Outsourcing: The True Impact

Abstract

Outsourcing: The True Impact

Outsourcing affects every part of business and is a controversial subject matter. Some praise outsourcing as being cost effective, efficient, productive and strategic, while others condemn it for being evil, money-grabbing, destructive, ruthless, exploiting the poor, destroying communities and nations. (Dixon)No matter the purpose of the outsourcing, whether it was to get around unions, lower cost of labor in other places, or to get greater expertise inevitably when a company outsources someone loses a job while another gains a job, sometimes overseas and at far lower wages. The resentment to outsourcing seems to grow tremendously with geographic distance and the gap between the original wages and the new ones. (Pearllstein, 2012). This battle between the views of outsourcing has been going on since at least the 1880’s, when the first New England textile mills began moving production to the Carolinas. Whatever you choose to call it outsourcing, runaway plants, global sourcing, or offshoring workers and the public condemn it; while executives view it as inevitable and economists defend it as part of the process in which market economies prosper. (Pearllstein, 2012)

Offshoring vs Outsourcing

The ongoing national debate about the employment practices of U.S. companies and private equity firms abroad features two phrases that confuse rather than clarify the issues: offshoring and outsourcing. For most Americans, the phrases are interchangeable; Americans are more concerned with jobs shifting from the United States to other countries. And they don’t put much stock into whether those jobs stay within a particular company or are contracted to a third party when the ultimate outcome is jobs lost at home. This is why most Americans find debates about outsourcing versus offshoring to be meaningless. To them it is all about the overseas outsourcing of jobs. Plunkett Research defines outsourcing and offshoring very differently the definitions they provide of each are as follows. (Directory Journal Staff)

Offshoring – The tendency among many U.S., Japanese and Western European firms to send both knowledge-based and manufacturing work to third-party firms in other nations. Often, the intent is to take advantage of lower wages and operating costs. (Directory Journal Staff)
Outsourcing – Hiring of an outside company to perform task that would otherwise be performed internally by a company. (Directory Journal Staff)

As you can see according to Plunkett Research outsourcing and offshoring have two very different meanings. We also consider it to be outsourcing when a company hires an independent contractor, such as that stay at home mom to answer customer service jobs or to do that data entry for them from their home office. However, for simplicities sake from here forward we will be using the term outsourcing as a general term to cover both definitions.

Facts about overseas outsourcing

So how pervasive is overseas outsourcing in our economy? Comprehensive data on overseas outsourcing practices are hard to establish, due in large part to limited government information which, according to the Congressional Research Service, were “not designed to link employment gains or losses in the United States, either for individual jobs, individual companies or in the aggregate, with the gains and losses of jobs abroad.” Companies attempt to limit exposure of their overseas outsourcing practices, leading researchers to believe that even the most extensive methodologies only capture one-third of all production shifts. Still, there are important factors to understand about outsourcing as the debate makes its way back onto the national stage. Here are the top trends: (Directory Journal Staff)

1. U.S. multinationals shifted millions of jobs overseas in the 2000s.

Data from the U.S. Department of Commerce showed that “U.S. multinational corporations, the big brand-name companies that employ a fifth of all American workers… cut their work forces in the U.S. by 2.9 million during the 2000s while increasing employment overseas by 2.4 million.” (Directory Journal Staff)

2. As overseas outsourcing has expanded, U.S. manufacturing has suffered the brunt of the blow.

According to a report on outsourcing by Working America, “Manufacturing employment collapsed from a high of 19.5 million workers in June 1979 to 11.5 workers in December 2009, a drop of 8 million workers over 30 years. Between August 2000 and February 2004, manufacturing jobs were lost for a stunning 43 consecutive months—the longest such stretch since the Great Depression.” Manufacturing plants have also declined sharply in the last decade, shrinking by more than 51,000 plants, or 12.5 percent, between 1998 and 2008. These stable, middle-class jobs have been the driving force of the U.S. economy for decades and theses losses have done considerable damage to communities across the country. (Directory Journal Staff)

3. The global electronics contract manufacturing industry reached a staggering $360 billion of revenue in 2011, and is expected to expand to $426 billion by 2015.

This figure consists of companies, many of which are American, contracting outside firms largely in third-world countries with cheaper labor costs to manufacture their products. While this figure is not exclusively U.S. companies, large corporations such as Apple Inc., which conducts all of its manufacturing on foreign shores, and Nike Inc., which subcontracts all of its footwear production to independently owned and operated foreign companies, lead the trend. (Directory Journal Staff)

4. Private equity firms have increased the pressure to cut costs by any means necessary, leading to more overseas outsourcing.

Corporate executives came to fear that if they did not run their businesses with the aim of maximizing short-term profits and share prices, their companies would become takeover targets and they would be out of a job. Overnight, outsourcing became a manhood test for corporate executives. The private equity firms that took over companies, “the standard strategy has been to load up company executives with so much stock and stock options that they don’t hesitate to make difficult decisions such as shedding divisions, closing plants or outsourcing work overseas.” (Directory Journal Staff)

5. Labor costs are the main driver of corporations sending jobs overseas, but foreign countries’ costs are increasing compared to the United States.

According to a 2012 survey from Duke’s Fuqua School of business, nearly three-quarters of respondents indicated labor cost savings as one of the three most important drivers leading to overseas outsourcing. (Directory Journal Staff)

The debate over outsourcing has been morphing, and today there are growing numbers of people who think that what started as a sensible, globalized extension of sending some work outside a firm to specialized companies may in fact be creating long-term structural unemployment in the United States, hollowing out entire industries.

At first a lot of outsourcing was to other American firms; later it involved moving to foreign countries. Companies rushed to outsource all but their most essential activities. Some of the world’s largest companies and biggest employers are the product of this outsourcing trend, for example; Sodexo in food service; IBM in information technology; G4S in security services; UPS and FedEx in logistics; Foxconn and Lenovo in computer manufacturing. The new model of industrial organization has become Nike, which outsources the making of all of its shoes, clothing and sporting equipment so it can concentrate on design and marketing, and Apple, which outsources all of its hardware manufacturing. (Pearllstein, 2012)

The downside of outsourcing positions overseas is that it does take away jobs from the country your company is located in. That in turn removes money from your country’s economy. It might work great for your company, but looking at the larger picture, it can also hurt the country as a whole economic system. (Directory Journal Staff) In times of economic downturn it’s best to create jobs close to home to stimulate the economy by giving the people who live there more money to spend. When you hire locally rather than outsourcing, other people are getting paid. These people are your potential customers; when they have money, they can spend money. And if they can’t find work, they can’t do business with you either. The higher income people need to rely on the middle and lower classes making enough to buy products and services from them to make more money. (Directory Journal Staff) While outsourcing can make sense to a company’s bottom line when you only look at up front expenses, overall it could also hurt them if they rely on consumer spending domestically. (Directory Journal Staff)

There are both positive and negative effects of outsourcing and the decision to do so must be carefully considered on both a micro and macro economical level. Ultimately, this practice saves money and is likely to be continued. Countries can make outsourcing less attractive by giving tax breaks to companies that will keep employment within a country’s borders. However, even with incentives not to outsource, benefits to this common business practice are likely to continue to exist. What companies that outsource must weigh is not just the short-term savings but the potential long term costs and possibly benefits for both itself and the society at large. (Ellis-Christensen, 2014)

References

Dixon, P. (n.d.). The Future of Outsourcing - Impact on Jobs. Retrieved 2014, from Global Change: http://www.globalchange.com/outsourcing.htm

Ellis-Christensen, T. (2014, February 02). Does Outsourcing Really Save Money? (O. Wallace, Editor, & C. Corporation, Producer) Retrieved 2014, from Wise Geek: http://www.wisegeek.com/does-outsourcing-really-save-money.htm

Hansen. (2013, April 16). How Outsourcing Affects The U>S> Economy, 2. Retrieved 2014, from Directory Journak: Small Business Blog: http://www.dirjournal.com/business-journal/how-outsourcing-affects-the-us-economy/

Pearllstein, S. (2012, July 1). Outsourcing: What's the true impact? Counting jobs is only part of the answer. Retrieved 2014, from Washington Post: http://www.washingtonpost.com/business/economy/outsourcings-net-effect-on-us-jobs-still-an-open-ended-question/2012/07/01/gJQAs1szGW_story.html

UNKNOWN. (n.d.). 5 Facts About Outsourcing, Trend Continues to Grow as American Workers Suffer. Retrieved 2014, from American Progress: http://www.americanprogress.org/issues/labor/news/2012/07/09/11898/5-facts-about-overseas-outsourcing/