Why outsourcing is a win-win solution: white paper
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Exploring the economic arguments for and against outsourcing – a white paper by Outsource Accelerator
Today, many companies in North America and Western Europe continue to assess whether outsourcing is the right business solution for them. In recent years, outsourcing has come under scrutiny and has been criticized for taking jobs abroad, for derailing customer service, and even for detracting from home economies. Yet, outsourcing has weathered the criticism because, ultimately, it works for the businesses that have embraced it as a cost-saving measure as well as for the other benefits it brings to the company.
As the outsourcing industry has grown and continues to evolve, many of the criticisms it suffered in the past are fading to reveal benefits that enhance company employees, communities at home and abroad, and even major economies. Businesses can and do benefit immensely from outsourcing, so if your company is considering working with an outsourcing firm overseas in a country like the Philippines, it’s vital to understand how it can be a win-win for all parties involved, and why adopting the outsourcing platform can enhance productivity and help your business to grow.
This paper is divided into sections that provide a basic definition of outsourcing, outline critical arguments against outsourcing and offshoring, beneficial aspects of outsourcing, and concluding information. The benefits section will include case study information based on current, multi-type publications. After reading this document, readers should have a comprehensive understanding of the multilateral benefits of outsourcing with real-world cases that provide evidentiary support of claims.
While some of the criticism of outsourcing has been exaggerated, some of it has been warranted. Readers can examine how this criticism has led to positive changes within outsourcing firms and Western businesses. In other words, many problems that once existed have now been greatly minimized owing to positive solutions designed by companies that support the outsourcing model. The concluding section will further address criticisms and common pitfalls of outsourcing and how companies can find effective solutions for them—an absolute necessity since globalization and outsourcing are here to stay.
Introduction to outsourcing/offshoring
Simply stated, outsourcing can be defined as contracting with an outside firm or vendor to perform various functions for the company that ranges from IT services to data entry. A company may outsource some of its processes to vendors within the country or abroad. For the purpose of this paper, the discussion will focus on offshore outsourcing; that is, contracting with firms overseas, specifically with the Philippines, for professional services that may include data entry, IT, data center operations, sales and lead generation, customer service, etc.
Today, companies large and small are turning to firms in countries like the Philippines to obtain services at a rate that is less expensive than what they currently pay to employees within their own countries. However, cost-saving is not the only reason a company may embrace offshoring to nations like the Philippines or Mexico. In some cases, the company may simply not want to invest in the expertise needed to perform some specific functionalities; they may believe that an outside firm already as the expertise and experience needed to perform the processes in question at a competitive rate.
Outsourcing as a component of globalization is not showing signs of a slowdown. In fact, research suggests that it is increasing worldwide. The economies of many nations, including the Philippines, can now demonstrate the positive effects that outsourcing is having on its country and its workers. Outsourcing provides win-win situations for the company and the company it contracts with, but then why does outsourcing still have such an image problem? By learning from this paper’s key takeaways, businesses can learn why some myths about globalization prevail and how they can be conquered.
Why has outsourcing boomed in the Philippines?
The Philippines is neither the biggest nor first outsourcing nation. India has been outsourcing for a much longer time, and its industry is about three times the size. However, the Philippines has shown great commitment to the development of this ‘golden-boy’ industry and has certainly created an environment that is most welcome to Western businesses. In recent years, the country has been dubbed “the call center capital of the world”. Well over one million Filipinos work in the country’s many call centers. According to reports like the one posted by LA Times, “The outsourcing boom has helped propel the country’s economy, once a laggard of Asia, into one of the region’s fastest-growing.” Whilst the Philippines isn’t the biggest outsourcing nation, it can be considered the highest quality option.
At the outset of the outsourcing trend, it was India that commanded the attention of many companies from the West. However, the Philippines, even with its considerably smaller population, has created an environment that is particularly attractive to Western nations. For one, the Philippines boasts a solid command of the English language. Scoring near the top of the BEI (Business English Index) in recent years, the Philippines has rivaled nations like the Netherlands and Norway for English proficiency. In addition, employees in The Philippines have proven themselves flexible on time, working well with time varying time zones, shift changes, and on holidays.
The government of the Philippines has helped bolster the nation’s outsourcing industry by developing partnerships with universities to create BPO-specific coursework and curriculums. The country has issued tax and non-tax incentives to drive investment from overseas companies and created a voucher system that helps support call center training. Many companies in the West have been impressed by the competent workforce that provides quality for what amounts to a bargain rate. Because Filipino workers train for specific careers in the outsourcing industry, they can boast highly-skilled talent that is attractive to companies in the West in search of an overseas back-end, operations, or logistics partner.
This isn’t to say that the Philippines has left its competition in the dark; on the contrary, offshoring is more competitive from country to country than ever. India, Thailand, Malaysia, Brazil, China, and other nations are among the nations with the most outsourcing jobs. With the Philippines’ growth rate of 46%, however, it remains one of the nations to watch closely as it appears to function as an important model for the outsourcing industry, a model that illustrates what works best in this highly competitive marketplace.
Criticism of outsourcing
In many Western countries, offshoring has become a dirty word that is nearly synonymous with job loss. This criticism is unfair and potentially unfounded as we will discuss later in this publication, but it exists nonetheless in countries like the US and UK. Its stands to reason that if a corporation outsources its customer service call center to the Philippines, its American and British customer representatives will be out of a job. Time and again, companies that offshore do layoff segments of their workforce as they hire employees overseas at decreased rates. This remains the chief criticism of the outsourcing model as it pertains to offshoring. Moreover, as outsourcing moves beyond its infancy toward middle age, its image problem may finally fade as clear evidence emerges about its positive impact on Western businesses and even Western communities.
Economic loss is also a criticism when it comes to a company’s products and services. Critics suggest that outsourcing only marginally reduces the price of products and services. As an added inconvenience, they lament that decreased wages detract from their healthy economy, assuming wages are decreased, which is also an argument that does not always bear fruit in the current climate. Critics have worried that the profits made from offshoring wind up in the coffers of the wealthy and do nothing to lift the position of the middle class or the working class.
No doubt, readers may have seen criticisms that the supposed benefits of outsourcing for the home nation’s workers have not been realized. There are fewer advanced and sophisticated jobs for US and UK workers. Some workers also complain that there are fewer full-time occupations and that even part-time job offerings are more difficult to come by. Whether or not this is true or the fault of offshoring will be examined later in this discussion. For now, it’s important to note the criticisms of offshoring in order to eventually address them and discuss how businesses are creating new solutions to the problems associated with offshoring.
Some of these criticisms have been just and apply to many situations in the US and Western Europe. However, as the cons associated with offshoring have been illustrated and discussed for several years now, there have been numerous fixes to address these criticisms. These will be more closely examined later on in this paper.
Other problems with offshoring
Many companies have struggled with cultural and language barriers when offshoring to employees across the world. These barriers can still crucially impact the company’s brand and the success of its offshoring venture. Even the seemingly simple challenge associated with time zone changes can sink a venture if not appropriately addressed.
Then, of course, there is the real challenge of service quality. A London-based company, when considering outsourcing, has to ask this question: can a native person in Mumbai provide the same level of customer care as a Londoner? There’s no doubt that weaknesses—and indeed, failures—exist within the outsourcing sector, but as the sector has evolved, it has very effectively tackled this problem head on, especially in countries like the Philippines.
Some businesses dislike relinquishing hands-on control of any aspect of their business. This is understandable. However, by working with a firm that is able to integrate with the business well, it will retain all control necessary to obtain the desired outcomes. In some cases, a company simply requires a bit of time to get used to the changed paradigm. Many of today’s outsourcing firms have become quite savvy and intuitive when it comes to the job at hand.
Other problems that historically plagued the young industry have included poor communication between the company and the outsourced firm, hidden costs that might include things like start-up training, and reduced adherence to rules of confidentiality. Critics have pointed to low worker morale as another con associated with outsourcing.
Does outsourcing exploit workers in undeveloped countries?
An important concern that cannot be overlooked is the one that says that overseas workers are exploited or treated as veritable slaves who earn next to nothing for the same work that would earn a Western worker a living wage. Whilst the gravest conditions and concerns are reserved mainly for the manufacturing sector, the same concerns spill over to the service outsourcing sector. This complaint has merit as evidenced by the sweatshops that exist in undeveloped nations and the poor work conditions that many overseas workers are forced to endure. Western companies that engage in exploitive practices take a large risk. As word gets out, as it has, the brand suffers as customers choose to boycott companies that opt for profit over the support of basic human rights. In other words, engaging in unsavory offshoring practices can be a public relations nightmare for any company.
Many countries are, in fact, learning from the mistakes of those companies that pioneered outsourcing but didn’t manage their course very well. One of the worst tragedies in recent memory for outsourced workers occurred in the city of Dhaka in Bangladesh. According to World Bank, a building known as Rana Plaza crashed down on thousands of workers. More than one thousand people were killed and twice as many were injured. The workers there sewed garments for many European and American retailers. According to World Bank, “a chunk of blame for the collapse and deaths was placed on retailers and brands that outsourced their work to Bangladesh, and particularly Rana Plaza.”
In order for Western companies to engage global workers responsibly, they must assess working conditions by sending agents to the firms they want to contract with. It has become less acceptable for Western businesses to profit at the expense of workers in underdeveloped nations. Moreover, it has now become imperative for Western companies to vet companies to ensure that they comply with acceptable safety standards and work conditions. Many companies in North America and Europe have signed formal agreements to ensure that they will shut down any operations that do not comply with agreed-upon standards. Certainly, abuses still exist, but the improvements are undeniable.
For the sake of this white paper, it’s worth noting that service-based outsourcing (i.e. providing services instead of manufacturing) is generally less susceptible to tolerating low standards and working conditions. This is primarily because these functions require a workforce that is generally more middle class and better educated. These people are generally less tolerant of low standards, and are more informed and vocal about their rights and expectations. Equally, in the Philippines, the government tends to be very protectionist towards its workforce, and is generally very pro-labor, especially within the largely foreign-led outsourcing sector.
Regardless, concerns for abuse or exploitation are by no means immaterial, and they will be addressed hereafter. Naturally, companies today must assess potential pitfalls associated with offshoring. Companies that can see past the unfounded complaints and create solutions to the obstacles that offshoring may present stand to benefit from the effort.
The political dynamic of offshoring / outsourcing
While a New Yorker whose job has been shipped to India or Mexico certainly has a legitimate personal gripe to make, much of the case made against outsourcing and, indeed, globalization in general, comes from political corners. Can politicians who rail against offshoring be trusted? Can these politicians actually bring jobs back to their struggling workforce?
In many ways, Western politicians have earned votes by promising to curtail offshoring by either penalizing companies that engage in the practice or by promising incentives for companies to keep all company processes within the home country. To a large degree, these politicians have made unrealistic claims. Case in point: take the current Trump administration in the US. Trump waged a campaign to bring overseas jobs back to America. His campaign pledge is “Make America Great Again.” Moreover, one only has to read the recent headlines to note the US president’s anti-immigrant position.
Savvy onlookers will, no doubt, have seen the articles that point out Trump’s double standards. As a business leader, Trump exports beaucoup jobs to far-flung lands that are very far, indeed, from American shores and, more specifically, American workers. According to The Independent, “For Trump, highlighting US-made products is inconsistent with his practices as a businessman. For years, the Trump Organization has outsourced much of its product manufacturing, relying on a global network of factories in a dozen countries—including Bangladesh, China and Mexico—to make its clothing, home decor pieces, and other items.”
The same can be said of the American president’s daughter who also offshores jobs from her companies. The “Made in America” mantra of the Trump campaign is an obvious example of the liberties that politicians take when attempting to score votes. It’s important to note this when trying to understand what, if any, genuine negative effects outsourcing has on Western businesses, Western economies, and Western workers.
The politics surrounding outsourcing is hardly an American problem. A recent article by HR Director reported how “unsubstantiated claims of loss of employment due to offshoring have played a part to the UK voting for Brexit and the rise of right wing protectionist governments across the world.” In fact, much of how Brexit will affect outsourcing efforts is still uncertain. For instance, pulling out of certain trade agreements may impact offshoring agreements.
In other studies, there are genuine fears that Brexit will actually cause a labor market shock and send a big increase in jobs overseas, according to a report by Deutsche Bank. The bank is warning that a tighter labor market will not result in higher wages for Brits.
Yet, the fact remains that outsourcing is a polarizing word. Even if the research does not back up the claims that outsourcing steals jobs, politicians will inevitably place blame on globalization if it suits their platform and if they can convince their constituents that reducing outsourcing and tempering globalization will lead to improved job growth. Businesses must look past this rhetoric and find the real evidence for the real benefits that come with outsourcing.
The pros and cons of outsourcing examined:
The benefits for the Philippines
The success that the Philippines is enjoying because of its progress in the field of outsourcing is literally transforming the nation’s economy. Headline after headline flaunts the country’s improvements and its evolution from a nation of workers who have traveled abroad to perform more menial work tasks to a nation of skilled professionals who are competitive in areas that required a high degree of expertise.
This positive press and national support for outsourcing fly in the face of other headlines in nations like the UK, where economic woes and employment vulnerability are ever present. Critics of offshoring see how it spurs economic improvements in developing nations and point to the success as a cause for the downturns in Western economies whether it happens to be true or not.
The sustained growth of the Philippines’ outsourcing sector is directly impacting the country’s ever strengthening and maturing economy. In addition, investment forecasts have concluded that this success is likely to continue as increasing numbers of businesses from the West— including countries as disparate as New Zealand and Australia, US, UK and even Scandinavia—choose to partner with outsourcing firms in the Philippines.
With increased investment, the Philippines is able to further invest in this sector with programs designed to support its growth. The employees themselves, far from feeling exploited, have been thrilled with the job opportunities that await them in the outsourcing industry. In some cases, standard rank-and-file outsourcing employees make more than general doctors. Jobs are plentiful as evidenced by reports from Manila’s Bureau of Local Employment, which stated that the BPO sector continues to offer the most jobs in the country. While IT employees make more than call center employees, the benefits of a steady salary that is substantial by national standards is what continues to drive many Filipinos to the country’s many call centers.
Prior to outsourcing, the country’s minimum hourly rate worked out to about $1.12 per hour—far less than minimum rate that exists in the U.S., which is between $7 and $10 per hour. In Australia and Canada the minimum rate is about $16. After outsourcing began to improve the nation’s economy, the rate increased to $1.50 per hour. In many ways, the outsourcing sector in the Philippines is raising wages throughout the country across multiple industries. What do these increases mean to a developing nation? One only needs to witness the optimism of the nation’s millennial class. Rather than pinning their hopes for a better life on wages earned cleaning a high-rise hotel in Tokyo or Shanghai, they have a real option to remain in their homeland earning wages that are good by their own standards.
Countries like the Philippines where outsourcing is increasing are experiencing economic upturns, but where is the evidence that clearly illustrates that their upturns are responsible for American or UK economic downturns? As the research unfolds, the evidence simply is not there. This paper will revisit this issue of research elsewhere in the discussion.
Introduction to the benefits of overseas outsourcing
The reality of globalization is tied in numerous ways to the outsourcing paradigm. A simple claim can be made: if outsourcing didn’t work, big businesses wouldn’t do it. Failed ventures aside (and there are always failed ventures and unsuccessful projects when it comes to business), outsourcing has proven to be a successful endeavor for businesses representatives virtually every major industry. As outsourcing and offshoring have evolved to the present day, large and small businesses have learned numerous lessons and made significant changes in their approach to and implementation of outsourcing.
Additionally, countries that have a substantial outsourcing sector like the Philippines and India have also learned much through simple trial and error or through the examples of other nations where outsourcing occurs on a large scale. Having learned from lessons of the past decade alone, outsourcing firms have been able to better fulfill the needs of their Western partners. Although offshoring may not be a cure-all solution for Western businesses, it isn’t the destroyer of Western economies either. And, according to CNN Money, “most economists say criticizing the practice is absurd, because outsourcing ultimately does more good than harm.”
By exploring the benefits that outsourcing brings to small and large businesses, company leaders and other interested parties will see that outsourcing is a win-win situation for stakeholders. Its many benefits do offset many of the criticisms that have been leveraged against it. Proponents of outsourcing forecast that it will witness growth in most areas, including finance, IT, and human resources. The Huffington Post forecasts that 80% of American businesses will be outsourcing at least some of its functions and processes by the year 2020. If your business is considering partnering with an outsourcing firm abroad, particularly in a country like the Philippines, it’s essential to explore the advantages of such a move.
Many companies embrace outsourcing to reduce costs, though this is by no means the only benefit to contracting with businesses overseas. As Forbes recently pointed out, 300,000 jobs in the US are outsourced, and reducing labor costs is a primary reason many businesses choose to do it. The fact remains that businesses can hire a worker in the Philippines at a substantially lower rate than what they would pay a worker in the US, Canada, or the UK. It’s not uncommon for businesses to save as much as 60% on labor costs when they contract with an outsourcing firm in Asia.
With freed-up funds and higher profit margins, companies are more structurally sound, have more opportunity to grow and diversify, can invest in new opportunities, and will appear more attractive to potential investors. According to the New York Times, “Outsourcing converts fixed costs into variable costs, releases capital for investment elsewhere in your business, and allows you to avoid large expenditures in the early stages of your business. Outsourcing can also make your firm more attractive to investors, since you’re able to pump more capital directly into revenue-producing activities.”
Eliminate repetitive businesses processes
Businesses must carefully examine what processes to offshore. Many choose to eliminate jobs like data entry by outsourcing them to companies abroad which specialize in this function. These tasks are commonly of low complexity and high repetition so it’s easy for outsourcing firms to manage them without significant training. Or, once training has been complete, the outsourcing firm can easily manage these more mundane tasks that would otherwise bog the main business down with operational distraction and infrastructure costs. In fact, many jobs that Western companies view as mundane like data entry or customer service are embraced by overseas company that have chosen to specialize in them. They may already have a ready workforce that can integrate with the company to provide outstanding customer service.
Cost sharing is a benefit that can also leave companies with more money in their proverbial pockets. Companies that offshore their disaster relief management, as one example, can save considerably on IT costs. The outsourced firm, a company that specializes in off-site data management, will fund its own new equipment needs. When it needs new servers, it will make the investment. Businesses that do not outsource this type of service are forced to pay for those expensive upgrades as well as pay the continued salaries of those employees tasked to maintain them. Not only do businesses save money on this part of their infrastructure, they can more effectively prepare budgets with far more flexibility, knowing that there is no need to set aside funds for new fixed-cost IT servers for this purpose.
With more available funding and increased investment, businesses are poised to expand in new directions designed to enhance its success. With more funding, businesses can purchase new equipment or new properties where they can expand their company. Making improvements on capital assets allows the company to better maintain those important assets. If a company already has its eye on a new property, it can shift to an outsourcing paradigm to quickly increase funding rather than having to build capital from the ground up.
Hire more employees
A key criticism of offshoring is that it takes jobs from Western workers. As jobs shuffle beyond borders, some jobs may be lost, but it must also be said that other jobs are created. Many companies use their cost savings to hire more specialized employees or use the cost savings to invest in, upskill, and better serve their core workforce by providing better roles, higher pay, and more benefits. Businesses can use their resources to better develop their internal staff so that they can be trained for new, more advanced endeavors within the company. When employees are allowed to specialize, they can help the company prosper just as their individual careers can prosper. Naturally, as employees obtain new skills, they can demand increased salaries. Enabling Western companies to upskill their workforce, through increased specialization and professional sophistication, provides for a future-proofed stronger home economy.
A report by CNN Money stated that when a company like Apple chooses to have its iPhones manufactured in China, it uses its money savings to hire more employees in areas like sales, technology design, and marketing. The report stated that “even though some people lost jobs due to outsourcing, the greater efficiencies the industries realized allowed them to hire even more people in the United States than were laid off.”
Improved business focus
Businesses that are able to shuffle non-core business processes to outsourcing firms can better focus on those core services. In the US, Comcast outsources a substantial part of its customer service department to offshore firms. This allows the company to focus more closely on what it does—provide cable and internet services to its North American customers. Comcast does not specialize in customer service. From a fiscal point of view, it makes sense for the company to dispense with this area of operations and allow an overseas firm that does specialize in this area to take on the job.
With that in mind, businesses can assess whatever it is they do best and work to hone those skills as they dispense with operations that may be superfluous to their missions. This, of course, is why so many companies are outsourcing their IT services. Training and maintaining a competitive IT workforce can be a major drain on a company’s coffers, and it may not play any major role in its product or service offerings. In such cases, many companies find it much easier to pay a monthly fee to a contractor for IT service than to spend much more trying to maintain an entire department along with all the required equipment and pricy equipment upgrades.
Access to the best offshore firms around the world
In today’s global marketplace, companies can access the best offshore businesses to contract with. Outsourcing is highly competitive among firms that engage in this work. They strive hard to not only attract Western businesses but to keep them highly satisfied. In countries like the Philippines, there are highly specialized firms that offer world-class services to the global businesses that choose to contract with them for any level of service.
Just as businesses can share costs with their outsourcing partners in some areas, they are also able to share risks. The best outsourcing firms work hard to integrate with the companies that contract them. Neither of these firms wants to fail, so they necessarily work to support each other to provide whatever is necessary to make the venture a success—a success that ultimately supports both companies. The fact is, as the Journal of Accounting pointed out, “There are tremendous risks associated with the investments an organization makes. When companies outsource, they become more flexible, more dynamic and better able to adapt to changing opportunities.”
Many companies are pleased to discover that tasks performed overseas are done with great efficiency. One of the obvious reasons for this is that many outsourcing firms specialize in the task they were contracted for. If you hire one of the best data entry centers in the Philippines, you should expect to see a high degree of expertise and efficiency. Another reason for improved efficiency is the competitive nature of jobs overseas. Workers are serious about showcasing a strong work ethic because someone else is certainly waiting in the wings to take their job. Some companies contract with overseas firms so that they can work-around the clock—referred to as ‘following the sun’. They may have customer service department in the South of England and another in Kolkata in order to maintain their high levels of efficient customer service. Offering a 24/7 customer service experience would simply not be economically viable if staffed solely through a Western home-country workforce.
Outsourcing is flexibly scalable. A company can decide to move the role of one employee, a partial department, or an entire operation to an overseas location. Nabisco, an old American company headquartered in New Jersey, recently decided to shut down one of its historic bakeries in Chicago and ship that part of its operation to Mexico in order to save money. So now, many packages of beloved Oreo Cookies will be made in a Mexico bakery. Nabisco is not moving all of its bakeries out of the US; rather than update an older bakery and continue to pay higher US salaries, it has taken the step to move one aspect of its operation elsewhere. Many companies do, or seek, something similar. The terrific part about offshoring is that the company can decide exactly what part of its operation to move and what to leave unchanged.
More competitively priced products and services
Some businesses choose to outsource in order to lower the cost of their products and services. They believe they can attract more customers by lowering their costs—and often businesses do see the growth spurts they have been longing for. When a company can make a toy, a pair of boots, or a car five times cheaper in another country than they can in their own, they’re going to see more cash. Some companies will only moderately lower their product cost—and that’s their prerogative—but others might dramatically decrease costs in order to edge out their competition. While consumers, if asked, might object to the concept of outsourcing, few consumers opt to pay a higher cost for goods if they have a cheaper option.
Many companies may not be turning to outsourcing just to impress investors and enhance their bottom line. For some companies, contracting with an offshore firm that can provide reliable yet cheap labor is simply a matter of survival. Paying an architect in the US will run a business about $3,000 per month. In the Philippines, that cost shrinks to $250 a month. That kind of cost savings can help a business that’s failing avoid taking on more debt or avoid collapse. Transitioning some aspects of a business can impact the business to the extent that it is transformed from a struggling entity to one that’s begun to thrive. Naturally, making savvy business decisions all the way around will impact a company’s success, but when a business needs to cut back costs or else, outsourcing is often the key to solving many financial problems.
Development of global leaders
As contracted partnerships are made all over the world, savvy individuals will be needed to maintain these global relationships. New careers are being forged to manage overseas operations. As some jobs are lost in areas like HR, for instance, because of a move abroad, others are gained. Companies that work with firms abroad gain a global edge over companies that do not expand their reach. Outsourcing, after all, is a veritable form of business networking. The company leaders who engage in this networking will gain experience that will enhance their careers and make them more critical to the business.
Learning from criticism: turning problems into benefits
Many of the abuses and operational problems associated with outsourcing occurred back in the 1990s. That was, after all, the very early stages of the industry— it was still very much immature, with a far less experienced, Westernized, and professionalized workforce. Since then, the industry has had lots of time to make important repairs. Signing those agreements to vet offshore firms for safety and promising to shut down operations if abuses are discovered are just part of the evolution that has taken place in the past decade. Outsourcing has not become a win-win situation by failing to address criticism. On the contrary, it has had to tackle many problems with innovation and progressive thinking. The result is that these problems can now be managed well.
Outsourcing fails the middle class—or does it?
A misconception that is still pervasive is that outsourcing is stealing jobs from Western workers and causing problems for home economies. An article published by the Washington Post takes this issue head on. Rather than accepting the fear that globalization and outsourcing models will “hollow out” entire industries in the West, it states that “rearranging where and how work is done has been going on ever since the first shepherd and farmer decided to trade milk for wheat on a regular basis. Outsourcing is merely an extension of the age-old story of specialization and exchange, whether it is done within a village or country or across national borders.”
The article goes on to astutely point out that “the resentment seems to grow exponentially with geographic distance [which heightens the ‘us’ versus ‘them’ tension] and the gap between the original wages and the new ones.” Knowing that there will be resentment when a company reduces its workforce and ships jobs overseas can be an opportunity for said business to create a public relations platform to address the resentment and any potential misinformation.
In order to stymie knee-jerk criticism, businesses contemplating offshoring can highlight this point: “global outsourcing has been a net job creator for the United States — that as a result of shifting work overseas, more jobs were created back home than were lost, even though the jobs and the workers may not be the same.” Many of these studies are well in keeping with basic tenets of accepted economic theories. After all, basic economic theory holds that specialization and healthy trade are “win-win propositions.”
So, yes, job loss may occur. For instance, over the decades many manufacturing jobs have been lost. However, the loss was offset by many-times greater job gains in the service, technology, and professional services sectors. So, the workers do have a legitimate gripe that their line of work may become more obsolete—harder to come by as a result of outsourcing and its inevitable specializations, but this is an economic reality that comes with progress.
There aren’t blacksmith stalls in London anymore. At some point in the past century, blacksmiths and ladies’ maids had to find a new line of work as was necessitated by change. Blacksmiths would have been feeling the pinch at the time, but now, no one is concerned for lack of blacksmiths, no one would complain that they are out of work as a result of there being no demand for blacksmiths, and the economy as a whole has more than moved on.
Developing nations are stealing jobs from Western nations
In some ways, this critique is similar to the one above, so some arguments will apply here too. For instance, as manufacturing jobs are shipped overseas, more service jobs wind up in the US or a Western European nation. However, if the critics want to engage in the blame game, they must address threats to workers that come from the inevitable and far more pervasive development of technology and robots. How many self-checkout lanes does your favorite grocery store now have? These tech-savvy lanes mean that fewer checkout workers are needed to provide the business with a service. This is merely one instance where technology has led to job loss, but job loss because of technological advances has been occurring since the Industrial Age first began. Studies show that “most American jobs are lost to other Americans or absorbed by technology,” according to a study by The Reason Foundation titled “Offshoring and Public Fear: Assessing the Real Threat to Jobs.”
The relentless march of technology is responsible for the loss of an almost infinite list of roles, jobs and livelihoods. Prior to looms, clothes were all handmade. Prior to washing machines and dishwashers, clothes and tableware were hand washed. Before computers people manually calculated things, taking many times longer and requiring many more people. Prior to heavy machinery, roads, bridges and buildings were largely constructed by hand (and possibly by the hand of human slaves). Few of humanity’s original roles still exist to this day. Technology and evolution has wiped out virtually every job we have historically ever known. However, it’s important to balance that with the realization that that same technology has also added just as many new jobs, if not more.
In the UK, there is a somewhat similar paradigm. In recent years, it’s been shown that every week in the UK 51,000 jobs are lost and about 53,000 are created. Clearly, outsourcing or offshoring aren’t the only reasons for these weekly job losses, according to the Leverhulme Centre. Back in 2005, only about 2.3% of these job losses could be attributed to outsourcing. In addition, the Leverhulme Centre for Research on Globalisation and Economic Policy states that “Offshoring creates jobs and boosts turnover within the UK Economy” and that “Offshoring was responsible for an estimated 3.5 percent of job losses in the UK in 2005. But this research shows that job gains by far outweigh the losses.”
In addition, according to a report from HR Director, it has been shown that many companies in Europe aren’t shipping jobs en masse to third-world countries; on the contrary, evidence shows that they are launching subsidiaries in “high income economies in Western Europe, North America or Japan and Australia.” So the argument that poor peoples from developing nations are taking over good jobs does not hold water on a close examination.
Contracting with—let’s be frank—a lemon is certainly not confined to the offshoring/ outsourcing paradigm. How many hairdressers does a woman go through in her life before she finds the right one, the one who handles her hair like a dream? And there are few business people that haven’t at some point lamented about encounters with poor performing accountants, overpriced solicitors, scandalous consultants, or ungrateful staff. There is no doubt that many companies who contracted for services with firms overseas were hugely and quite expensively disappointed in the quality of the service they got in return. There are nightmare stories—customers dumping businesses because they kept getting transferred to Indian representatives whose English was so poor it resulted in nothing but a failed transaction. Many firms may have promised to use speakers whose English was near in quality to a native speakers only to find that this was not the case.
In addition, some companies discovered that data entry services outsourced abroad contained numerous mistakes that compromised aspects of their business. Poor service will never entirely disappear from the picture, but as the competition among outsourcing firms has increased, the quality of work has also increased. Many firms in places like India and the Philippines are taking care to address issues of quality assurance. Many companies are embracing resources and tools that track error in order to bolster quality assurance programs. These days, when a customer call is routed to an India-based call center, the customer will likely not even know it. Many call centers take extraordinary care to hire professionals who are adept at speaking and understanding the English language.
Layoffs take a toll on any company. When an entire branch of a company is suddenly let go and their jobs shipped overseas, morale can bottom out among existing employees. Job loss creates a climate of anxiety and fear. This is definitely one of the downsides to moving jobs abroad. First, companies must realize that this climate of fear is temporary. It might last a month; it could last a year. It might even spur some employees to voluntarily seek employment elsewhere. In these instances, companies need to see this period as one of necessary transitioning.
Also important is the necessity for the company to address depleted morale in ways that are encouraging as well as honest. Outsourcing breaks down the organization, so rather than leaving the remaining employees to contemplate this broken paradigm that they are a part of, thoroughly explain how the organization will be rebuilt, how their roles are still integral to the work being done, and why the changes were necessary. It may also be beneficial to provide the staff with additional training or workshops that address the new changes that will take place. Effective communication is key to boosting employee morale. Companies who believe they don’t owe their workers honest explanations will likely experience more opposition and plummeting morale than companies that take care to nurture their employees as they weather the upcoming changes.
As an added measure, a company could provide severance packages to employees whose jobs were shipped abroad. They could also offer to retrain many for positions that will not be outsourced. It may not be possible for a large corporation to provide such personalized care for the employees it lets go, but any effort can bolster the brand and show everyone involved that it cares for its workforce in spite of the changes that must take place.
As immigrants and refugees are railed against by leading politicians in Western nations, racial tensions are flaring up in places like the US, Germany, and France. Could it be that a subtle form of racism is underpinning some of the complaints regarding offshoring? Just this month, the Dhaka Tribune posted article raising this question: “why do some people oppose globalization?” The article’s author notes the hostility that exists toward globalization and suggests that it’s not simply job loss that fuels this hostility. It may be also be “transmission and blending of ideas, lifestyles, [and] cultures” that angers so many politicians and voters in the West. The trend toward nationalism and the negative views of immigrants and refugees who have recently poured into Europe and the US may further be dampening outsourcing’s image.
Is your business okay with that? Because globalization isn’t going anywhere, and it can be ineffective, or dangerous, for a business to shun it. Of course, many businesses today have no desire to shun globalization as they stand to benefit from trade agreements that allow them to sell their products or services all around the globe. In order to sell your product, you have to position your business as a global brand and as a forward-minded company that embraces all cultures.
So what happens if your company’s CEO is dubbed a racist, or is seen to shun certain racial groups? You don’t have to look far to find out. As NPR reported in late December, CEO and founder of Papa John’s Pizza Chain was forced to step down from his position as CEO because of the controversial remarks he made about NFL players and the Black Lives Matter movement in the US. His comments, construed to be racist, had citizens throughout the US pledging to boycott the successful pizza chain and calling the company “racist.” Just as exploiting workers can sabotage a company, exhibiting racial prejudices can also ruin a company’s reputation. In this global marketplace, companies cannot afford to be viewed as hateful of globalization.
Some companies that were all set to enjoy a windfall of cash after moving a department overseas discovered that their cost savings was not what they projected it to be. Some businesses have and do suffer hidden costs when offshoring. For instance, additional training of outsourced employees may be needed. Company employees may be tasked to travel to countries like the Philippines to train and assist the outsourcing firm, particularly in that first contract year. Yet, these costs can be built into the project’s budget and should not, perhaps, come as a surprise at all. It’s important for any business to research thoroughly in order to establish a good budget and an accurate projection of cost savings after outsourcing is implemented.
When considering an expansion abroad, companies have to examine all the risks that could potentially threaten their cost savings. Supply and Chain Quarterly did an excellent job of illustrating some of the hidden costs that needn’t remain hidden once you explore them. Let’s say your company is outsourcing some aspect of product production to the Philippines but oil costs explode. Suddenly, much of the money the business was saving on maintaining operations in- house is now being spent on product transportation. Another scenario that happened: in just the last few years, gas prices have dramatically decreased in the US but are four times higher in parts of Asia.
Wages for outsourced employees could go up too, which presents more unexpected costs. Supply and Chain Quarterly mentioned that China’s wages “are now five times what they were in 2000.” That can eat up some of your firm’s cost savings—absolutely.
So, can these hidden costs be addressed? Companies might design contracts that have shorter renewal dates in case they want to make adjustments or move operations to a different country. Working with industry experts in the Philippines, for instance, can arm business executives with knowledge. For instance, is there pending legislation to increase the nation’s minimum wage? The fact is, hidden cost is a business reality no matter where you conduct business. However, the more thoroughly your business examines the risks for hidden costs, the better it can head them off or deal with them should they arise.
Confidentiality suffers (but it needn’t)
Some companies have been bothered by the notion that outsourcing hampers confidentiality. The SANS Institute recently published a paper describing on this topic. As sensitive information that includes financial records and social security numbers is transferred to countries like China, Indonesia, and India, a risk for confidentiality breaches is heightened. The paper cited an example of a disgruntled Pakistani medical records transcriber who threatened to post sensitive information about patients of the University of California San Francisco if she was not presented with payment. This one incident alone had many companies worried and taking steps to prevent such breaches from occurring.
According to the institute, “As a result, some American politicians have introduced new pieces of stringent legislation that provide clear guidelines, strict accountability, and penalties in order to keep such incidents from occurring.” As America and Europe enact these tough standards, many nations where outsourcing is a vital part of the sector are following suit. Again, this is another example of how the outsourcing sector has been able to successfully mobilize to solve a large problem.
Some companies are choosing not to export elements of the company that deal with sensitive information to overseas contractors. Some may be waiting for even tougher legislation or simply want to witness the effects of the legislation over time. However, companies should note the confidentiality breaches can be home grown too. Data security and confidentiality of sensitive information must be well protected whether at home or abroad.
Outsourcing: an inevitable part of today’s global economies
A global economy and global-based workforce is not going away just as developed nations are not going back to the horse and carriage having gotten used to their SUVs. Globalization is a component of economic progress and, barring certain interruptions like war, it’s going to march onward. Businesses that embrace and evolve with the times tend to be more resilient than businesses that are inflexible to change. Does this mean you have to outsource in today’s global marketplace? No—but it should compel you to seriously investigate whether some degree of offshoring or even near-shoring can positively impact your business. If, for example, outsourcing meant that you were able to produce a better service at a cheaper cost for your clients, you would be negligent if you didn’t adopt this opportunity.
Outsourcing may appear to be changing the rules of the business game people have come to know, but change in the workplace and world, has, and always will occur. Globalization may pose some drawbacks for some companies and some individuals, but it also offers new opportunities. For instance, a shop no longer has a customer base confined to its town; it can sell its wares around the world thanks to globalization’s trade agreements and improvement technologies. As shoppers, many of us are thrilled to pay for a sweater made in China because it costs so much less than one made in our home country. Companies generally cannot afford to ignore the progress that comes with globalization. In order to thrive in the 21st century, today’s businesses, whether small or large, must accept that they compete on the world’s stage and not merely on Main Street.
At this time, it can behoove businesses to consider just where outsourcing is increasing and what places are specializing in services that could impact your business. For instance, it was reported just last month that “Ukraine is the UK’s offshoring destination of the year according to the Global Sourcing Association (GSA) UK.” Ukraine is attempting to fulfill much of Europe’s need for IT sector workers. The nation is working through regulatory issues and striving to provide its young workforce with relevant education in order to obtain these jobs. But depending on your business’s specific needs, there may well be an ideal location in the Philippines or South Africa, for example, to best meet your company’s needs.
Some form of globalization is surely knocking at your company’s door. Whether or not your business chooses to investigate how outsourcing could enhance its operation is something all businesses will need to contend with. However, if you have been on the fence about contracting with another business to outsource some of your operations, it’s important for you to keep the potent takeaways outlined in this paper in mind. They can help you decide if outsourcing is a viable option for you and how to avoid some of the obstacles that other companies faced in their transition process. By planning carefully and acknowledging the win-win that may be in store for your business, you can move your company forward in order to take advantage of the many benefits associated with outsourcing and offshoring.
Bibliography and references
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