturing of products is also outsourced to countries like China and Taiwan. Consumer products including clothes and computer hardware are manufactured in these countries due to cheap labor. These products in turn lead to a cheaper prices in the consuming nations.