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.”