Offshoring and Outsourcing

Every organization faces "make or buy" decisions. These decisions embody the essential spirit of economics-scarcity. Companies have unlimited wants and limited resources. When faced with these "make or buy" decisions, organizations sometimes turn to offshoring and/or outsourcing. Offshoring and outsourcing are two very similar topics. Offshoring is a narrower subset of outsourcing, dealing with the transfer of work to other countries. Outsourcing is a decision that an organization or individual makes to buy a good or service rather than make the good or service.These topics have been categorized as negative events. However, outsourcing offers the buyer flexibility and a chance to fully concentrate on core competencies. This allows organizations and individuals to maximize profits; profit maximization, whether it is financial, spiritual, or social, is the goal of every organization and individual.At the heart of these topics, though, is the "make or buy" conundrum.

Offshoring offers our country and citizens more than first meets the eye. It is true that some jobs are outsourced to other countries, but why do companies do that? It all comes down to cost. Companies cut costs, allowing them to cut prices, which affords them a competitive advantage in the marketplace. Outsourcing the information technology aspects of a business can reduce costs by up to fifty percent (Pfannenstein, 2004). Most businesses are competing on a very even playing field, and a fifty percent reduction in labor costs could make the difference as to whether or not a business will succeed or fail in the long run. The author also says, "Some of these savings are offset by the costs incurred to manage outsourcing arrangements... most companies still experience substantial cost reductions" (Pfannenstein 2004 p 2). Of course, there will be additional costs associated with an outsourcing plan, but the net gain more than outweighs the initial loss. It has been proven numerous times that specialization is more efficient and cost-effective. The author states, "Economists have found that if countries specialize in areas where they have a comparative advantage, free trade between countries generally leads to greater wealth for those nations" (Patterson, 2006, p 3). Every country has a unique labor force with its own distinctive knowledge, skills, abilities, and human/natural resources.

China is known for its large, unskilled labor force in the manufacturing industry.The United States is known for its innovation and service-based economy, because of its relatively highly educated workforce. Because of our talented human capital, the United States has an immense advantage over other nations in the world. According to Daniel Griswold (2004), our nation's benefits come from our highly-capitalistic, flexible economy. New jobs that have been created after others were outsourced require more skills, but more skills usually translates to more pay. An article on the website for the National Center for Policy Control details how many and what types of jobs have been created by outsourcing and insourcing of jobs. Some of their statistics mention that we have brought more jobs in than we have shipped out, we have brought in more manufacturing jobs than service jobs, and the jobs we bring in pay over sixteen percent more than a domestic occupation (Bartlett 2004). Some new guidelines have been created that are used to prepare countries and organizations for the world of offshoring/outsourcing. According to Patterson (2006), the tips focus on communication, training, and industry participation in education.

The final one may be the most important, because allowing companies to inject "real world" knowledge into the classroom will result in a better-educated, job-ready workforce. Many companies hire for experience instead of education, and if those companies had a stake in creating classroom curricula, then there would be a vested interest for companies to provide relevant, job-specific input. All jobs are not in trouble of being offshored. According to Patterson (2006), work that is not routine, work that includes critical control of operations, and work that requires significant security risks are not going to be offshored any time in the near future. Taylor (2005) agrees with this; he says that some services are subject to limits, such as computer installations and nursing services. This makes sense. Just as normal people are not going to outsource every single aspect of their lives, companies only outsource the functions that are cost-effective.

Many jobs and tasks are communication-intensive, which precludes many from being outsourced. Also, Griswold (2004) points out that offshoring can create more costs than keeping work onshore, because of travel, training, and oversight expenses. Information technology is a sector that is often associated with offshoring. Some of the changes that are driving information technology outsourcing are lower costs, higher focus on core concepts and values, and the increasingly technical nature of the IT business functions (Pfannenstein, 2004). People are quick to point out the various jobs that have been "taken" from American workers and given to other countries; however, the author declares, "The U.S. has been a pioneer in offshoring of IT jobs, yet U.S. government statistics show IT employment is at an all-time record" (Patterson, 2006, p 12). If the correct information about offshoring and outsourcing was reported, then more people would be receptive to the changes associated with these events.

The phenomenon of outsourcing does not only concern businesses and governments; Individuals face many "make or buy" decisions everyday. Timothy Taylor (2005) is quick to point out that the reader is most likely not wearing clothes, sitting in a chair, or eating food that was produced solely by that person. That is because that person has outsourced the various needs in his/her life to allow more time to pursue that person's own specialty. At one time in our nation's history, people were much closer to being self-sufficient. Farmers raised their own food and made much of what they needed to survive, but even they had to sometimes barter or buy what they could not make themselves. Adam Smith, one of the first well-known economists, believed that division of labor, also known as specialization, was the key to create more economic growth. At this time, I believe we have found some limits as to how "specialized" different jobs can be; however, we are still seeing new and exciting ways to outsource and specialize in a certain discipline.

Our increasingly busy lives have pushed the market to create more service-oriented jobs. Many years ago, people could not have fathomed automatic teller machines, landscaping services, or pet waste cleanup crews. However, these are only a few of the new niche markets created to serve the time-starved consumer. The development of these new services has allowed workers to be more productive. According to Taylor (2005), increased productivity is what causes an economy's standard of living to increase. In fact, there are even ways for people to become their own "outsourcing agent." Companies like Alpine Access, LiveOps, and Home-Base USA recruit people to work from home as mobile call centers. A spokesman for the Alpine says, "Not every type of call works well when you send it to India and the Philippines... You can't easily train 5,000 people at a call center in Bangalore. Here you have more control" (Gardner 2007 p 1). So, whether individuals choose to "make or buy," they still face some of the same options as larger organizations.

The outsourcing trend is not without its possible negative effects. Improper planning, false measurements, and unreliable providers can wreak havoc on a company's bottom line. According to Kumar and Eickhoff (2006), the company bidding out the work would be in trouble if the supplier was unable to perform the service due to financial or labor problems. It would have a domino effect on all the steps involved in the business' processes. My parents have had this problem in their business. They own a machine shop that makes custom parts for its customers, and when a supplier or subcontractor is late on a shipment, the rest of the processes (assembly, machining, cleanup, etc.) grind to a halt to wait on the bottleneck. It can be quite a headache. Other potential problems come not from the outside of the company, but from within. The authors state, "Other challenges may include the outsourcing company losing control over its process, and current employees in the company feeling threatened...

In conclusion, offshoring and outsourcing do not deserve the bad publicity they have been given. As a strategic business decision, outsourcing can reduce expenses, increase profits, and create an atmosphere dedicated to a company's core competencies. While some outsourcing has taken jobs from Americans, the gains from those decisions far outweigh the losses. There may be some risk associated with these activities, but the potential gain far outweighs the possible risk. Companies have become leaner, stronger, and more competitive throughout both national and international markets. Sooner or later, the concept of specialization will no longer be looked at as a problem, but as a solution. Outsourcing has yet to see its limits on the personal, organizational, national, and international fronts.

References

Bartlett, B. (2004). How outsourcing creates jobs for Americans. Retrieved from National Center for Policy Analysis website. http://www.ncpa.org/pub/ba/ba480/

Bridges, A. (2007). Outsourcing complicates food recalls. Retrieved from Town Hall website. http://www.townhall.com/news/us/2007/09/02/outsourcing_complicates_food_recalls

Corsi, J.R. (2007). Traffic ticket data shipped to Mexico. Retrieved from World Net Daily website. http://www.wnd.com/news/article.asp?ARTICLE_ID=56887

Gardner, M. (2007). Outsourcing comes home. Retrieved from Christian Science Monitor website. http://www.csmonitor.com/2007/1022/p13s01-wmgn.html

Griswold, D. T. (2004). Why we have nothing to fear from foreign outsourcing. Retrieved from Free Trade website. http://www.freetrade.org/node/104

Kumar, S. & Eickhoff, J. H. (2006). Outsourcing: When and how should it be done? Information Knowledge Systems Management 2005/2006, p 245-259. Retrieved from the EbscoHost database.

Patterson, D. A. (2006). Offshoring: Finally facts vs. folklore. Communications of the ACM, 49 (2) p 41-42. Retrieved from the EbscoHost database.

Pfannenstein, L. (2004). Offshore outsourcing: Current and future effects on American industry. ISM Journal: Fall 2004. Retrieved from the EbscoHost database.

Taylor, T. (2005). In defense of outsourcing. Cato Journal, 25 (2), p 367-377. Retrieved from the EbscoHost database.