Outsourcing: Friend or Foe?

The business practice known as Outsourcing is when a company hires a person or group to perform a task the company cannot fulfill or does not desire to fulfill. Is outsourcing a more profitable method of employing workers compared to traditional methods? This paper will look at outsourcing data, methods, and the reasons for outsourcing. It will attempt to determine if outsourcing is a better means of employing personnel than more traditional methods. Outsourcing businesses were predicted to produce over $50 billion in revenues worldwide by the end of 2004 (Smith).

This is an important topic because more jobs are being outsourced. Over half of world companies outsource at least one human resource function (Smith). This affects individuals in many fields and those that have been working in the fields being outsourced.

The report will discuss the pros and cons of outsourcing. It will also cover its affects on companies and on the employees.

Methodology

The methodology used in researching the topic for this report consisted of collecting articles from a database. The articles referenced were selected because some contained survey data on the subject. Companies as well as executives making outsourcing decisions were surveyed in the articles. One article referenced the World Trade Organization's definitions of outsourcing (Bhagwati). An article that discusses the choices made by a company to stop outsourcing was used (Ackermann). Articles that compare and contrast outsourcing with traditional methods were consulted (Beasley). The proper outsourcing practice to be used was the topic of another article studied (Kirchheimer).

Results of the Study

After studying the articles chosen, it would appear that outsourcing could be a valid method in managing costs. It is also useful in supplying needed skills and services. A company that uses outsourcing should make the choice to do so with great care as the practice could end in failure.

Findings

Cost Management and Other Benefits

According to a survey conducted, 80% of companies say that the most important factor in making decisions about outsourcing is managing costs. (Maddox) "Outsourcing is a trade-off. You pay for outside expertise, but, in effect, you are paying for the vendor's overhead," said Rich Vancil, VP-CMO Advisory Research at IDC (Bhagwati). Companies are looking to lower costs to stay competitive. Getting rid of the need to manage resources is what outsourcing can do.

Outsourcing can provide many benefits other than cost management. Often times a company has a client requiring specific skills or services. This is a great opportunity to utilize outsourcing practices to provide those functions. Companies will often outsource functions in order to increase their skills and services that can be provided to a client. Many companies chose to manage services through outsourcing in order to better focus on their primary service to a client. Spending time on minor issues or tasks that the company cannot fully provide will take away resources that can be spent serving the client.

More companies than ever are turning to outsourcing. According to a survey, almost half of the companies polled state that they are making plans to increase their outsourcing programs in the next year (Maddox). The Internet is making outsourcing of intellectual services more economical and efficient.

Downsides of Outsourcing

Outsourcing is meant to help a company become more competitive. There are potential pitfalls that can be associated with outsourcing. Higher costs can develop through unforeseen fees or miscommunication between companies. When a company outsources specific skills from an outside firm, those skills are often lost to the parent company. The knowledge achieved through experience, training, and mentoring is no longer taking place. When a company outsources, they no longer maintain complete control of the processes used because the outsourcing company now holds the function in their hands (Schlosser). If the end product is unsatisfactory, time and revenue are lost. If the client is unhappy, the company suffers even though they did not perform the work. If the function outsourced is intellectual in nature, then security becomes a major issue. That product could be given to a competitor in many different ways (Beasley).

Larger companies will often have more resources available that enable them to utilize outsourcing methods. They can often buy in bulk. Larger organizations often have a need to provide more functions and services to clients and employees, thus increasing the need for outsourcing functions that they do not want to be burdened with. When a smaller company outsources, they are better prepared to handle failure, as they are not as dependent on those fewer services to function properly (Beasley).

Outsourcing American Jobs

Outsourcing overseas is a growing concern for the American worker. If the jobs outsourced remained stateside then the workers would still have jobs available. If the jobs are in a foreign country then their earning potential becomes zero. In 2002, a report from Forrester Research, Inc. estimated that the total number of American jobs outsourced would be nearly 3.3 million by the year 2015. The report estimates that there are approximately 300,000 more jobs being outsourced every year (Bhagwati). Looking at these numbers alone can feel frightening. The total number of jobs in the year 2002 was 56.7 million. This means that the total number of jobs affected is 0.53 percent, nearly one half of one percent of the jobs in America. This small percentage will seem much larger for the worker that earns their living by a job that is within that 0.53 percent (Bhagwati).

Summary of the Results

Outsourcing is a viable method for a company to provide services and functions. This is true only if these functions are handled properly. If they were not handled properly, then any financial relief would be eliminated. In some cases a greater cost could ensue.

Discussion of the Results

Outsourcing can be a valid method to solve a companies cost management issues. It places the management of personnel, materials, and equipment in the hands of an outside source. The company no longer needs to spend time and money working on these issues. Outsourcing fails when too much additional time and resources are spent managing the outsourced function.

If a company chooses to outsource, research must first be done. If outsourcing is chosen as a cost savings solution, the company must first understand the fee they are being charged. It is possible that unforeseen charges may occur which will drive up costs. When providing a new skill or service, the company must make sure that the provider is licensed and accredited properly. If there is a problem with the service provided, the parent company is often liable even though they did not directly perform the service.

Conclusion and Recommendations

The research done demonstrates the usefulness of outsourcing as a means to provide skills and services if handled properly. It is recommended that a company can use outsourcing to fill human resource needs and to provide skills and services that a company does not provide.

This study was important because of the increase of jobs being outsourced. Many individuals work in fields that could be outsourced. Fear of losing a job to outsourcing is valid. Fear of losing a job in general is understood. Outsourcing adds another dimension of how a worker could lose a job. Should an employee be afraid? Workers whose jobs could be outsourced should determine if they could get involved in the outsourcing. The job need is still there whether the worker is directly employed or not. It is recommended to a worker in an outsourced job to seek employment from an outsourcing provider as an alternative solution. Works Cited

Ackermann, Matt. "Outsourcing Out: S.C. Firm Starts Broker Subsidiary." American Banker 172.2 (2007): 11-11. ContentSelect Research Navigator. 1 April 2007.

Beasley, Mark, Bradford, Marianne, and Don Pagach. "Outsourcing? at your own risk." Strategic Finance 86.1 (2004): 23-29. ContentSelect Research Navigator. 1 April 2007.

Bhagwati, Jagdish, Panagariya, Arvind, and T. N. Srinivasan. "The Muddles over Outsourcing." Journal of Economic Perspectives 18.4 (2004): 93-114. ContentSelect Research Navigator. 1 April 2007.

Kirchheimer, Barbara. "OUTSOURCING INS AND OUTS." Modern Healthcare 35.40 (2005): S1-S5. ContentSelect Research Navigator. 1 April 2007.

Maddox, Kate. "Outsourcing of marketing programs is on the rise." B to B 88.11 (2003): 35-35. ContentSelect Research Navigator. 1 April 2007.

SMITH, P.C., VOZIKIS, GEORGE S., and LYUDMILA VARAKSINA. "Outsourcing Human Resource Management: A Comparison of Russian and U.S. Practices." Journal of Labor Research 27.3 (2006): 305-321. ContentSelect Research Navigator. 1 April 2007.