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Paper shredding can be contracted out

Outsourcing (or contracting out) is often defined as the delegation of non-core operations or jobs from internal production within a business to an external entity (such as a subcontractor) that specializes in that operation. Outsourcing is a business decision that is often made to lower costs or focus on competencies. A related term, offshoring, means transferring work to another country, typically overseas. Offshoring is similar to outsourcing when companies hire overseas subcontractors, but differs when companies transfer work to the same company in another country. Outsourcing became a popular buzzword in business and management in the 1990s.

Overview

Outsourcing is defined as the management and/or day-to-day execution of an entire business function by a third party service provider.

Outsourcing and/or out-tasking involve transferring a significant amount of management control to the supplier. Buying products from another entity is not outsourcing or out-tasking, but merely a vendor relationship. Likewise, buying services from a provider is not necessarily outsourcing or out-tasking. Outsourcing always involves a considerable degree of two-way information exchange, co-ordination, and trust.

Organizations that deliver such services feel that outsourcing requires the turning over of management responsibility for running a segment of business. In theory, this business segment should not be mission-critical, but practice often dictates otherwise. Many companies look to employ expert organizations in the areas targeted for outsourcing. Business segments typically outsourced include Information Technology, Human Resources, Facilities and Real Estate Management and Accounting. Many companies also outsource customer support and call center functions, manufacturing and engineering. Outsourcing business is characterized by expertise not inherent to the core of the client organization.

The overhead costs of customer service are typically less where outsourcing has been used, leading to many companies, from utilities to manufacturers, closing their in-house customer relations departments and outsourcing their customer service to third party call centers. The logical extension of these decisions was of outsourcing labor overseas to countries with lower labor costs, this trend is often referred to as offshoring of customer service.

Due to this demand call centers have sprung up in Canada, China, Eastern Europe, India, Israel, Ireland, Pakistan, Philippines and even the Caribbean. Many companies, most notably Dell and AT&T Wireless, have gained significant negative publicity for their decisions to use non-US labor for customer service and technical support; one of the most prominent complaints being the expectation that the replacement staff will have more trouble communicating with customers.

A related term is out-tasking: turning over a narrowly-defined segment of business to another business, typically on an annual contract, or sometimes a shorter one. This usually involves continued direct or indirect management and decision-making by the client of the out-tasking business.

The term "outsourcing" became more well known largely because of a growth in the number of high-tech companies in the early 1990s that were often not large enough to be able to easily maintain large customer service departments of their own. In some cases these companies hired technical writers to simplify the usage instructions of their products, index the key points of information and contracted with temporary employment agencies to find, train and hire generally low-skilled workers to answer their telephone technical support and customer service calls. These agents generally worked in call centers where the information needed to assist the calling customer was indexed in a computer system. The agents were often not able to tell the customer they did not actually directly work for the original manufacturer. In some cases, the agents are not allowed to even give out their real name.

Shared services - an alternative

Organizations now often establish Shared services within their firm as an alternative to outsourcing. Shared Services are the convergence and streamlining of an organisation’s functions to ensure that they deliver the organisation the services required of them as effectively and efficiently as possible. Rather than having e.g. HR devolved over a number of offices a shared service is the centralising and convergence of these. This often involves the centralising of back office functions such as HR and Finance but can also be applied to the middle or front offices. A key advantage of this convergence is that it enables the appreciation of economies of scale within the function and can enable multi function working (e.g. linking HR and Finance together, where there is the potential to create synergies). A large scale cultural and process transformation is often a key component of a move to Shared Services. This transformation often results in a better quality of work life for employees.

Outsourcing, Offshoring, and Offshore Outsourcing

Note that “outsourcing,” “offshore outsourcing,” and “offshoring” are used interchangeably in public discourse despite important technical differences. To be consistent, “outsourcing,” in corporate context, represents an organizational practice that involves the transfer of an organizational function to a third party. When this third party is located in another country the term “offshore outsourcing” makes more sense. “Offshoring,” in contrast, represents the transfer of an organizational function to another country, regardless of whether the work stays in the corporation or not. In short, “outsourcing” means sharing organizational control with another organization, or a process of establishing network relations within an organizational field. "Offshoring,” on the other hand, represents a relocation of an organizational function to a foreign country, not necessarily a transformation of internal organizational control.

Types of outsourced work

Some outsourcing companies use a competition/contest-style approach to get their advanced work done AND hunt for international talents for potential employment.

Data analysis

Every organization generates huge chunks of data. Hidden in them is information. Data analysis is the crucial process to extract information out of the otherwise random pile of data. The analysis results in gaining intelligence, such as trends, out of the data. This is vital in any processes let it be banking operations, retail or pharmaceutical research. Varying amounts of data in quantity and quality are generated depends upon the process. Similarly the analysis requirements too vary depends upon the process. For example the huge chunk of data generated by drug trials needs to be analyzed to conclude the result. Similarly data from a diversified field needs to be pulled together and analyzed to forecast the trend in the stock market.

There are numerous ways the outsourcing is exploited for business advantages. For example the data generated out of the New York stock exchange (NYSE) during the days transaction is send the to analysis centers at Bangalore, India, at the opposite end of the time zone. The Data Analysts perform the analysis required for the trading company executives and send it back to New York. The day for the New York executive starts with the needed picture processed out of the data.

Research process

This is treated as the niche sector in the outsourcing. The research processes are usually outsourced in full or in parts. Let it be the research in nanotechnology or research in genetics, the processes is viable for outsourcing. Generally larger research projects are cut into various sub projects or tasks. The outsourcing is then carried out based on the viability and competitiveness of the outsourcing destinations. Thus exploiting the competitiveness available at various parts of the world into a single large project. The research process outsourcing (RPO) is also known as Knowledge Process Outsourcing (KPO) as it calls for the application of specialized knowledge of a high level. The KPO typically involves a component of Analysis Proves Outsourcing (APO) and Research Process Outsourcing (RPO). General Electric (GE) is one of the pioneers in RPO

IT operations

This is one of the newcomers in the outsourcing arena. The task basically involves the management of IT assets of corporations from a remote location. For example the management of a computer network of a large corporation includes outage monitoring, alarms monitoring, remote monitoring of data centers etc. The nature of these operations calls for a real-time support when the need arises. That means such tasks are not easily outsourced to the places in far time zones. Instead it’s outsourced to comparable time zone locations, which are competitive. This need for the geographical proximity earned it a specific name Nearsourcing.

Engineering design

Any thing from design of huge refineries to wristwatch design can be outsourced. This is probably the next matured outsourcing process after the software development outsourcing. There are two types of business houses in this arena. The first is the captive design houses, that is design houses setup for the exclusive work of one client. There are different cases such us the parent company themselves setup the design center at a different (economically competitive) country or partner with another company at the outsourcing location or completely depend on the partners resources (with appropriate contractual obligations). Popularly such facilities are called Offshore Development Center (ODC). The second types of design firms are open in nature. That’s they win contracts for design from customers in an open market, just like any other services for sale. Typical specialties of engineering design outsourcing includes Structural design (buildings, factories, bridges etc), Hardware design (consumer electronics, home appliances, toys, industrial instruments etc ), Product design ( medical devices, white goods, automobiles etc ), Architectural design, Mechanical engineering ( Gas turbines, aircraft engines, automobile parts etc)

Medicare

This is often touted as the most promising yet contentious area of outsourcing. The services that can be outsourced in Medicare could be anything from the trivial keying in of the physicians transcript (in audio) of the treatment records into a structured documents to physically sending the patients to another country for treatment. Other services include using the service of radiologists at a remote but competitive country to interpret scan images such as CT or MRI. A recent example of Medicare outsourcing is that of United Kingdom’s decision to send blood and urine samples from NHS (National Health Service) patients to India for pathology tests to cut cost. The non-emergency requirements (where the results are required not within 48 hours) of pathology tests are conducted at the clinical lab setup at Mumbai, India. The blood and urine samples are flown to Mumbai. The 24-hour lab conducts the test and the results are uploaded into the special network linked to the NHS. The NHS hospitals in the UK get the reports in 24 hours. Another larger area of outsourcing in biological area is bioinformatics and biotechnology. Here again the outsourcing ranges from data analysis to basic research.

Legal support services

Works outsourced in this field ranges from those in the techno-legal (such as drafting patent claims) to the keying in of legal transcripts (from audio) to structured legal documents. Patent application preparation is a painstakingly labor intensive (searching patents all over the world) that needs special knowledge in the subject under patenting and the legal requirements. Nevertheless this is a multibillion dollar business and hence its place in the outsourcing arena.

Art, animation, editorial and DTP work

This is where the creative business finds its overseas partners at a competitive country. Anything from apparel design to cartoon animation in the creative business is outsourced. For example creative houses are setup at competitive locations to get the animation of movies done. Another example is the DTP work. For example the text transcript of a book can be send to another country to get the book designed (typeset, artwork, illustrations, cover design etc). This can be then directly sent to press.

Software development

This is probably the most talked about subject in the outsourcing field. Probably because of the very nature of the software, outsourcing in software development has much fast evolved as compared to other area of outsourcing.

• Software development e.g. TopCoder
• Business process

See Business Process Outsourcing

• Home Tutors
• Translators

Environmental services

Many large institutions have outsourced the management of their environmentsl service facilities, such as laundries and waste management plants, to service providers. Thus, while appearing to save on operating costs, the institution gives up control of these vital functions to the outsourcing company.

Arguments for Outsourcing

A recent poll of economists by the Wall Street Journal found that only 16 % of them saw outsourcing as having a significant impact on the overall job picture. ^[1]

One criticism of outsourcing is that product quality suffers. But the outsourcing firm has freedom to move a firm department or division back home if its profits are suffering as a result of poor quality. In fact, many American companies like Dell have moved customer service divisions back to America as a result of poor quality ^[2]. The decision to outsource is like any other business investment decision in that there is risk. Critics of outsourcing often talk about outsourcing failures without mentioning instances of outsourcing success. The decision to outsource is like the decision to expand a business overseas, to incorporate computer technology, or to hire new workers. If the company does it correctly, it benefits from higher profits. Proponents of outsourcing believe that arguing that outsourcing leads to lower product quality is pointless because if it were true, consumer demand will force firms to shift back to producing the good or service in-firm rather than out-firm. That many large businesses outsource and continue to outsource suggests that in many cases outsourcing is successful in that it increases product quality, lowers costs substantially, or both.

Some economists have argued that outsourcing is a form of technological innovation analogous to machines on a car assembly line. American Motor Company Ford relied heavily on workers in the past to assemble car parts. Today these workers are replaced by machines because they are cheaper in the long run, produce better quality products, or a combination of both (the firm is trying to increase its quality to cost ratio, quality being defined by the consumer and inferred from revenue). Economists argue that machines on the car assembly line must have a higher quality to cost ratio than workers because, if they didn’t, there would be no incentive for the firm to replace workers with machines. Although workers’ jobs were lost from this replacement of workers with machines, the Ford Motor Company made more money by lowering costs (or increasing quality, thereby increasing revenue). Some argue that greater profits to the labor owners lead to higher consumption, which leads to further job creation, allowing those who lost jobs to gain jobs in other sectors of the economy. However, economists do concede that labor is not always perfectly mobile and that some workers may have difficulty getting new jobs. Some economists suggest that government training programs be provided.

A firm's motivation for replacing workers with machines is identical to the motivation for outsourcing, i.e. the firm is trying to maximize the quality of its product given cost (its productivity). Because outsourcing allows for lower costs, even if quality reduces slightly or not at all, productivity increases, which benefits the economy on aggregate.

Economist Thomas Sowell from the University of Chicago said “anything that increases economic efficiency--whether by outsourcing or a hundred other things--is likely to cost somebody's job. The automobile cost the jobs of people who took care of horses or made saddles, carriages, and horseshoes.” ^[1] Walter Williams, another economist, said “we could probably think of hundreds of jobs that either don't exist or exist in far fewer numbers than in the past--jobs such as elevator operator, TV repairman and coal deliveryman. ‘Creative destruction’ is a discovery process where we find ways to produce goods and services more cheaply. That in turn makes us all richer.” ^[2]

Professor Drezner reports that for every dollar spent on outsourcing to India, the United States reaps between $1.12 and $1.14 in benefits. ^[3] Drezner also points out that large software companies such as Microsoft and Oracle have increased outsourcing and used the savings for investment and larger domestic payrolls. Nationally, 70,000 computer programmers lost their jobs between 1999 and 2003, but more than 115,000 computer software engineers found higher-paying jobs during that same period. ^[3]

Advocates of outsourcing also claim that outsourcing-related fraud is insignificant, averring that such malpractices can occur in any country. For example, 40 million credit card numbers were stolen in June 2005 at CardSystems Solutions in Tucson, Arizona. (See the full story.). In December 2005, nearly 50 people were indicted in connection with a scheme that bilked at least $200,000 from Katrina relief fund at Red Cross claim center in Bakersfield, Calif., which handled calls from storm victims.

Criticisms of Outsourcing

Because "outsourced" workers are not actually paid agents of the company, it has been argued that there is less incentive for the agent to show loyalty or work ethic in its representation of said company. It has been therefore argued that quality levels of customer service and technical support of outsourced tasks are lower than where they have remained 'in-house'.

In hospitals whose environmental services have been outsourced, the regular staff members commonly complain that the outsourced services were performed better and less expensively when they were performed in-house. Outsource companies may not be able to meet the demanding quality standards which a health care facility is likely to require. Also, managers at outsource companies tend to assume that all hospitals are alike, thus underestimating the service needs of major institutions.

The 2004 U.S. presidential election race focused on outsourcing to some degree. This debate did not center on problems of declining quality of customer services but on the threat to U.S. jobs and work. Criticism of outsourcing, from the perspective of U.S. citizens, by-and-large, revolves around the costs associated with transferring control of the labor process to an external entity in another country. A Zogby International poll reports that 71% of American voters believe that “outsourcing jobs overseas” hurts the economy and another 62% believe that the U.S. government should impose some legislative action against companies that transfer domestic jobs overseas, possibly in the form of increased taxes on companies that outsource. The poll of over 1,000 Americans was conducted in August 2004 (See Zogby International survey results online at zogby.com).

Outsourcing appears to threaten the livelihood of domestic workers and the American Dream. This is especially true for high-tech workers who were promised the “jobs of tomorrow”- a phrase Bill Clinton iterated in 1994 to justify his conservative position on NAFTA. Outsourcing appears to work contrary to the claim that “free trade” will create the “jobs of tomorrow” in America when high-tech or high paying white collar jobs are transferred to or created in foreign countries. Thus, outsourcing is criticized as it represents a new threat to labor, contributing to rampant worker insecurity, and reflective of the general process of globalization where the United States government fails to mediate business-labor relations in a way conducive to prevailing values that places the American middle class worker as a central priority.

Criticism of outsourcing from the public and media sometimes tend to concentrate on lackluster customer service and technical support being provided by either local workers who are not actually employees of the company, or by overseas workers attempting to communicate with Americans in broken or incomprehensible English. Defenders of outsourcing say if this were true, then companies would experience market forces compelling them to return service and support handling back from the outsourced company. However, service and support are often not considered by customers as part of their original purchases. Customers only experience outsourced service and support after they have spent their money since sales is generally done in-house by the original company. Dealing with lackluster outsourced service is a negative surprise after the money is already spent.

Policy solutions to outsourcing are also criticized. One solution often offered is retraining of domestic workers to new jobs. However, some of these workers are already highly educated and already possess a bachelor's and master's degree. Retraining to their current level in another field may not be an option due to years of study and cost of education involved. There is also little incentive given that the jobs in their new field could also be outsourced as well. Proportions of workers trained for Science, Technology, Engineering, and Mathematics (STEM) fields fields in developing nations are viewed to outstrip traditional technology leaders such as the U.S. With these traditionally "safe" jobs perceived to be endangered, this raises questions regarding whether origin countries can maintain any comparative advantage given the losses in both low and high-value jobs.

There are also security issues concerning companies giving outside access to sensitive customer information. In April of 2005, a high-profile case involving the theft of $350,000 from four Citibank customers occurred when Indian call center workers in Pune, India, acquired the passwords to customer accounts and transferred the money to their own accounts opened under fictitious names. Citibank did not find out about the problem until the American customers noticed discrepancies with their accounts and notified the bank. (See the full report.)

Outright fraud is also a concern. In 2005, Intel discovered and fired 250 Indian employees after they faked their expense reports. The firings followed from Intel's internal Business Practice Excellence programme of expenses claims. The report concluded that fraudulent practises such as "faking bills to claim your allowances like conveyance [and] drivers’ salaries" were some common malpractices in India. Intel would not put up with such fraud. NASSCOM, which is a forum of IT and ITeS companies, has attempted to address these fraud concerns in India by creating the National Skills Registry. That database contains personal and work-related information, enabling employers to verify a staff member's credentials and allowing police to track the background of workers.

Democratic U.S. presidential candidate John Kerry blasted firms that outsource jobs abroad or that incorporate overseas in tax havens to avoid paying their fair share of U.S. taxes during his unsuccessful 2004 campaign, calling such firms "Benedict Arnold corporations," in reference to the infamous traitor Benedict Arnold.

It is argued a malicious implementation of the Higher Education Role Analysis (HERA) in the U.K. may force Higher Education administrative and support staff to prematurely retire or seek for new employment in other organizations, thus freeing of staff many departments which could then be effectively outsourced. Outsourcing departments like Accounts, Payroll and Procurement is now common practice, as seen in August 2005 at the University of Portsmouth.

Notes

1. ^  This view is borne out by a recent study by Richard Freeman at the National Bureau of Economic Research in Washington. He found that in the year 2000, 17 % of university bachelor degrees in the U.S. were in science and engineering compared with a world average of 27 % and 52 % in China. Universities in the European Union granted 40 % more science and engineering doctorates than the United States, with that figure expected to reach nearly 100 % by about 2010 according to Freeman's paper.
2. 1. ^  “Outsourcing” and “Saving Jobs” by Thomas Sowell
3. 2. ^  Should we “Save Jobs”? by Walter Williams
4. 3. ^  "The Outsourcing Bogeyman" (Foreign Affairs, May/June 2004)

Literature

Technology and Offshore Outsourcing Strategies (2005) Peter Brudenall (editor) ISBN 1403946191

Mark Kobayashi-Hillary. 2004. (2nd ed 2005) Outsourcing to India. ISBN 354023943X.

Exporting America Why Corporate Greed is Shipping American Jobs Overseas Lou Dobbs 2004 ISBN 0-446-57744-8

Outsourcing America What's Begind our national crisis and how we can reaclaim American Jobs Ron Hira and Anirl Hira 2005 ISBN 0-8144-0868-0

See also

• Freelancing on the Internet
• Offshoring
• Supply chain
• Vertical integration
• Open Outsourcing
• IT consulting
• List of management topics

External links

• The Rise Of India An article published at NASSCOM site narrates the inside view of a typical outsourcing center in India.
• TechsUnite a website of organized IT workers concerned with U.S. job security
• Informed Choices - Website devoted to detailing and commenting on offshoring and outsourcing, particularly from the U.K.
• SurviveOutsourcing.com Blog written by an American IT professional. The blog deals with news in the offshore outsourcing world, and gives perspective on how to adapt your career to a changing economy.
• Outsourcing the American Dream by George J. Bryjak.
• Myth: All Outsourcing Is Offshoring Computerworld Magazine.
• The New Face of the Silicon Age - by Daniel H. Pink Wired Magazine
• Indian outsourcing: an alternative view by Sam Varghese. A skeptical opinion of the importance of outsourcing.
• GE Ex-CEO Blasts Outsourcing Opponents
• India 2.0 Aims to Sustain Its Global IT Influence by Stan Gibson for eWeek, explains how Indian IT industries are planing for new ways to dominate the global IT market.

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