Why outsourcing is a win-win solution: white paper

business meeting with boss

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.

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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.

Poor service

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.

Plummeting morale

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.

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Subtle racism

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.

Hidden costs

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.

Shaking hands after successful meeting

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.

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